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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-229097

 

PROSPECTUS

6,500,000 American Depositary Shares

 

 

LOGO

Representing 78,000,000 Ordinary Shares

We are offering 6,500,000 American Depositary Shares, or ADSs, each representing 12 ordinary shares, $0.0003 par value per share, of Stealth BioTherapeutics Corp. This is our initial public offering, and no public market currently exists for our ADSs or ordinary shares. The public offering price is $12.00 per ADS. Our ADSs have been approved for listing on The Nasdaq Global Market under the symbol “MITO.”

We are an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, and are subject to reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

Investing in the ADSs involves a high degree of risk. See the “Risk Factors” section beginning on page 14 of this prospectus.

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

 

 

 

     PER ADS      TOTAL  

Initial Public Offering Price

   $ 12.00    $ 78,000,000

Underwriting Discounts and Commissions (1)

   $ 0.84    $ 5,460,000

Proceeds to Stealth BioTherapeutics Corp before expenses

   $ 11.16    $ 72,540,000

 

 

(1)    See “Underwriting” beginning on page 191 for additional information regarding underwriting compensation.

Certain entities associated with certain of our existing noteholders and/or our principal shareholder, Morningside Venture (I) Investments Limited, have indicated an interest in purchasing up to an aggregate of approximately $60.0 million of the ADSs in this offering at the initial public offering price and on the same terms as the other purchasers in this offering. However, because indications of interest are not binding agreements or commitments to purchase, these persons may determine to purchase fewer ADSs than they indicate an interest in purchasing or not to purchase any ADSs in this offering. It is also possible that these persons could purchase more ADSs in this offering. In addition, the underwriters could determine to sell fewer ADSs to any of these persons than they indicate an interest in purchasing or not to sell any ADSs to such persons. The underwriters will receive the same underwriting discount and commissions on these ADSs as they will on any other ADSs sold to the public in this offering.

Delivery of the ADSs is expected to be made on or about February 20, 2019. We have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase an additional 975,000 ADSs. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be approximately $6.3 million, and the total proceeds to us, before expenses, will be approximately $83.4 million.

Joint Book-Running Managers

 

Jefferies   Evercore ISI   BMO Capital Markets

Lead Manager

Nomura

Prospectus dated February 14, 2019.


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TABLE OF CONTENTS

 

 

 

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     14  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

     62  

USE OF PROCEEDS

     63  

DIVIDEND POLICY

     64  

CAPITALIZATION

     65  

DILUTION

     67  

SELECTED CONSOLIDATED FINANCIAL DATA

     69  

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

     71  

BUSINESS

     86  

MANAGEMENT

     146  

RELATED PARTY TRANSACTIONS

     159  

PRINCIPAL SHAREHOLDERS

     161  

DESCRIPTION OF SHARE CAPITAL AND ARTICLES OF ASSOCIATION

     163  

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     174  

SHARES AND ADS ELIGIBLE FOR FUTURE SALE

     184  

TAXATION

     186  

UNDERWRITING

     191  

EXPENSES OF THIS OFFERING

     199  

LEGAL MATTERS

     200  

EXPERTS

     200  

ENFORCEMENT OF CIVIL LIABILITIES

     200  

WHERE YOU CAN FIND MORE INFORMATION

     201  

 

 

Through and including March 11, 2019 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

Neither we nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, ADSs only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of ADSs. Our business, financial condition, results of operations and prospects may have changed since that date.

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

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability, and a majority of our outstanding securities are owned by non-U.S. residents. Under the rules of the U.S. Securities and Exchange Commission, or the SEC, we are currently eligible for treatment as a “foreign private issuer.” As a foreign private issuer, we will not be required to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic registrants whose securities are registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act.


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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. It does not contain all of the information that you should consider in making your investment decision. Before investing in the ADSs, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes included elsewhere in this prospectus. You should also consider, among other things, the matters described under “Risk Factors” beginning on page 14. Except as otherwise indicated herein or as the context otherwise requires, references in this prospectus to “Stealth,” “the Company,” “we,” “us” and “our” refer to Stealth BioTherapeutics Corp and its consolidated subsidiaries, or any one or more of them as the context may require.

Overview

We are a clinical-stage biotechnology company focused on the discovery, development and commercialization of novel therapies for diseases involving mitochondrial dysfunction. Mitochondria, found in nearly every cell in the body, are the body’s main source of energy production and are critical for normal organ function. Dysfunctional mitochondria characterize a number of rare genetic diseases, collectively known as primary mitochondrial diseases, and are also involved in many common age-related diseases. We believe our lead product candidate, elamipretide, has the potential to treat both rare genetic and common age-related mitochondrial diseases. Our mission is to be the leader in mitochondrial medicine, and we have assembled a highly experienced management team, board of directors and group of scientific advisors to help us achieve this mission.

We are studying elamipretide in the following indications:

Primary mitochondrial myopathy. Primary mitochondrial myopathy, characterized by debilitating skeletal muscle weakness, exercise intolerance and fatigue, which we believe affects an estimated 40,000 diagnosed individuals in the United States. There are no therapies approved by the U.S. Food and Drug Administration, or the FDA, the European Medicines Agency, or the EMA, or the National Medical Products Association of China, or the NMPA, for the treatment of this indication. We have received Fast Track and Orphan Drug designations from the FDA for the development of elamipretide in this indication. We are conducting a Phase 3 pivotal trial in North America and Europe and expect to have data from that trial by the end of 2019.

Barth. Barth syndrome, or Barth, characterized by heart muscle weakness, or cardiomyopathy, neutropenia, or low white blood cell count (which may lead to an increased risk for infections), skeletal muscle weakness, delayed growth, fatigue and varying degrees of physical disability, is estimated to affect between one in 300,000 to one in 400,000 births in the United States and there are estimated to be less than 200 known living patients worldwide with Barth. There are no therapies approved by the FDA, EMA or NMPA for the treatment of Barth. We have received Fast Track and Orphan Drug designations from the FDA for the development of elamipretide in this indication. In December 2018, we completed the placebo-controlled portion of a Phase 2/3 clinical trial in patients with Barth. While the trial did not reach its primary endpoints, we observed trends toward improvement in the subset of patients with lower ratios of monolysocardiolipin to tetralinoleylcardiolipin, which we believe are the patients most likely to respond to therapy. We plan to meet with the FDA during the first half of 2019 to discuss a potential new drug application, or NDA, submission.

LHON. Leber’s hereditary optic neuropathy, or LHON, is characterized by central vision loss. We estimate that LHON affects approximately 10,000 individuals in the United States, of whom an estimated 70% have the genetic mutation, G11778A, that we are studying. There are no therapies approved by the FDA or NMPA for the treatment of LHON, and there is only one EMA-approved therapy. We have received Fast Track and Orphan Drug designations from the FDA for the development of elamipretide in this indication. We completed the placebo-controlled portion of a Phase 2 clinical trial during the first half of 2018, and continue to follow patients in open-label extension. While the trial did not reach its primary endpoint of change in best corrected



 

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visual acuity, we observed trends favoring elamipretide across a number of endpoints, and we are continuing to observe improvements in an ongoing open-label extension. We plan to meet with the FDA for an end-of-Phase 2 meeting during the first half of 2019. Following that meeting, we plan to submit a clinical trial application to the NMPA for inclusion of clinical trial sites in China in a potential Phase 3 clinical trial.

Dry AMD. Dry acute macular degeneration, or dry AMD, characterized by symptoms such as distorted vision, reduction in low light visual acuity, reduced overall visual acuity and blurred vision, is estimated to affect over 10 million individuals in the United States and is the leading cause of blindness among older adults in the developed world. There are no therapies approved by the FDA, EMA or NMPA for the treatment of dry AMD. We completed a Phase 1 trial in patients with drusen, an early form of dry AMD, and geographic atrophy, an advanced form of dry AMD, in which we observed statistically significant improvement over baseline in various parameters of visual function in both the drusen and geographic atrophy cohorts. We received Fast Track designation from the FDA for the development of elamipretide for patients with dry AMD with geographic atrophy in November 2018. We plan to launch a Phase 2b clinical trial for the treatment of patients with geographic atrophy in the first quarter of 2019.

In addition to our clinical development programs for elamipretide, we plan to evaluate SBT-20, our second clinical-stage product candidate, for rare disease indications, such as peripheral neuropathies. We are developing SBT-272, a preclinical-stage product candidate, for rare neurodegenerative diseases. In addition, our internal discovery platform has generated a library of over 100 proprietary, differentiated compounds which could have clinical benefit for diseases related to mitochondrial dysfunction and from which we plan to designate potential product candidates. We may also utilize certain of these compounds as part of our “carrier platform,” in which they could serve as scaffolds to deliver other beneficial compounds to the mitochondria.



 

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Our Pipeline

The following table summarizes our development pipeline, including preclinical studies and ongoing and planned clinical trials of our product candidates we have advanced, or expect to advance in the next year, to clinical development.

 

LOGO

We previously completed a Phase 1/2 clinical trial for the evaluation of SBT-20 in subjects with early-stage Huntington’s disease and a Phase 1 healthy volunteer study. We are currently evaluating preclinical disease models for the selection of an indication ahead of planning for a Phase 2 clinical trial.

Our Product Candidates

Elamipretide

Elamipretide is a small peptide that targets and binds reversibly to cardiolipin, stabilizing mitochondrial structure and function under conditions of oxidative stress. Elamipretide has been generally well-tolerated in over 900 people exposed to it systemically and 53 subjects exposed to it topically as of December 31, 2018.

We are evaluating elamipretide in primary mitochondrial diseases where there is a genetic basis for the underlying mitochondrial dysfunction and where we have the potential for expedited regulatory review, including primary mitochondrial myopathy, Barth and LHON. We also believe that elamipretide and our pipeline compounds may be able to address the significant unmet medical needs of larger populations affected by common diseases associated with aging. We are progressing our development of elamipretide for dry AMD, and we plan to evaluate clinical trials for other common age-related disease indications in conjunction with our pipeline compounds.

SBT-20

SBT-20 is a small peptide that, like elamipretide, targets and binds reversibly to cardiolipin, stabilizing mitochondrial structure and function under conditions of oxidative stress. SBT-20 has been generally well-tolerated in 75 people exposed to it systemically as of December 31, 2018. Based on preclinical studies, we believe that SBT-20 readily penetrates cell membranes and targets and binds reversibly to the inner membrane of mitochondria, or IMM. We plan to evaluate SBT-20 for rare peripheral neuropathies.



 

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SBT-272

SBT-272, our lead discovery pipeline compound, is among our novel peptides and peptidomimetics, which target the mitochondria and potentially improve mitochondrial function relative to our current product candidates as observed in non-clinical experiments. We are evaluating SBT-272 for rare neurodegenerative diseases, such as amyotrophic lateral sclerosis, or ALS.

Background on Mitochondrial Diseases

Mitochondria, found in almost all human cells, are the “powerhouse of the cell.” Normal mitochondrial function is essential for human life and for the proper functioning of many systems in our bodies. Mitochondria have their own DNA, called mitochondrial DNA, or mtDNA, which is inherited only from our mothers and is separate and distinct from nuclear DNA. Mitochondrial diseases arising from inherited genetic defects, called primary mitochondrial diseases, are typically rare diseases which can impact multiple organ systems within the body and may lead to reduced lifespan. Symptoms of primary mitochondrial disease, including chronic pain, vision problems, cardiovascular problems and kidney problems, may be compared to “accelerated aging” as described by individuals with the disease and their caregivers.

Although mtDNA is originally inherited from our mothers, it is replicated within cells as mitochondria reproduce and is highly susceptible to mutation within specific cells and organ systems as we age. Mitochondrial diseases arising from these spontaneous mutations in our mtDNA, called secondary mitochondrial diseases, include senescence, neurodegenerative diseases (such as Alzheimer’s disease, Parkinson’s disease and ALS), heart disease (such as heart failure and atherosclerosis), diabetes, ophthalmic conditions (such as AMD, glaucoma, diabetic retinopathy and diabetic macular edema), cancer, diabetes, skeletal muscle dysfunction (such as sarcopenia) and kidney diseases.

Mitochondrial dysfunction, whether inherited or acquired, often impacts high energy-demanding organs such as the skeletal muscle, cardiac, renal, visual, neurological, central nervous, circulatory or endocrine systems.

Our approach

Our product candidates target cardiolipin in the IMM, stabilizing it under conditions of oxidative stress. Cardiolipin is a conically shaped phospholipid that plays an important role in establishing the cristae architecture within the IMM and optimizing the function of the electron transport chain. Reduced and damaged cardiolipin content has been observed in many diseases, and a deficiency of normal cardiolipin is thought to be centrally involved in mitochondrial dysfunction.

Our lead product candidate, elamipretide, along with several of our pipeline compounds, target and bind reversibly to cardiolipin, stabilizing it under conditions of oxidative stress, thereby preserving the curved architecture of the IMM. We have focused our development efforts on diseases and conditions that affect the organs in the body that generate significant energy because of the high mitochondrial content found in the cells comprising these organs.

Our Strategy

We aim to continue the development of mitochondrial medicine to improve the lives of patients with unmet medical needs. There are no treatments approved by the FDA, the EMA or the NMPA for primary mitochondrial myopathy, Barth or dry AMD, and there are no FDA or NMPA approved treatments for LHON. We are pioneering the development of treatments for these diseases with unmet medical needs and believe we are well-positioned to be among the first to address these largely untapped markets in the United States, Europe and China. Although our initial development focus is on rare primary mitochondrial diseases, we believe that over the longer term there could be significant opportunities with regard to common age-related diseases, including dry AMD. To achieve our objective, we intend to:



 

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Rapidly advance the clinical development of elamipretide in rare mitochondrial diseases

We are developing elamipretide for rare mitochondrial diseases, including primary mitochondrial myopathy, Barth and LHON. We have received Fast Track and Orphan Drug designations in the United States for each of these indications. We are enrolling subjects into our ongoing Phase 3 clinical trial for the treatment of primary mitochondrial myopathy, which we expect to have fully enrolled during the first half of 2019. We have completed the placebo-controlled portion of a Phase 2/3 clinical trial for the treatment of Barth and are continuing to evaluate efficacy endpoints during an open-label extension, in which all subjects are eligible to continue receiving elamipretide. Eight subjects are continuing in the open-label extension phase. We plan to meet with the FDA regarding this program during the first half of 2019 to discuss a potential NDA submission. We have completed the placebo-controlled portion of a Phase 2 clinical trial for the treatment of LHON and are continuing to evaluate efficacy endpoints during an open-label extension trial, in which all subjects are eligible to continue receiving the study drug. We plan to meet with the FDA for an end-of-Phase 2 meeting regarding this program during the first half of 2019. Following that meeting, we plan to submit a clinical trial application to the NMPA for inclusion of clinical sites in China in a potential Phase 3 clinical trial, which we believe may help expedite clinical trial enrollment. We will continue to evaluate development of elamipretide for additional rare disease indications.

Accelerate the clinical development of elamipretide for dry AMD

We are advancing development of elamipretide for dry AMD, an age-related disease, which is the leading cause of blindness in older adults. Dry AMD is estimated to impact approximately 10 million individuals in the United States and is the leading cause of blindness among older adults in the developed world. We received Fast Track designation in the United States for dry AMD with geographic atrophy in November 2018. Dry AMD would provide a significantly larger potential market size than our rare disease indications if we are able to successfully develop and commercialize elamipretide or one of our pipeline compounds for this indication. In our Phase 1 clinical trial of elamipretide, we observed evidence of clinical benefit for patients with dry AMD. We plan to initiate a Phase 2b placebo-controlled clinical trial for the treatment of patients with geographic atrophy, an advanced form of dry AMD, in the first quarter of 2019.

Expand clinical development efforts in China under new regulatory pathways

The prevalence of primary mitochondrial diseases, such as primary mitochondrial myopathy, Barth and LHON, is thought to be comparable in China to that in the United States because evidence suggests that prevalence does not vary by race or ethnicity for mitochondrial diseases. China has recently implemented policies to expedite regulatory pathways for rare diseases, including publication of a list of rare diseases that includes mitochondrial related diseases such as LHON. For primary mitochondrial myopathy, with respect to which we are currently conducting a pivotal trial in the United States and Europe, and Barth, we may apply to the NMPA for clinical trial waivers and expedited approval if and when we receive FDA approval for these indications. For LHON, we plan to submit a clinical trial application to the NMPA for the inclusion of Chinese clinical sites in our subsequent clinical trials, which may be used to support FDA approval. We believe that inclusion of Chinese sites may help expedite enrollment of clinical trials in rare diseases, as well as progress potential commercial collaboration opportunities for the China market for our product candidates, if approved.

Advance the development of pipeline mitochondrial medicines in rare diseases

We believe that our mitochondrial targeted product candidates may be beneficial in rare diseases involving mitochondrial dysfunction and hope to nominate compounds from our pipeline for select rare disease indications. We plan to evaluate our second clinical product candidate, SBT-20, for which we have completed two Phase 1 clinical safety trials in healthy volunteers, for rare peripheral neuropathies. We are evaluating our lead pipeline compound, SBT-272, for rare neurodegenerative diseases, such as ALS. We expect to initiate a Phase 1 clinical safety trial for SBT-272 by the end of 2019.



 

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Advance the development of pipeline mitochondrial medicines in common age-related diseases

We believe that mitochondrial medicine may be a promising approach for many common age-related diseases beyond AMD, including neurodegenerative diseases. We believe that the United States, Europe and China are important markets for the clinical development of age-related diseases, and we are evaluating further development of our product candidates and pipeline compounds for age-related indications in these markets.

Expand our carrier platform

We have extensive experience in optimizing delivery of our compounds to the mitochondria, which has been a challenge for other drug delivery technologies. We have demonstrated capability to deliver beneficial “payloads” to mitochondria by conjugating them with our proprietary compounds, which serve as vectors or carriers to the mitochondria, conferring organelle specificity to promising therapies. These payloads could include small molecules, proteins, oligonucleotides and complex formulations, such as DNA, siRNA and miRNA, nanoparticles and liposomes. This delivery platform, which we call our carrier platform, could enable delivery of missing proteins or even gene therapy to address inherited mitochondrial disorders.

Explore potential strategic partnerships and alliances to maximize the value of our development programs

We hold worldwide exclusive licenses from the Cornell Research Foundation, Inc. and the Institut de recherches cliniques de Montréal for our two clinical-stage assets, elamipretide and SBT-20. We have full ownership of our preclinical compound library, including SBT-272. We may explore select strategic partnerships and alliances to support our drug development programs, while preserving significant development and commercialization rights, if we believe that such alliances may allow us to leverage the financial support and therapeutic area expertise and resources of a strategic partner to accelerate the development and commercialization of our drug candidates, particularly in common disease indications. We plan to retain rights to lead the development and commercialization of elamipretide for primary mitochondrial myopathy, Barth, LHON and dry AMD in the United States but will consider collaborating in Europe and China.

Expand our intellectual property portfolio in the field of mitochondrial medicine

We continue to invest in our mitochondrial medicine discovery platform to identify new approaches to improve absorption, distribution, metabolism and excretion of active mitochondrial compounds. We have an active discovery and development program focused on novel compounds targeting mitochondria. We believe the differentiated mitochondrial targeting characteristics of our compounds, our development of proprietary assays to screen new compounds for mitochondrial targeting and activity characteristics, and our experience working with various models of mitochondrial dysfunction position us to be a leader in next generation development of mitochondrial product candidates that are improved relative to elamipretide and SBT-20. We intend to use our insight into mitochondrial biology to continue developing additional intellectual property as we pursue additional novel compounds that target mitochondrial disease. As of December 31, 2018, our intellectual property portfolio included 374 issued patents and 298 patent applications relating to mitochondrial medicine, either wholly-owned or in-licensed, in select commercially relevant jurisdictions, including the United States, key European countries, China, Japan and Canada.

Recent Developments

As of December 31, 2018, we had cash and cash equivalents of $10.9 million.

The information above is based on preliminary unaudited information and management estimates for the year ended December 31, 2018, is not a comprehensive statement of our financial results, and is subject to completion of our financial closing procedures. Our independent registered public accounting firm has not conducted an audit or review of, and does not express an opinion or any other form of assurance with respect to, this preliminary estimate.



 

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Risks Associated with Our Business

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

 

   

We have incurred significant losses since inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability. As of September 30, 2018, we had an accumulated deficit of $399.7 million.

 

   

We will need substantial additional funding. If we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate our research and drug development programs or commercialization efforts. If we do raise additional capital, it may cause dilution to our shareholders.

 

   

We depend heavily on the success of elamipretide, our lead product candidate, and we cannot be certain that we will receive regulatory approval for elamipretide or if we will successfully commercialize elamipretide even if we receive such regulatory approval.

 

   

Our approach to the discovery and development of product candidates that target mitochondria is unproven, and we do not know whether we will be able to develop any drugs of commercial value.

 

   

If clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of regulatory authorities or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.

 

   

We expect to depend on third parties for the development, marketing and/or commercialization of our product candidates in some cases. If those collaborations are not successful, we may not be able to capitalize on the market potential of our product candidates.

 

   

We hold exclusive licenses from Cornell Research Foundation and the Institut de recherches cliniques de Montréal for both of our clinical-stage product candidates, elamipretide and SBT-20. If these third parties terminate their agreements with us, our competitive position and our market share, will be harmed. For example, under our license agreement with Cornell, if we fail to commercialize a product by December 31, 2020, Cornell may terminate our license, subject to specified exceptions for causes due to scientific and regulatory events that are common in drug development, such as institutional review board delays, clinical trial recruitment, clinical trial results and regulatory delays, and other events over which we cannot exert direct control.

 

   

Following completion of this offering, Morningside Venture (I) Investments Limited will beneficially own approximately 64.4% of our ordinary shares (or 62.7% if the underwriters exercise their option to purchase additional ADSs in full) and will therefore continue to have substantial control over us after this offering, which could limit your ability to influence the outcome of key decisions and transactions involving us, including a change of control.

 

   

Based on our cash balances, recurring losses and our projected spending in 2018, and without giving effect to the proceeds of this offering, there is a substantial doubt about our ability to continue as a going concern.

 

   

As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and Nasdaq Stock Market, or Nasdaq, corporate governance rules and are permitted to file less information with the Securities and Exchange Commission, or the SEC, than U.S. companies. This may limit the information available to holders of the ADSs.

Corporate Information

Our registered office is located at c/o Intertrust Corporate Services (Cayman) Limited, 190 Elgin Avenue, George Town, Grand Cayman, KY1-9005 Cayman Islands. We have three wholly-owned subsidiaries: Stealth BioTherapeutics, Inc., a Delaware company, which we refer to as Stealth Delaware; Stealth BioTherapeutics (HK) Limited, a company incorporated with limited liability under the laws of Hong Kong; and Stealth BioTherapeutics (Shanghai) Limited, a limited liability company established in the People’s Republic of China.



 

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Our agent for service of process in the United States is Stealth Delaware, and the executive offices of Stealth Delaware are located at 275 Grove Street, Suite 3-107, Newton, MA 02466, and the telephone number there is (617) 600-6888. Our website address is www.stealthbt.com. We have included our website address in this prospectus as an inactive textual reference only. The information contained in, or accessible through, our website does not constitute part of this prospectus.

Stealth BioTherapeutics Corp is a Cayman Islands company and we conduct our operations in the United States through Stealth Delaware. All of our employees are employed by Stealth Delaware.

“Stealth BioTherapeutics,” the Stealth BioTherapeutics logo and other trademarks or service marks of Stealth BioTherapeutics Corp appearing in this prospectus are the property of Stealth BioTherapeutics or our subsidiaries. This prospectus contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or symbols.

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:

 

   

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 about our executive compensation arrangements;

 

   

exemption from the non-binding advisory votes on executive compensation, including golden parachute arrangements; and

 

   

exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting.

Generally, we may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, we have more than $700.0 million in market value of our shares held by non-affiliates or we issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of certain reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold securities.

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

Implications of Being a Foreign Private Issuer

Our status as a foreign private issuer also exempts us from compliance with certain laws and regulations of the SEC and certain regulations of The Nasdaq Stock Market. Consequently, we are not subject to all of the disclosure requirements applicable to companies organized within the United States. For example, we are exempt from certain rules under the Exchange Act that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act. In addition, our senior management and supervisory board members are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules



 

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with respect to their purchases and sales of our securities. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies. Accordingly, there may be less publicly available information concerning our company than there is for U.S. public companies.

In addition, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from the Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information.

We may take advantage of these exemptions until such time as we no longer qualify as a foreign private issuer. In order to maintain our current status as a foreign private issuer, either a majority of our shares must be directly or indirectly owned of record by non-residents of the United States, or a majority of our executive officers or directors may not be United States citizens or residents, more than 50% of our assets cannot be located in the United States and our business must be administered principally outside the United States.



 

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The Offering

 

ADSs offered by us


6,500,000 ADSs

 

ADSs to be outstanding following this offering


6,500,000 ADSs (with each ADS representing 12 ordinary shares)

 

Ordinary shares to be outstanding following this offering


413,298,719 ordinary shares, or 424,998,719 ordinary shares if the underwriters exercise their option to purchase additional ADSs in full (including, in each case, ordinary shares represented by the ADSs offered by this prospectus)

 

Option to purchase additional ADSs

The underwriters have an option for a period of 30 days from the date of this prospectus to purchase up to 975,000 additional ADSs.

 

The ADSs

Each ADS represents 12 ordinary shares, par value $0.0003 per share. You will have the rights of an ADS holder or beneficial owner (as applicable) as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time. To better understand the terms of our ADSs, see “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, the form of which is filed as an exhibit to the registration statement of which this prospectus forms a part.

 

Depositary

Citibank, N.A.

 

Use of proceeds

We intend to use the net proceeds from this offering, together with our existing cash and cash equivalents, to fund the continued development of elamipretide, to fund continued clinical development of discovery compounds, including SBT-272, and for working capital and other general corporate purposes. See “Use of Proceeds” for a more complete description of the intended use of proceeds from this offering.

 

Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in the ADSs.

 

Concentration of Ownership

Following the completion of this offering, Morningside Venture (I) Investments Limited will own 64.4% of our ordinary shares (or 62.7% if the underwriters exercise their option to purchase additional ADSs in full).

 

Proposed Nasdaq Global Market symbol

MITO

 

 

The number of ordinary shares to be outstanding after this offering is based on 335,298,719 ordinary shares issued and outstanding as of December 31, 2018, giving effect to (i) the conversion of all outstanding Series A convertible preferred shares into 91,600,398 ordinary shares and (ii) the issuance of 175,210,373 ordinary shares upon the conversion of our outstanding convertible notes in an aggregate principal amount of



 

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$132.4 million, or the 2018 Notes, based on the initial public offering price of $12.00 per ADS, both of which will occur automatically upon the closing of this offering, and excluding:

 

   

15,871,229 ordinary shares issuable upon exercise of share options outstanding as of December 31, 2018, at a weighted-average exercise price of $1.06 per share;

   

9,631,519 ordinary shares available for future issuance as of December 31, 2018 under our 2006 share incentive plan, which shares will cease to be available for issuance following the closing of this offering;

 

   

47,692,934 ordinary shares reserved for issuance, in connection with this offering, under our 2019 share incentive plan, which plan includes provisions that automatically increase the number of ordinary shares reserved for issuance thereunder each year;

 

   

3,972,565 ordinary shares reserved for issuance, in connection with this offering, under our 2019 employee share purchase plan, which plan includes provisions that automatically increase the number of ordinary shares reserved for issuance thereunder each year; and

 

   

500,000 ordinary shares issuable upon exercise of an outstanding warrant with an exercise price equal to $1.00 per share (based upon the initial public offering price of $12.00 per ADS in this offering and reflected on an implied per ordinary share basis).

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

 

   

a one-for-three reverse share split that became effective on December 28, 2018

 

   

the conversion of all outstanding Series A convertible preferred shares into an aggregate of 91,600,398 ordinary shares;

 

   

conversion of the 2018 Notes;

 

   

no exercise of the outstanding options or warrant described above;

 

   

no exercise by the underwriters of their option to purchase additional ADSs; and

 

   

no purchases of ADSs by our existing shareholders in this offering.

Certain entities associated with certain of our existing noteholders and/or our principal shareholder, Morningside Venture (I) Investments Limited, have indicated an interest in purchasing up to an aggregate of approximately $60.0 million of the ADSs in this offering at the initial public offering price and on the same terms as the other purchasers in this offering. However, because indications of interest are not binding agreements or commitments to purchase, these persons may determine to purchase fewer ADSs than they indicate an interest in purchasing or not to purchase any ADSs in this offering. It is also possible that these persons could purchase more ADSs in this offering. In addition, the underwriters could determine to sell fewer ADSs to any of these persons than they indicate an interest in purchasing or not to sell any ADSs to such persons. The underwriters will receive the same underwriting discount and commissions on these ADSs as they will on any other ADSs sold to the public in this offering.



 

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Summary Consolidated Financial Information

We have derived the following summary of consolidated statement of operations data for the years ended December 31, 2016 and 2017 and the summary consolidated balance sheet data as of December 31, 2017 from our audited consolidated financial statements appearing elsewhere in this prospectus. We have derived the following consolidated statements of operations data for the nine months ended September 30, 2017 and 2018 and the consolidated balance sheet data as of September 30, 2018 from unaudited condensed consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair presentation of the consolidated financial statements. Historical results are not necessarily indicative of the results that may be expected in the future, and the results for the nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the full fiscal year or any other period. The summary consolidated financial data set forth below should be read together with our consolidated financial statements and the related notes to those statements, as well as the sections of this prospectus captioned “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

    YEAR ENDED
DECEMBER 31,
    NINE MONTHS ENDED
SEPTEMBER 30,
 
    2016     2017     2017     2018  
    (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

       

Operating expenses:

       

Research and development

  $ 48,445     $ 63,220     $ 46,212     $ 41,758  

General and administrative

    13,403       16,500       12,937       12,541  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    61,848       79,720       59,149       54,299  
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (61,848     (79,720     (59,149     (54,299

Other income (expense), net

    799       (3,190     (1,691     (15,824
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

  $ (61,049   $ (82,910   $ (60,840   $ (70,123
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to ordinary shareholders—basic and diluted (1)

  $ (0.90   $ (1.21   $ (0.89   $ (1.02
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average ordinary shares used in net loss per share attributable to ordinary shareholders—basic and diluted (1)

    68,165,325       68,472,262       68,471,469       68,474,614  
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to ordinary shareholders—basic and diluted (1)

    $ (0.42     $ (0.23
   

 

 

     

 

 

 

Pro forma weighted-average ordinary shares used in net loss per share attributable to ordinary shareholders—basic and diluted (1)

      190,610,424         244,608,268  
   

 

 

     

 

 

 

 

 

(1)    See Notes 2 and 15 to our audited consolidated financial statements and notes 2 and 13 to our unaudited interim condensed consolidated financial statements appearing elsewhere in this prospectus for further details on the calculation of basic and diluted net loss per share attributable to ordinary shareholders and pro forma basic and diluted net loss per share attributable to ordinary shareholders.


 

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The following table sets forth summary consolidated balance sheet data as of September 30, 2018:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the conversion of all outstanding Series A convertible preferred shares into 91,600,398 ordinary shares; and

 

   

on a pro forma as adjusted basis to give further effect to (i) the issuance of 175,210,373 ordinary shares upon the conversion of our outstanding convertible notes in an aggregate principal amount of $132.4 million, based on the initial public offering price of $12.00 per ADS, both of which will occur automatically upon the closing of this offering and (ii) our issuance and sale of 6,500,000 ADSs in this offering at the initial public offering price of $12.00 per ADS, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

 

     AS OF SEPTEMBER 30, 2018  
     ACTUAL     PRO FORMA     PRO FORMA
AS ADJUSTED
 
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 4,078     $ 4,078     $ 74,380  

Working capital

     (31,027     (31,027     43,665  

Net assets

     (149,076     (149,076     37,411  

Total assets

     11,630       11,630       81,932  

Total Series A convertible preferred shares

     211,377              

Total accumulated deficit

     (399,680     (399,680     (399,680

Total shareholders’ (deficit) equity

     (360,453     (149,076     37,411  

 

 



 

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RISK FACTORS

Investing in the ADSs involves a high degree of risk. Before you decide to invest in the ADSs, you should consider carefully the risks described below, together with the other information contained in this prospectus, including our consolidated financial statements and the related notes appearing at the end of this prospectus. We believe the risks described below are the risks that are material to us as of the date of this prospectus. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. In these circumstances, the market price of the ADSs 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 losses since inception and expect to incur significant and increasing losses for at least the next several years. We may never achieve or maintain profitability.

We have incurred significant annual net operating losses in every year since our inception. Our net losses were $61.0 million, $82.9 million and $70.1 million for the years ended December 31, 2016 and 2017 and nine months ended September 30, 2018, respectively. As of September 30, 2018, we had an accumulated deficit of $399.7 million. We expect to continue to incur significant and increasing operating losses for the foreseeable future, and we do not know whether or when we will become profitable. We have not generated any revenues from product sales, have not completed the development of any product candidates and may never have a product candidate approved for commercialization. We have financed our operations to date through the issuance of our ordinary shares and Series A convertible preferred shares and debt financings and have devoted substantially all of our financial resources and efforts to research and development, including preclinical studies and clinical development programs. Our net losses may fluctuate significantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our shareholders’ deficit and working capital.

We anticipate that our expenses will increase substantially if and as we:

 

   

continue to develop and conduct clinical trials with respect to our lead product candidate, elamipretide, including our ongoing Phase 2 and 3 clinical trials, for the treatment of primary mitochondrial myopathy, Barth, LHON, and dry AMD and any future clinical trials;

 

   

initiate and continue research and preclinical and clinical development efforts for our other product candidates, including SBT-20 and SBT-272;

 

   

seek to identify and develop additional product candidates;

 

   

seek regulatory and marketing approvals for our product candidates that successfully complete clinical trials, if any;

 

   

establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize various products for which we may obtain marketing approval, if any;

 

   

require the manufacture of larger quantities of product candidates for clinical development and potentially commercialization;

 

   

maintain, expand and protect our intellectual property portfolio;

 

   

hire and retain additional personnel, such as clinical, quality control and scientific personnel;

 

   

add operational, financial, management information systems and commercial personnel, including personnel to support our product development and help us comply with our obligations as a public company; and

 

   

add property, equipment and physical infrastructure to support our research and development programs in the United States, Europe and China.

Our ability to become and remain profitable depends on our ability to generate revenue. We do not expect to generate significant revenue unless and until we are, or any future collaborator is, able to obtain marketing approval for, and successfully commercialize, one or more of our product candidates. This will require our, or any of our future collaborators’, success in a range of challenging activities, including completing clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those

 

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products for which we, or any of our future collaborators, may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursement for our products from private insurance or government payors. Because of the uncertainties and risks associated with these activities, we are unable to accurately predict the timing and amount of increased expenses, and if or when we might achieve profitability. We and any future collaborators may never succeed in these activities and, even if we do, or any future collaborators do, we may never generate revenues that are large enough for us to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of product candidates or continue our operations. A decline in the value of our company could cause you to lose all or part of your investment.

We will need substantial additional funding. If we are unable to raise capital when needed, we may be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a very time-consuming, expensive and uncertain process that takes years to complete. We expect our expenses to increase in connection with our ongoing activities, particularly as we initiate new clinical trials of, initiate new research and preclinical development efforts for and seek marketing approval for our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we may incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing, manufacturing and distribution are not the responsibility of a future collaborator. Furthermore, following the completion of this offering, we expect to incur significant additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed and on attractive terms, we may be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

We plan to use the net proceeds of this offering primarily to fund our ongoing research and development efforts, including our clinical development of elamipretide for rare disease indications and for dry AMD. We will be required to expend significant funds in order to advance the development of elamipretide, as well as any other product candidates we may develop in the future. In addition, while we may seek one or more collaborators for future development of our product candidates, and, in particular, may conduct any large Phase 3 clinical trials of elamipretide, such as those we would likely be required to conduct for common diseases such as dry AMD, in collaboration with one or more partners that would finance most of the associated costs, we may not be able to enter into a collaboration for any of our product candidates on suitable terms, or at all. In any event, the net proceeds of this offering and our existing cash and cash equivalents will not be sufficient to fund all of the efforts that we plan to undertake or to fund the completion of development of any of our product candidates. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements for the next 12 months. Our estimate as to how long we expect the net proceeds from this offering, together with our existing cash and cash equivalents, to be able to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned. Our future funding requirements, both short-term and long-term, will depend on many factors, including:

 

   

scope, progress, timing, costs and results of our current and future clinical trials;

 

   

research and preclinical development efforts for any future product candidates that we may develop;

 

   

our ability to enter into and the terms and timing of any collaborations, licensing agreements or other arrangements;

 

   

number of future product candidates that we pursue and their development requirements;

 

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outcome, timing and costs of seeking regulatory approvals;

 

   

costs of commercialization activities for any of our product candidates that receive marketing approval to the extent such costs are not the responsibility of any future collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

 

   

subject to receipt of marketing approval, revenue, if any, received from commercial sales of our current and future product candidates;

 

   

our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure;

 

   

costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims; and

 

   

costs of operating as a public company.

We have no history of commercializing pharmaceutical products, which may make it difficult to evaluate the prospects for our future viability.

We began operations in 2006 and initiated our first clinical trial in 2010. Our operations to date have been limited to financing and staffing our company and developing our technology and conducting preclinical research and clinical trials for our product candidates. We have not demonstrated an ability to obtain marketing approvals, manufacture a commercial scale product, or arrange for a third-party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Accordingly, you should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development, especially clinical-stage biopharmaceutical companies such as ours. Predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing pharmaceutical products.

Our recurring losses and negative cash flows have raised substantial doubt regarding our ability to continue as a going concern.

Based on our cash balances, recurring losses and our projected spending, there is a substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient capital in this offering, our business, financial condition and results of operations will be materially and adversely affected, and we will need to obtain alternative financing or significantly modify our operational plans to continue as a going concern. If we are unable to continue as a going concern, we might have to liquidate our assets and, the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our consolidated financial statements. Further, even if we successfully complete and receive net proceeds from this offering, given our planned expenditures for the next several years, including, without limitation, expenditures in connection with our clinical trials of elamipretide, SBT-20 and other new compounds, we may conclude, in connection with the issuance of our consolidated financial statements for the year ending December 31, 2018 or any other subsequent period, that there is substantial doubt regarding our ability to continue as a going concern. In addition, our lack of cash resources and our potential inability to continue as a going concern may materially adversely affect the price of the ADSs and our ability to raise new capital or to enter into critical contractual relations with third parties.

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

We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent that we raise additional capital through the sale of ordinary shares, ADSs, convertible securities or other equity securities, our existing shareholders’ ownership interest may be substantially diluted, and the terms of these securities could include liquidation or other preferences and anti-dilution protections that could adversely affect your rights as a holder of ADSs. Additional debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, creating liens, redeeming shares or declaring dividends, that could adversely impact our ability to conduct our business. For example, in connection with our term loan facility with Hercules Capital, Inc., or Hercules, we granted a security interest on all of our assets, excluding our intellectual property, and agreed to a negative pledge on our intellectual property. The term loan facility also contains restrictive covenants including, subject to certain exceptions, covenants that prohibit us from incurring additional indebtedness, creating any lien on our property, making investments, paying dividends or

 

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redeeming shares, transferring any material portion of our assets, merging with or acquiring another entity, entering into a transaction that will result in a change of control and making certain other corporate changes. Future debt securities or other financing arrangements could contain similar or more restrictive negative covenants. In addition, securing financing could require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention away from day-to-day activities, which may adversely affect our management’s ability to oversee the development of our product candidates.

If we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

We have a significant amount of debt, which may affect our ability to operate our business and secure additional financing in the future.

As of September 30, 2018, we had $20.0 million of outstanding principal under our term loan facility with Hercules and an additional $20.0 million of available borrowings, subject to achievement of specified milestones. Beginning in December 2018, we are required to repay principal and interest on these borrowings in monthly installments through January 2021. Subject to the restrictions in this existing facility, we could incur additional indebtedness beyond our borrowings from Hercules.

Our outstanding indebtedness, including any additional indebtedness beyond our borrowings from Hercules, combined with our other financial obligations and contractual commitments, could have significant adverse consequences, including:

 

   

requiring us to dedicate a portion of our cash resources to the payment of interest and principal, reducing money available to fund working capital, capital expenditures, product development and other general corporate purposes;

 

   

increasing our vulnerability to adverse changes in general economic, industry and market conditions;

 

   

subjecting us to restrictive covenants that may reduce our ability to take certain corporate actions or obtain further debt or equity financing;

 

   

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and

 

   

placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing options.

We may not have sufficient funds and may be unable to arrange for additional financing to pay the amounts due under our existing debt instruments. Failure to make payments or comply with other covenants under our existing debt instruments could result in an event of default and acceleration of amounts due. Additionally, under our loan and security agreement with Hercules, an occurrence that has a material adverse effect on our business, operations, properties, assets or financial condition, on the collateral, liens or priority of such liens or on our ability to perform under the terms of the loan or associated agreements is an event of default. If an event of default occurs and the lenders accelerate the amounts due, we may not be able to make accelerated payments, and the lenders could seek to enforce security interests in the collateral securing such indebtedness, which includes substantially all of our assets other than our intellectual property. In addition, the covenants under our credit facility, the pledge of our assets as collateral and the negative pledge with respect to our intellectual property could limit our ability to obtain additional debt financing.

Risks Related to the Discovery, Development and Commercialization of Our Product Candidates

Our approach to the discovery and development of product candidates and the development of therapies targeting mitochondria generally are unproven, and we do not know whether we will be able to develop any products of commercial value.

We are focused on discovering and developing therapies for diseases involving mitochondrial dysfunction, particularly by developing therapies that target mitochondria in order to normalize the function of dysfunctional

 

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mitochondria. While we believe that our approach may ultimately enable drug research and clinical development for mitochondrial diseases across a wide range of therapeutic areas, this approach is unproven. We have not yet succeeded and may never succeed in demonstrating efficacy and safety for any of our product candidates in later stage clinical trials or in obtaining marketing approval thereafter. For example, although we have conducted Phase 1 and Phase 2 clinical trials, we have not yet completed a Phase 3 clinical trial.

In addition, there are over 250 genetic mutations underlying numerous rare diseases collectively known as primary mitochondrial diseases. Our clinical trials for the treatment of primary mitochondrial myopathy required that subjects have genetic confirmation of primary mitochondrial disease. Participants in our ongoing Phase 3 clinical trial may have a different mix of genotypes than the subjects of our prior clinical trials, which could have an impact on the results of our Phase 3 clinical trial. However, we have agreed with the FDA that we will stratify patients in our ongoing Phase 3 clinical trial according to certain categories of genetic mutation, so that patients within the agreed categories of mutations will be evenly balanced as between elamipretide and placebo treatment. Furthermore, no products or therapies targeting mitochondrial dysfunction have ever obtained marketing approval from the FDA or the NMPA, and the EMA has approved one therapy to treat LHON (Raxone, or idebenone, made by Santhera Pharmaceuticals), which is the only approved therapy to treat any primary mitochondrial disease.

If we are unable to successfully discover and develop product candidates, our business prospects will be substantially harmed.

We are dependent on the success of elamipretide, our lead product candidate. If we are unable to complete the clinical development of, obtain marketing approval for or successfully commercialize this product candidate, either alone or with a collaborator, or if we experience significant delays in doing so, our business could be substantially harmed.

We have no products approved for sale and are investing a significant portion of our efforts and financial resources in the development of elamipretide for the treatment of rare primary mitochondrial diseases. Our prospects are substantially dependent on our ability, or the ability of any future collaborator, to develop, obtain marketing approval for and successfully commercialize elamipretide.

The success of elamipretide will depend on several factors, including the following:

 

   

successful recruitment of subjects, enrollment in and completion of our ongoing clinical trials;

 

   

initiation and successful recruitment of subjects, enrollment in and completion of additional clinical trials;

 

   

safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority for marketing approval;

 

   

our ability to identify success criteria and endpoints for our clinical trials such that the FDA and other regulatory authorities will be able to determine the clinical efficacy and safety profile of any product candidates we may develop;

 

   

timely receipt of marketing approvals from applicable regulatory authorities;

 

   

the performance of our future collaborators, if any;

 

   

the extent of any required post-marketing approval commitments to applicable regulatory authorities;

 

   

establishment of supply arrangements with third-party raw materials suppliers and manufacturers;

 

   

establishment of arrangements with third-party manufacturers to obtain finished drug products that are appropriately packaged for sale;

 

   

obtaining and maintaining patent, trade secret protection and regulatory exclusivity, both in the United States and internationally;

 

   

protection of our rights in our intellectual property portfolio;

 

   

successful launch of commercial sales following any marketing approval;

 

   

a continued acceptable safety profile following any marketing approval;

 

   

accuracy of the estimates of the current and future number of patients with mitochondrial associated or inherited mitochondrial diseases;

 

   

commercial acceptance by patients, the medical community and third-party payors following any marketing approval; and

 

   

our ability to compete with other therapies targeting inherited mitochondrial diseases.

 

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Many of these factors—including with respect to clinical development, the regulatory submission process, potential threats to our intellectual property rights and the manufacturing, marketing and sales efforts of any future collaborator—are beyond our control, and clinical development of product candidates is inherently risky and uncertain. For example, although we observed trends towards improvement in a certain subset of patients, our Phase 2/3 clinical trial in Barth failed to reach its primary efficacy endpoints. If we are unable to develop, receive marketing approval for and successfully commercialize elamipretide, on our own or with any future collaborator, or experience delays as a result of any of these factors or otherwise, our business could be substantially harmed.

Additionally, we are developing elamipretide for certain indications of the eye, including LHON and dry AMD. Our clinical trial for the treatment of LHON involved administration of elamipretide by use of topical drops, and our clinical trial for the treatment of dry AMD involved administration of elamipretide by subcutaneous injection. We are cognizant of the challenges of targeting back of eye diseases with topical drops. The human eye has evolved to protect itself by washing foreign substances such as eye drops from the surface, with tears capable of removing as much as 95% of an eye drop. The vitreous in the interior of the eye also poses a barrier to delivery of therapies from the front of the eye to the retina. Based on the results of our Phase 2 clinical trial of elamipretide for the treatment of LHON, which did not meet its primary endpoint of change in best corrected visual acuity over the 12-month double-blind portion of the trial, we will still consider topical drops for back of eye indications and may need to conduct additional studies to determine the appropriate dose.

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

A significant portion of the research that we are conducting involves the development of new therapeutic compounds targeting the mitochondria. The results we obtain in preclinical testing and early clinical trials may not be predictive of results that are obtained in later studies, and we may suffer significant setbacks in advanced clinical trials, even after seeing promising results in earlier studies. The drug discovery that we are conducting may not be successful in identifying compounds that have commercial value or therapeutic utility. Our discovery platform may initially show promise in identifying potential product candidates, yet fail to yield viable product candidates for clinical development or commercialization for a number of reasons, including:

 

   

compounds we develop may not demonstrate improved efficacy, safety or tolerability;

 

   

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

 

   

competitors may develop alternative therapies that render our potential product candidates non-competitive or less attractive; or

 

   

a potential product candidate may not be capable of being produced at an acceptable cost.

Our research programs to identify new product candidates will require substantial technical, financial and human resources, and we may be unsuccessful in our efforts to identify new product candidates. If we are unable to identify suitable additional compounds for preclinical and clinical development, our ability to develop product candidates and obtain product revenues in future periods could be compromised, which could result in significant harm to our financial position and adversely impact the price of the ADSs.

We have never obtained marketing approval for a product candidate and we may be unable to obtain, or may be delayed in obtaining, marketing approval for any of our product candidates.

We have never obtained marketing approval for a product candidate. It is possible that the FDA may refuse to accept for substantive review any new drug applications, or NDAs, that we submit for our product candidates or may conclude after review of our data that our application is insufficient to obtain marketing approval of our product candidates. If the FDA does not accept or approve our NDAs for either of our most advanced product candidates, it may require that we conduct additional clinical, nonclinical or manufacturing validation studies and submit that data before it will reconsider our applications. Depending on the extent of these or any other FDA-required studies, approval of any NDA or application that we submit may be delayed by several years, or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve our NDAs.

Any delay in obtaining, or an inability to obtain, any marketing approvals would prevent us from commercializing our product candidates, generating revenues and achieving and sustaining profitability. If any of these outcomes occur,

 

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we may be forced to abandon our development efforts for our product candidates, which could significantly and materially harm our business.

Results of preclinical studies and early clinical trials may not be predictive of results of future clinical trials.

The outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of clinical trials do not necessarily predict success in future clinical trials. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we cannot be certain that we will not face similar setbacks. The design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. If our trial designs are not sufficient, our ophthalmic programs may be delayed or we may decide to terminate one or more of such programs.

We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support marketing approval. In addition, preclinical and clinical data are often susceptible to varying interpretations and analyses. During the regulatory review process, we will need to identify success criteria and endpoints at the time of the initiation of the trial such that the FDA or other regulatory authorities will be able to determine the clinical efficacy and safety profile of any product candidates we may develop, and the resulting clinical data and results may be difficult to analyze. Even if the FDA or other regulatory authorities were to find our success criteria to be sufficiently validated and clinically meaningful, we may not achieve the pre-specified endpoints to a degree of statistical significance. Many companies that believed that their product candidates had performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain marketing approval of their product candidates. Even if we, or any future collaborators, believe that the results of clinical trials for our product candidates warrant marketing approval, the FDA or comparable foreign regulatory authorities may disagree and may not grant marketing approval of our product candidates.

In some instances, there can be significant variability in safety or efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, changes in and adherence to the dosing regimen and other clinical trial protocols and the rate of dropout among clinical trial participants. Specifically, the clinical trials we have completed to date have enrolled only small numbers of subjects, we have experienced dropout among participants and we have not always successfully achieved our pre-specified clinical trial endpoints to a degree of statistical significance.

To date, we have conducted small Phase 1 and Phase 2 clinical trials, many of which have been undertaken to help inform our clinical strategy and develop later stage clinical trials intended to assess efficacy. While the endpoints and populations for these later stage clinical trials, including Phase 3 clinical trials that we are planning, are derived from results of our earlier trials and medical literature, in our prior clinical trials we did not demonstrate a statistically significant effect in the population and on the efficacy endpoints prospectively described in the clinical trial protocol. The lack of statistical significance could be attributed to various factors, including the lack of power to demonstrate significance, the design of the studies or the lack of a treatment benefit from our product candidate. In some cases, we conducted post hoc, retrospective analyses of data subsets and have designed, and expect to design planned, later clinical trials based on the results of such post hoc analyses. For example, in our Phase 2 clinical trial for the treatment of primary mitochondrial myopathy, in the elamipretide-treated group, we observed an improvement on the primary endpoint of improvement in distance walked in six minutes (the six minute walk test, or 6MWT) relative to the placebo-treated group, which was not statistically significant, and our Phase 1/2 clinical trial for the treatment of primary mitochondrial myopathy did not demonstrate statistically significant changes in the high-dose versus placebo comparison of 6MWT results at day five pursuant to the primary statistical analysis model specified in the statistical analysis plan. We conducted an exploratory post hoc analysis of the results from this Phase 1/2 clinical trial primarily to assess, among other things, whether there was a potentially confounding cohort effect in the placebo group, which could occur if subjects randomized to placebo within higher-dose cohorts performed better due to the placebo effect of knowing they were randomized within a higher-dose cohort. This post hoc analysis showed a significant mean improvement from baseline in six-minute walk distance after five days of treatment, as adjusted for gender and baseline distance, for individuals treated with the high dose of elamipretide compared to placebo-treated individuals. The design of our Phase 3 clinical trial for the treatment of mitochondrial myopathy was informed, in part, by the results of this post hoc analysis.

 

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If we fail to receive positive results in clinical trials of our product candidates and do not achieve statistical significance for the prospectively specified primary endpoints in our planned Phase 3 clinical trials, the development timeline and regulatory approval and commercialization prospects for our most advanced product candidates, and, correspondingly, our business and financial prospects, would be negatively impacted.

Because we are developing elamipretide for the treatment of several indications for which regulatory authorities have not issued definitive guidance as to how to measure and demonstrate efficacy, there is substantial risk that the design or outcomes of our clinical trials will not be satisfactory to support marketing approval.

We are developing elamipretide for several indications for which there is currently no approved therapy in the United States, China or the European Union, including primary mitochondrial myopathy, Barth, and dry AMD. We are developing elamipretide for LHON, for which there are no currently approved therapies in the United States or China and only one therapy approved in Europe. Furthermore, there has been limited historical clinical trial experience for the development of drugs to treat many of these indications. As a result, the design and conduct of clinical trials for these indications is subject to substantial risk. In particular, regulatory authorities in the United States and in other jurisdictions, including Europe and China, have not issued definitive guidance as to how to measure and demonstrate efficacy for primary mitochondrial myopathy, Barth, LHON or dry AMD and, as a result, there is substantial risk that the design or outcomes of our clinical trials will not be satisfactory to support marketing approval. For example, the endpoints in our Phase 2/3 clinical trial of elamipretide for the treatment of Barth syndrome included change in six-minute walk distance and change in a total fatigue scale, or BTHSA Total Fatigue, from the Barth symptom assessment, or BTHSA, a newly developed patient reported outcome measure, which has not been utilized in prior trials and may not be accepted by regulators as a basis for approval. Even if this type of novel endpoint is accepted as a basis for approval in the United States, we cannot be certain that regulators outside of the United States will accept such endpoints or will not require us to conduct additional validation studies to support the suitability of such endpoints for approval in these jurisdictions.

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

Because we have limited financial and managerial resources, we intend to focus on developing product candidates for specific indications that we identify as most likely to succeed, in terms of both their potential for marketing approval and commercialization. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that may prove to have greater commercial potential.

Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable product candidates. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to the product candidate.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome.

Clinical testing is expensive, time-consuming and uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, or at all. The clinical development of our product candidates is susceptible to the risk of failure at any stage of drug development, including failure to demonstrate efficacy in a clinical trial or across a broad population of patients, the occurrence of adverse events that are severe or medically or commercially unacceptable, failure to comply with protocols or applicable regulatory requirements and determination by the FDA or any comparable foreign regulatory authority that a product candidate may not continue development or is not approvable. For example, Phase 3 clinical trials for common diseases associated with aging, such as dry AMD, would likely require a large number of subjects to be enrolled, which would cause any such trial to be very expensive. Moreover, it is possible that even if one or more of our product candidates has a beneficial effect, that effect will not be detected during clinical evaluation as a result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or analysis of our clinical trials. Conversely, as a result of the same factors, our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any. Similarly, in our clinical trials we may fail to detect toxicity of or intolerability caused by our product candidates, or mistakenly believe that our product candidates are toxic or not well tolerated when that is not in fact the case. Many companies in the pharmaceutical and biotechnology industries have suffered

 

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significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we cannot be certain that we will not face additional setbacks. It is possible that any of our development programs may be placed on full or partial clinical hold by regulatory authorities at any point, which would delay and possibly prevent further development of our product candidates.

If clinical trials of our product candidates fail to satisfactorily demonstrate safety and efficacy to the FDA and other comparable foreign regulators, we, or any future collaborators, may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of these product candidates.

We, and any future collaborators, are not permitted to commercialize, market, promote or sell any product candidate in the United States without obtaining marketing approval from the FDA. Comparable foreign regulatory authorities impose similar restrictions. We, and any future collaborators, may never receive such approvals. We, and any future collaborators, must complete extensive preclinical development and clinical trials to demonstrate the safety and efficacy of our product candidates in humans before we, or they, will be able to obtain these approvals.

Clinical testing is expensive, difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. We have not previously submitted an NDA to the FDA or similar drug approval filings to comparable foreign regulatory authorities for any of our product candidates. Any inability to complete preclinical and clinical development successfully could result in additional costs to us, or any future collaborators, and impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties. Moreover, if (i) we, or any future collaborators, are required to conduct additional clinical trials or other testing of our product candidates beyond the trials and testing that we or they contemplate, (ii) we, or any future collaborators, are unable to successfully complete clinical trials of our product candidates or other testing, (iii) the results of these trials or tests are unfavorable, uncertain or are only modestly favorable, or (iv) there are unacceptable safety concerns associated with our product candidates, we, or any future collaborators, may:

 

   

be delayed in obtaining marketing approval for our product candidates;

 

   

not obtain marketing approval at all;

 

   

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

 

   

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

 

   

be subject to additional post-marketing testing or other requirements; or

 

   

be required to remove the product from the market after obtaining marketing approval.

Adverse events or undesirable side effects caused by, or other unexpected properties of, any of our product candidates may be identified during development that could delay or prevent their marketing approval or limit their use.

Adverse events or undesirable side effects caused by, or other unexpected properties of, our product candidates could cause us, any future collaborators, an institutional review board or regulatory authorities to interrupt, delay or halt clinical trials of one or more of our product candidates and could result in a more restrictive label or the delay or denial of marketing approval by the FDA or comparable regulatory authorities. If any of our product candidates is associated with adverse events or undesirable side effects or has properties that are unexpected, we, or any future collaborators, may need to abandon development or limit development of that product candidate to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. For example, subjects in certain of our clinical trials have reported adverse events arising from reaction at the injection site and some subjects have withdrawn as a result. Moreover, laboratory findings have demonstrated mild to moderate elevations in eosinophils beginning at approximately three to four weeks after initiation of elamipretide treatment, although these have not been reported to be associated with any systemic clinical manifestations of eosinophilia and in general were demonstrated to have returned to within normal range or to baseline levels after withdrawal of elamipretide therapy and, in most subjects, to decrease to within normal range after approximately 16 weeks of elamipretide therapy (and without withdrawal of therapy). In addition, we observed a mean increase in certain liver enzymes in subjects who received the highest dose of SBT-20 in our Phase 1 clinical trial, although the principal investigator determined that no individual increases in such liver enzymes were clinically significant and although similar increases were not observed in the highest dose cohort of a prior Phase 1/2 clinical trial of SBT-20. Many compounds that initially showed promise in clinical or earlier stage testing have later been found to cause undesirable or unexpected side effects that prevented further development of

 

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the compound. If we, or any future collaborators, experience any of a number of possible unforeseen events in connection with clinical trials of our product candidates, potential marketing approval or commercialization of our product candidates could be delayed or prevented.

We, or any future collaborators, may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent marketing approval or commercialization of our product candidates, including:

 

   

clinical trials of our product candidates may produce unfavorable or inconclusive results;

 

   

we, or any future collaborators, may decide, or regulators may require us or them, to conduct additional clinical trials or abandon product development programs;

 

   

the number of subjects required for clinical trials of our product candidates may be larger than we, or any future collaborators, anticipate, subject enrollment in these clinical trials may be slower than we, or any future collaborators, anticipate or participants may drop out of these clinical trials at a higher rate than we, or any future collaborators, anticipate;

 

   

the cost of planned clinical trials of our product candidates may be greater than we anticipate;

 

   

our third-party contractors or those of any future collaborators, including those manufacturing our product candidates or components or ingredients thereof or conducting clinical trials on our behalf or on behalf of any future collaborators, may fail to comply with regulatory requirements or meet their contractual obligations to us or any future collaborators in a timely manner, or at all;

 

   

regulators or institutional review boards may not authorize us, any future collaborators or our or their investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

   

we, or any future collaborators, may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

 

   

subjects that enroll in a clinical trial may misrepresent their eligibility to do so or may otherwise not comply with the clinical trial protocol, resulting in the need to drop the subjects from the clinical trial, increase the needed enrollment size for the clinical trial or extend the clinical trial’s duration;

 

   

we, or any future collaborators, may have to delay, suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate;

 

   

regulators or institutional review boards may require that we, or any future collaborators, or our or their investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or their standards of conduct, a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate or findings of undesirable effects caused by a chemically or mechanistically similar drug or drug candidate;

 

   

the FDA or comparable regulatory authorities may disagree with our, or any future collaborators’, clinical trial designs or our or their interpretation of data from preclinical studies and clinical trials;

 

   

the FDA or comparable regulatory authorities may fail to approve or subsequently find fault with the manufacturing processes or facilities of third-party manufacturers with which we, or any future collaborators, enter into agreements for clinical and commercial supplies;

 

   

the supply or quality of raw materials or manufactured product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply; and

 

   

the approval policies or regulations of the FDA or comparable regulatory authorities may significantly change in a manner rendering our clinical data insufficient to obtain marketing approval.

Product development costs for us, or any future collaborators, will increase if we, or they, experience delays in testing or pursuing marketing approvals and we, or they, may be required to obtain additional funds to complete clinical trials and prepare for possible commercialization of our product candidates. We do not know whether any preclinical tests or clinical trials will begin as planned, will need to be restructured, or will be completed on schedule, or at all. Significant preclinical or clinical trial delays also could shorten any periods during which we, or any future collaborators, may have the exclusive right to commercialize our product candidates or allow our

 

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competitors, or the competitors of any future collaborators, to bring products to market before we, or any future collaborators, do and impair our ability, or the ability of any future collaborators, to successfully commercialize our product candidates and may harm our business and results of operations. In addition, many of the factors that lead to clinical trial delays may ultimately lead to the denial of marketing approval of any of our product candidates.

If we, or any future collaborators, experience delays or difficulties in the enrollment of subjects in clinical trials, our or their receipt of necessary regulatory approvals could be delayed or prevented.

We, or any future collaborators, may not be able to initiate or continue clinical trials for any of our product candidates if we, or they, are unable to locate and enroll a sufficient number of eligible subjects to participate in clinical trials as required by the FDA or comparable regulatory authorities. For example, we are developing elamipretide for the treatment of several rare diseases with small patient populations, such as Barth. Enrollment is a significant factor in the timing of clinical trials, and is affected by many factors, including:

 

   

the size and nature of the patient population;

 

   

the severity of the disease under investigation;

 

   

the proximity of subjects to clinical sites;

 

   

the eligibility criteria for the trial;

 

   

the design of the clinical trial;

 

   

efforts to facilitate timely enrollment;

 

   

competing clinical trials; and

 

   

clinician and patient perception as to the potential advantages and risks of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating.

Our inability, or the inability of any future collaborators, to enroll a sufficient number of subjects for our, or their, clinical trials could result in significant delays or may require us or them to abandon one or more clinical trials altogether. For example, our Phase 2a clinical trial of elamipretide in subjects pre-treated prior to a renal angioplasty was terminated early due to recruitment challenges after enrolling only 14 subjects of the 28 originally planned. In our Phase 3 clinical trial of elamipretide for the treatment of primary mitachondrial myopathy, we aim to enroll 200 subjects, all of whom were required to be enrolled in our pre-trial registry. Of the over 400 subjects in the pre-trial registry, 69 are located in Italy, where we are in discussions with regulators for authorization to use our pen injector in the Phase 3 clinical trial. If we are unable to obtain such authorization, the enrollment in our Phase 3 clinical trial may be delayed or otherwise adversely impacted. Enrollment delays in clinical trials may result in increased development costs for our product candidates, delay or halt the development of and approval processes for our product candidates and jeopardize our, or any future collaborators’, ability to commence sales of and generate revenues from our product candidates, which could cause the value of our company to decline.

If any of our product candidates receives marketing approval and we, or others, later discover that the drug is less effective than previously believed or causes undesirable side effects that were not previously identified, our ability, or that of any future collaborators, to market the drug could be compromised.

Clinical trials of our product candidates are conducted in carefully defined subsets of subjects who have agreed to enter into clinical trials. Consequently, it is possible that our clinical trials, or those of any future collaborator, may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any, or alternatively fail to identify undesirable side effects. In particular, because our product candidates will require chronic dosing over the lifetime of the patient, there may be undesirable side effects as a result of long-term exposure to the drug that were not observed in our clinical trials. If, following approval of a product candidate, we, or others, discover that the drug is less effective than previously believed or causes undesirable side effects that were not previously identified, any of the following adverse events could occur:

 

   

regulatory authorities may withdraw their approval of the drug or seize the drug;

 

   

we, or any future collaborators, may be required to recall the drug, change the way the drug is administered or conduct additional clinical trials;

 

   

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

 

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we may be subject to fines, injunctions or the imposition of civil or criminal penalties;

 

   

regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;

 

   

we, or any future collaborators, may be required to create a medication guide outlining the risks of the previously unidentified side effects for distribution to patients;

 

   

we, or any future collaborators, could be sued and held liable for harm caused to patients;

 

   

the drug may become less competitive; and

 

   

our reputation may suffer.

Any of these events could have a material and adverse effect on our operations and business and could adversely impact the price of the ADSs.

Even if one of our product candidates receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success and the market opportunity for the product candidate may be smaller than we estimate.

We have never commercialized a product. Even if one of our product candidates is approved by the appropriate regulatory authorities for marketing and sale, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. For example, physicians are often reluctant to switch their patients from existing therapies even when new and potentially more effective or convenient treatments enter the market. Further, patients often acclimate to the therapy that they are currently taking and do not want to switch unless their physicians recommend switching products or they are required to switch therapies due to lack of reimbursement for existing therapies.

Efforts to inform the medical community and third-party payors on the benefits of our product candidates may require significant resources and may not be successful. If any of our product candidates is approved but does not achieve an adequate level of market acceptance, we may not generate significant revenues and we may not become profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

   

the efficacy and safety of the product;

 

   

the potential advantages of the product compared to alternative treatments;

 

   

the prevalence and severity of any side effects;

 

   

the clinical indications for which the product is approved;

 

   

whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy;

 

   

limitations or warnings, including distribution or use restrictions, contained in the product’s approved labeling;

 

   

our ability, or the ability of any future collaborators, to offer the product for sale at competitive prices;

 

   

the product’s convenience and ease of administration compared to alternative treatments;

 

   

the willingness of the target patient population to try, and of physicians to prescribe, the product;

 

   

the strength of sales, marketing and distribution support;

 

   

the approval of other new products for the same indications;

 

   

changes in the standard of care for the targeted indications for the product;

 

   

the timing of market introduction of our approved products as well as competitive products;

 

   

availability of coverage and the adequacy of reimbursement from government payors, managed care plans and other third-party payors;

 

   

adverse publicity about the product or favorable publicity about competitive products; and

 

   

potential product liability claims.

The potential market opportunities for our product candidates are difficult to estimate precisely. Our estimates of the potential market opportunities are predicated on many assumptions, including industry knowledge and publications, third-party research reports and other surveys. While we believe that our internal assumptions are reasonable, these

 

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assumptions involve the exercise of significant judgment on the part of our management, are inherently uncertain and the reasonableness of these assumptions has not been assessed by an independent source. If any of the assumptions proves to be inaccurate, the actual markets for our product candidates could be smaller than our estimates of the potential market opportunities.

If we are unable to establish sales, marketing and distribution capabilities or enter into sales, marketing and distribution arrangements with third parties, we may not be successful in commercializing any product candidates that we develop if and when those product candidates are approved.

We do not have a sales, marketing or distribution infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties. We plan to use a combination of focused in-house sales and marketing capabilities and third-party collaboration, licensing and distribution arrangements to sell any of our products that receive marketing approval.

We generally plan to retain rights to participate in commercialization in the United States, particularly for products that we can commercialize with a specialized sales force and by building a focused sales and marketing organization in the United States to sell our products. The development of sales, marketing and distribution capabilities will require substantial resources, will be time-consuming and could delay any product launch. If the commercial launch of a product for which we recruit a sales force and establish marketing and distribution capabilities is delayed or does not occur for any reason, we could have prematurely or unnecessarily incurred these commercialization costs. This may be costly, and our investment could be lost if we cannot retain or reposition our sales and marketing personnel. In addition, we may not be able to hire or retain a sales force that is sufficient in size or has adequate expertise in the medical markets that we plan to target. If we are unable to establish or retain a sales force and marketing and distribution capabilities, our operating results may be adversely affected. If a potential partner has development or commercialization expertise that we believe is particularly relevant to one of our products, then we may seek to collaborate with that potential partner even if we believe we could otherwise develop and commercialize the product independently.

We hope to collaborate with third parties for commercialization in the United States of any products that require a large sales, marketing and product distribution infrastructure. We plan to commercialize our products outside the United States through collaboration, licensing and distribution arrangements with third parties. As a result of entering into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues may be lower, perhaps substantially lower, than if we were to directly market and sell products in those markets. Furthermore, we may be unsuccessful in entering into the necessary arrangements with third parties or may be unable to do so on terms that are favorable to us. In addition, we may have little or no control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively.

If we do not establish sales, marketing and distribution capabilities, either on our own or in collaboration with third parties, we will not be successful in commercializing any of our product candidates that receive marketing approval.

We have recently modified our manufacturing processes so that we will be able to produce sufficient quantities of elamipretide for commercial distribution. Interruptions in this process could delay anticipated marketing authorization applications.

Solid-phase peptide synthesis was previously used to produce elamipretide acetate batches for all completed and certain ongoing preclinical and clinical trials. Due to a lack of scalability, we deemed this process undesirable for production of commercial quantities of elamipretide and have implemented a new solution-phase process. It is typical during the years prior to gaining approval for new drugs to continue to develop manufacturing processes to achieve larger scale production with a typical goal of implementing essentially the commercial process prior to supplying pivotal clinical trials. However, our transition to a solution-phase process is recent, and any interruption in continued production of supply needed to meet potential commercial demands could delay anticipated marketing authorization applications, including NDAs, and/ or significantly impact the anticipated cost of commercial production, if our product candidates are approved for sale.

 

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To simplify the daily injection of elamipretide for patients, we have recently developed a multi-dose cartridge suitable for use in a pen injector, but we are still evaluating whether the cartridge will meet performance specifications.

For Phase 1/2 clinical trials, we developed a ready-to-use sterile solution drug product suitable for subcutaneous administration. This ready-to-use solution drug product consists of 1.5 mL of a simple sterile solution of elamipretide acetate containing sodium chloride for tonicity, packaged in a single-use 5-mL vial. This product has been administered clinically using a disposable needle and syringe. To simplify the daily injection of elamipretide for patients with primary mitochondrial myopathy, a multi-dose cartridge, suitable for use in a pen injector, has been developed for use in the most recent clinical trials, including the pivotal clinical trial for primary mitochondrial myopathy, and for commercial distribution, if elamipretide is approved for sale for this indication. Development of this multi-dose cartridge has necessitated that a preservative be added to the formulation to inhibit bacterial growth during the five-day intended-use period, and a buffer has been added to maintain a pH suitable for injection; these formulation changes also apply to the multi-use vial which will be supplied to Barth patients if elamipretide is approved for sale for Barth. The preservative and buffer salt are common in similar types of formulations administered by subcutaneous injection. The specific preservative and the level contained in the drug products have been the subject of meetings seeking scientific advice from EU competent authorities and an end-of-Phase 2 meeting with FDA. No issues were raised in either case that would prevent us from continuing as planned with the commercialization of the formulation.

In addition, we have limited experience with the cartridge as a primary container for the drug product and have not demonstrated that the packaged product is stable for extended periods or that the cartridge meets the performance specifications in the pen injector after prolonged storage. Failure in any of these key stability measures could limit the shelf-life of elamipretide. The pen injector has not been submitted for approval in the United States or certain other markets that are key to the projected commercial value of the product, if it is approved for sale. However, we have discussed the pen injector with the FDA and other regulatory authorities and we have received authorization to utilize the pen injector and multi-use cartridge in our Phase 3 clinical trial in countries including the United States, Canada, Denmark, Hungary and the United Kingdom. We are continuing discussions with regulators in Italy, which does not have a clear path for utilizing a device such as our pen injector in clinical trials. It is possible that we will not receive approval to utilize the device at our Italian sites, which account for 69 of the 407 subjects enrolled in our pre-trial registry. With respect to FDA, the comments received to date have been primarily to address human factors testing (ease of use), which we have addressed in our responses.

We face substantial competition from other pharmaceutical and biotechnology companies, and our operating results may suffer if we fail to compete effectively.

The development and commercialization of new drug products is highly competitive. We expect that we, and any future collaborators, will face significant competition from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide with respect to any of our product candidates that we, or they, may seek to develop or commercialize in the future. Specifically, there are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of product candidates for the treatment of the key indications of our most advanced programs.

We are initially developing elamipretide for the treatment of rare primary mitochondrial diseases and common diseases of aging in which mitochondrial function is impaired. There are several companies developing treatments that target mitochondria or mitochondria-associated diseases. The majority of these efforts is in preclinical development, is focused on gene therapy or is proposing the use of generic compounds. To our knowledge, none of these is focused on cardiolipin remodeling. Our competitors include: NeuroVive Pharmaceutical AB, Reata Pharmaceuticals, Inc., BioElectron Technology Corporation (formerly Edison Pharmaceuticals Inc.), LumiThera, Inc. and Santhera Pharmaceuticals Holding. In addition to competition from competitors who are developing treatments that seek to improve mitochondrial function or otherwise target the mitochondria, we also face competition from therapies that target the indications we are studying, particularly for diseases of aging such as dry AMD. Such competitors who are developing or who have developed competing therapies include Allegro Ophthalmics, LLC, Apellis Pharmaceuticals, Astellas Pharma Inc., Hemera Biosciences Inc., Ionis Pharmaceuticals, Inc. and Ophthotech Corporation.

 

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Our competitors may succeed in developing, acquiring or licensing technologies and drug products that are more effective, have fewer or more tolerable side effects or are less costly than any product candidates that we are currently developing or that we may develop, which could render our product candidates obsolete and noncompetitive.

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we, or any future collaborators, may develop. Our competitors also may obtain FDA or other marketing approval for their products before we, or any future collaborators, are able to obtain approval for ours, which could result in our competitors establishing a strong market position before we, or any future collaborators, are able to enter the market.

Many of our existing and potential future competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining marketing approvals and marketing approved products than we do. 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 or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

If the FDA or comparable regulatory authorities approve generic versions of any of our products that receive marketing approval, or such authorities do not grant our products appropriate periods of data exclusivity before approving generic versions of our products, the sales of our products could be adversely affected.

Once an NDA is approved, the product covered thereby becomes a “reference-listed drug” in the FDA’s publication, “Approved Drug Products with Therapeutic Equivalence Evaluations.” Manufacturers may seek approval of generic versions of reference-listed drugs through submission of abbreviated new drug applications, or ANDAs, in the United States. In support of an ANDA, a generic manufacturer need not conduct clinical studies. Rather, the applicant generally must show that its product has the same active ingredient(s), dosage form, strength, route of administration and conditions of use or labeling as the reference-listed drug and that the generic version is bioequivalent to the reference-listed drug, meaning it is absorbed in the body at the same rate and to the same extent. Generic products may be significantly less costly to bring to market than the reference-listed drug and companies that produce generic products are generally able to offer them at lower prices. Thus, following the introduction of a generic drug, a significant percentage of the sales of any branded product or reference-listed drug may be typically lost to the generic product.

The FDA may not approve an ANDA for a generic product until any applicable period of non-patent exclusivity for the reference-listed drug has expired. The Federal Food, Drug, and Cosmetic Act, or FDCA, provides a period of five years of non-patent exclusivity for a new drug containing a new chemical entity, or NCE. Specifically, in cases where such exclusivity has been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the submission is accompanied by a Paragraph IV certification that a patent covering the reference-listed drug is either invalid or will not be infringed by the generic product, in which case the applicant may submit its application four years following approval of the reference-listed drug. We have an issued composition of matter patent on elamipretide. As such, the active ingredient will be treated as an NCE and any products containing elamipretide will be granted exclusivity based on that patent expiry date and other contributing factors. It is unclear whether the FDA will treat the active ingredients in our other product candidates as NCEs and, therefore, afford them five years of NCE data exclusivity if they are approved. If any product we develop does not receive five years of NCE exclusivity, the FDA may approve generic versions of such product three years after its date of approval. Manufacturers may seek to launch these generic products following the expiration of the applicable marketing exclusivity period, even if we still have patent protection for our product.

Competition that our products, if any, may face from generic versions of our products could materially and adversely impact our future revenue, profitability and cash flows and substantially limit our ability to obtain a return on the investments we have made in those product candidates.

 

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Even if we, or any future collaborators, are able to commercialize any product candidate that we, or they, develop, the product may become subject to unfavorable pricing regulations, third-party payor reimbursement practices or healthcare reform initiatives that could harm our business.

The commercial success of our product candidates in key potential markets will depend substantially on the extent to which the costs of our product candidates will be paid by third-party payors, including government health administration authorities and private health coverage insurers. If coverage and reimbursement is not available, or reimbursement is available only to limited levels, we, or any future collaborators, may not be able to successfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us, or any future collaborators, to establish or maintain pricing sufficient to realize a sufficient return on our or their investments.

There is significant uncertainty related to third-party payor coverage and reimbursement of newly approved drugs. Marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we, or any future collaborators, might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay commercial launch of the product, possibly for lengthy time periods, which may negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability or the ability of any future collaborators to recoup our or their investment in one or more product candidates, even if our product candidates obtain marketing approval. Moreover, in the United States, no uniform policy of coverage and reimbursement for products exists among third-party payors. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their reimbursement rates, but also have their own methods and approval process apart from Medicare determinations. Therefore, coverage and reimbursement for products in the United States can differ significantly from payor to payor.

Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Therefore, our ability, and the ability of any future collaborators, to commercialize any of our product candidates will depend in part on the extent to which coverage and reimbursement for these products and related treatments will be available from third-party payors. Third-party payors decide which medications they will cover and establish reimbursement levels. The healthcare industry is acutely focused on cost containment, both in the United States and worldwide. Government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications, which could affect our ability or that of any future collaborators to sell our product candidates profitably. These payors may not view our products, if any, as cost-effective, and coverage and reimbursement may not be available to our customers, or those of any future collaborators, or may not be sufficient to allow our products, if any, to be marketed on a competitive basis. Cost-control initiatives could cause us, or any future collaborators, to decrease the price we, or they, might establish for products, which could result in lower than anticipated product revenues. If the prices for our products, if any, decrease or if governmental and other third-party payors do not provide coverage or adequate reimbursement, our prospects for revenue and profitability will suffer.

There may also be delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the indications for which the drug is approved by the FDA or comparable regulatory authorities. Moreover, eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Reimbursement rates may vary, by way of example, according to the use of the drug and the clinical setting in which it is used. Reimbursement rates may also be based on reimbursement levels already set for lower cost drugs or may be incorporated into existing payments for other services.

In addition, increasingly, third-party payors are requiring higher levels of evidence of the benefits and clinical outcomes of new technologies and are challenging the prices charged. We cannot be sure that coverage will be available for any product candidate that we, or any future collaborator, commercialize and, if available, that the reimbursement rates will be adequate. Further, the net reimbursement for drug products may be subject to additional reductions if there are changes to laws that presently restrict imports of drugs from countries where they

 

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may be sold at lower prices than in the United States. An inability to promptly obtain coverage and adequate payment rates from both government-funded and private payors for any of our product candidates for which we, or any future collaborator, obtain marketing approval could significantly harm our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

Product liability lawsuits against us could divert our resources, cause us to incur substantial liabilities and limit commercialization of any products that we may develop.

We face an inherent risk of product liability claims as a result of the clinical testing of our product candidates despite obtaining appropriate informed consents from our clinical trial participants. We will face an even greater risk if we or any future collaborators commercially sell any product that we or they may develop. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Regardless of the merits or eventual outcome, liability claims may result in:

 

   

decreased demand for our product candidates or products that we may develop;

 

   

injury to our reputation and significant negative media attention;

 

   

withdrawal of clinical trial subjects;

 

   

significant costs to defend resulting litigation;

 

   

substantial monetary awards to trial subjects or patients;

 

   

loss of revenue;

 

   

reduced resources of our management to pursue our business strategy; and

 

   

the inability to commercialize any products that we may develop.

Although we believe we maintain adequate general and clinical trial liability insurance for a company at our stage, this insurance may not fully cover potential liabilities that we may incur. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. We will need to increase our insurance coverage if and when we begin selling any product candidate that receives marketing approval. In addition, insurance coverage is becoming increasingly expensive. If we are unable to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims, it could prevent or inhibit the development and commercial production and sale of our product candidates, which could adversely affect our business, financial condition, results of operations and prospects.

Risks Related to Our Dependence on Third Parties

We expect to seek to establish collaborations and, if we are not able to establish them on commercially reasonable terms, we may have to alter our development and commercialization plans.

Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. We expect to continue to seek one or more collaborators for the development and commercialization of one or more of our product candidates. For example, we hold worldwide rights for elamipretide and SBT-20 and we own our new pipeline compounds, including SBT-272. We expect to retain rights to control the commercialization of elamipretide in rare primary mitochondrial conditions in the United States, and we may explore partnerships for development of elamipretide, SBT-20 and one or more of our pipeline compounds, including SBT-272, in selected other indications and territories. Likely collaborators may include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. In addition, if we are able to obtain marketing approval for any of our product candidates from foreign regulatory authorities, we intend to enter into strategic relationships with international biotechnology or pharmaceutical companies for the commercialization of such product candidates outside of the United States.

We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise,

 

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the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the potential differentiation of our product candidate from competing product candidates, design or results of clinical trials, the likelihood of approval by the FDA or comparable foreign regulatory authorities and the regulatory pathway for any such approval, the potential market for the product candidate, the costs and complexities of manufacturing and delivering the product to patients and the potential of competing products. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available for collaboration and whether such collaboration could be more attractive than the one with us for our product candidate.

Collaborations are complex and time-consuming to negotiate and document. Further, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.

We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms, or at all. If we do not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue.

If we enter into collaborations with third parties for the development and commercialization of our product candidates, our prospects with respect to those product candidates will depend in significant part on the success of those collaborations.

We may enter into collaborations for the development and commercialization of certain of our product candidates. If we enter into such collaborations, we will have limited control over the amount and timing of resources that our collaborators will dedicate to the development or commercialization of our product candidates. Our ability to generate revenues from these arrangements will depend on any future collaborators’ abilities to successfully perform the functions assigned to them in these arrangements. In addition, any future collaborators may have the right to abandon research or development projects and terminate applicable agreements, including funding obligations, prior to or upon the expiration of the agreed upon terms.

Collaborations involving our product candidates pose a number of risks, including the following:

 

   

collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;

 

   

collaborators may not perform their obligations as expected;

 

   

collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs, based on clinical trial results, changes in the collaborators’ strategic focus or available funding or external factors, such as an acquisition, that divert resources or create competing priorities;

 

   

collaborators may delay clinical trials, provide insufficient funding for a clinical trial, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;

 

   

a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing and distribution of such product or products;

 

   

disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development, might cause delays or termination of the research, development or commercialization of product candidates, might lead to additional responsibilities for us with respect to product candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive;

 

   

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

 

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collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability; and

 

   

collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates.

Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner, or at all. If any future collaborator of ours is involved in a business combination, it could decide to delay, diminish or terminate the development or commercialization of any product candidate licensed to it by us.

We rely on third parties to conduct our clinical trials. If they do not perform satisfactorily, our business could be significantly harmed.

We do not independently conduct clinical trials of any of our product candidates. We rely on third parties, such as contract research organizations, clinical data management organizations, medical institutions and clinical investigators, to conduct these clinical trials and expect to rely on these third parties to conduct clinical trials of any other product candidate that we develop. Any of these third parties may terminate their engagements with us under certain circumstances. We may not be able to enter into alternative arrangements or do so on commercially reasonable terms. In addition, there is a natural transition period when a new contract research organization begins work. As a result, delays would likely occur, which could materially impact our ability to meet our expected clinical development timelines and harm our business, financial condition and prospects.

Further, our reliance on these third parties for clinical development activities limits our control over these activities, but we remain responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards. For example, notwithstanding the obligations of a contract research organization for a trial of one of our product candidates, we remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as current Good Clinical Practices, or cGCPs, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal investigators, clinical trial sites and institutional review boards. If we or our third-party contractors fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our product candidates, which would delay the marketing approval process. We cannot be certain that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. Similar regulatory requirements apply outside the United States, including the International Council for Harmonization of Technical Requirements for the Registration of Pharmaceuticals for Human Use, or ICH. We are also required to register clinical trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.

Furthermore, the third parties conducting clinical trials on our behalf are not our employees, and except for remedies available to us under our agreements with such contractors, we cannot control whether or not they devote sufficient time, skill and resources to our ongoing development programs. These contractors 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 impede their ability to devote appropriate time to our clinical programs. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we may not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates. If that occurs, we will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates. In such an event, our financial results and the commercial prospects for any product candidates that we seek to develop could be harmed, our costs could increase and our ability to generate revenues could be impaired.

We also rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our distributors could delay clinical development or marketing approval of our product candidates or commercialization of any resulting products, producing additional losses and depriving us of potential product revenue.

 

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We contract with third parties for the manufacture and distribution of our product candidates for clinical trials and expect to continue to do so in connection with our future development and commercialization efforts. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.

We currently have no manufacturing facilities and limited personnel with manufacturing experience. We rely on contract manufacturers to produce both drug substance and drug product required for our clinical trials. We plan to continue to rely upon contract manufacturers, and potentially collaboration partners, to manufacture commercial quantities of our product candidates and, if approved, products. Reliance on such third-party contractors entails risks, including:

 

   

manufacturing delays if our third-party contractors give greater priority to the supply of other products over our product candidates or otherwise do not satisfactorily perform according to the terms of the agreements between us and them;

 

   

the possible termination or nonrenewal of agreements by our third-party contractors at a time that is costly or inconvenient for us;

 

   

the possible breach by the third-party contractors of our agreements with them;

 

   

the failure of third-party contractors to comply with applicable regulatory requirements;

 

   

the possible mislabeling of clinical supplies, potentially resulting in the wrong dose amounts being supplied or active drug or placebo not being properly identified;

 

   

the possibility of clinical supplies not being delivered to clinical sites on time, leading to clinical trial interruptions, or of drug supplies not being distributed to commercial vendors in a timely manner, resulting in lost sales; and

 

   

the possible misappropriation of our proprietary information, including our trade secrets and know-how.

We currently rely, and expect to continue to rely, on third parties for the manufacture of our product candidates for preclinical studies and clinical trials, as well as for commercial manufacture if our product candidates receive marketing approval. To date, we, or our partners on our behalf, have obtained materials for elamipretide and SBT-20 from third party manufacturers. If any of our existing manufacturers should become unavailable to us for any reason, we may incur some delay in identifying or qualifying replacements.

Any manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations, delay our clinical trials and, if our products are approved for sale, result in lost sales. Any reliance on suppliers may involve several risks, including a potential inability to obtain critical materials and reduced control over production costs, delivery schedules, reliability and quality. Any unanticipated disruption to future contract manufacture caused by problems at suppliers could delay shipment of our product candidates, increase our cost of goods sold and result in lost sales.

If any of our product candidates are approved by any regulatory agency, we plan to enter into agreements with third-party contract manufacturers for the commercial production and distribution of those products. It may be difficult for us to reach agreement with a contract manufacturer on satisfactory terms or in a timely manner. In addition, we may face competition for access to manufacturing facilities as there are a limited number of contract manufacturers operating under current good manufacturing practices, or cGMPs, that are capable of manufacturing our product candidates. Consequently, we may not be able to reach agreement with third-party manufacturers on satisfactory terms, which could delay our commercialization efforts.

Third-party manufacturers are required to comply with cGMPs and similar regulatory requirements outside the United States, such as the ICH. Facilities used by our third-party manufacturers must be approved by the FDA after we submit an NDA and before potential approval of the product candidate. Similar regulations apply to manufacturers of our product candidates for use or sale in foreign countries. We do not control the manufacturing process and are completely dependent on our third-party manufacturers for compliance with the applicable regulatory requirements for the manufacture of our product candidates. If our manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA, and of any applicable foreign regulatory authority, we will not be able to secure the applicable approval for their manufacturing facilities. If these facilities are not approved for commercial manufacture, we may need to find

 

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alternative manufacturing facilities, which could result in delays in obtaining approval for the applicable product candidate.

In addition, our manufacturers are subject to ongoing periodic inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements both prior to and following the receipt of marketing approval for any of our product candidates. Some of these inspections may be unannounced. Failure by any of our manufacturers to comply with applicable cGMPs or other regulatory requirements could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of approvals, operating restrictions, interruptions in supply and criminal prosecutions, any of which could adversely affect supplies of our product candidates and significantly harm our business, financial condition and results of operations.

Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.

Risks Related to Our Intellectual Property

If we are unable to obtain and maintain sufficient patent protection for our product candidates, or if the scope of the patent protection is not sufficiently broad, our competitors could develop and commercialize products similar or identical to ours, and our ability to commercialize our product candidates successfully may be adversely affected.

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 proprietary product candidates. If we do not adequately protect our intellectual property, competitors may be able to erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. To protect our proprietary position, we file patent applications in the United States and abroad related to our novel product candidates that are important to our business. The patent application and approval process is expensive and time-consuming. We may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain. No consistent policy regarding the breadth of claims allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. In addition, the determination of patent rights with respect to pharmaceutical compounds commonly involves complex legal and factual questions, which has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability, term and commercial value of our patent rights are highly uncertain.

Our pending patent applications cannot be enforced against third parties practicing the technology claimed in such applications unless and until a patent issues from such applications. Assuming the other requirements for patentability are met, currently, the first to file a patent application is generally entitled to the patent. However, prior to March 16, 2013, in the United States, the first to invent was entitled to the patent. Publications of discoveries in the 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 be certain that we were the first to make the inventions claimed in our patents or pending patent applications, or that we were the first to file for patent protection of such inventions.

Moreover, because the issuance of a patent is not conclusive as to its inventorship, scope, validity, term or enforceability, our patents or pending patent applications may be challenged in the courts or patent offices in the United States and abroad. For example, we may be subject to a third-party preissuance submission of prior art to the U.S. Patent and Trademark Office, or USPTO, or become involved in post-grant review procedures, oppositions, derivations, reexaminations, inter partes review or interference proceedings, in the United States or elsewhere, challenging our patent rights or the patent rights of others. An adverse determination in any such challenges may result in loss of exclusivity or in patent claims being 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 products, or limit the duration of the patent protection of our technology and products. Moreover, if the breadth or strength of protection provided by our patents and patent applications is threatened, regardless of the outcome, it

 

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could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates. In addition, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. Furthermore, 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. As a result, the inventorship or ownership of our intellectual property may be challenged in the future.

Our pending and future patent applications may not result in patents being issued which protect our product candidates, in whole or in part, or which effectively prevent others from commercializing competitive products. Our issued patents or any patents that may issue in the future may be invalidated or interpreted narrowly, such that they fail to provide us with any significant competitive advantage. 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. In addition, the laws of foreign countries may not protect our rights to the same extent or in the same manner 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.

Even if our patent applications have issued or do issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner. Our competitors may also seek approval to market their own products similar to or otherwise competitive with our products. Alternatively, our competitors may seek to market generic versions of any approved products by submitting ANDAs to the FDA in which they claim that patents owned or licensed by us are invalid, unenforceable or not infringed. In these circumstances, we may need to defend or assert our patents, or both, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or other agency with jurisdiction may find our patents invalid or unenforceable, or that our competitors are competing in a non-infringing manner. Thus, even if we have valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives.

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

While we have obtained composition of matter patents with respect to our clinical-stage product candidates through an application family in-licensed from Cornell Research Foundation, Inc., a subsidiary of Cornell University, or Cornell, and Institut de recherches cliniques de Montréal, or the IRCM, we also rely on trade secret protection for certain aspects of our discovery platform. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, consultants, independent contractors, advisors, contract manufacturers, suppliers and other third parties. We also enter into confidentiality and invention or patent assignment agreements with employees, certain consultants, contractors and collaborators. To our knowledge, such agreements have been entered into with all relevant parties; however we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Any party with whom we have executed such an agreement may breach that agreement and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such third-party, or those to whom they communicate such technology or information, from using that technology or information to compete with us. If any of our trade secrets were to be misappropriated or disclosed to, or independently developed by, a competitor, our business and competitive position could be harmed.

 

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Certain aspects of our product candidates and technology are protected by patents exclusively licensed from academic institutions. If these third parties terminate their agreements with us or fail to maintain or enforce the underlying patents, or we otherwise lose our rights to these patents, our competitive position and our market share in the markets for any of our approved products will be harmed.

We are a party to license agreements and certain aspects of our business depend on patents and/or patent applications owned by third parties. In particular, we hold exclusive licenses from Cornell and the IRCM for elamipretide and SBT-20 as well as for other compounds and certain methods. We may enter into additional license agreements as part of the development of our business in the future. If we are unable to maintain these patent rights or our license to these patent rights for any reason, or if we are unable to maintain any future material license we may enter into, our ability to develop and commercialize our product candidates could be materially harmed.

Our licensors may not successfully prosecute certain patent applications under which we are licensed and on which our business depends. Even if patents issue from these applications, our licensors may fail to maintain these patents, may decide not to pursue litigation against third party infringers, may fail to prove infringement, or may fail to defend against counterclaims of patent invalidity or unenforceability. For example, under our license agreement with Cornell, we have the first right to enforce the licensed patents against third party infringement. However, our first right to enforce is subject to Cornell’s consent.

Risks with respect to parties from whom we have obtained intellectual property rights may also arise out of circumstances beyond our control. Despite our best efforts, our licensors might conclude that we have materially breached our license agreements and might therefore terminate the license agreements, thereby removing our ability to obtain regulatory approval and to market products covered by these license agreements. For example, under our license agreements with Cornell and the IRCM, if we fail to commercialize a product by December 31, 2020, Cornell may terminate the license, subject to specified exceptions for causes due to scientific and regulatory events that are common in drug development, such as institutional review board delays, clinical trial recruitment, clinical trial results and regulatory delays, and other events over which we cannot exert direct control. If our license agreements are terminated, or if the underlying patents fail to provide the intended market exclusivity, competitors would have the freedom to seek regulatory approval of, and to market, products similar or identical to ours. Moreover, if our license agreements are terminated, our former licensors and/or assignors may be able to prevent us from utilizing the technology covered by the licensed or assigned patents and patent applications. This could have a material adverse effect on our competitive business position and our business prospects.

Our license agreements with Cornell and the IRCM impose, and future license agreements we may enter into may impose, various diligence, milestone payment, royalty and other obligations on us. For example, our license agreements with Cornell and the IRCM include an obligation to pay royalties on the net sales of product candidates or related technologies to the extent they are covered by the agreement. If we fail to comply with our obligations under our license agreement with Cornell and the IRCM or future license agreements, and if no such exceptions apply, our counterparties may have the right to terminate these agreements, in which event we might not be able to develop, manufacture or market any product that is covered by the agreement or face other penalties under the agreement, such as loss of exclusivity. Such an occurrence could materially adversely affect the value of the product candidate being developed under any such agreement. Termination of these agreements or reduction or elimination of our rights under these agreements may result in our having to negotiate new or reinstated agreements with less favorable terms or cause us to lose our rights under these agreements, including our rights to important intellectual property or technology.

Moreover, disputes may arise regarding intellectual property subject to a licensing agreement, including:

 

   

the scope of rights granted under the license agreement and other interpretation-related issues;

 

   

the extent to which our product candidates, technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;

 

   

the sublicensing of patent and other rights under our collaborative development relationships;

 

   

our diligence obligations under the license agreement and what activities satisfy those diligence obligations;

 

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

 

   

the priority of invention of patented technology.

In addition, the agreements under which we currently license intellectual property or technology from third parties are complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, or increase what we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations, and prospects. Moreover, if disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on commercially acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates, which could have a material adverse effect on our business, financial conditions, results of operations, and prospects.

Some of our intellectual property that was discovered through government-funded programs may be subject to federal regulation such as “march-in” rights, certain reporting requirements, and a preference for United States industry. Compliance with such regulations may limit our exclusive rights, subject us to expenditure of resources with respect to reporting requirements and limit our ability to contract with foreign manufacturers.

Some of our intellectual property with respect to our product candidates has been funded, at least in part, by the U.S. government and, therefore, would be subject to certain federal regulations. As a result, the U.S. government may have certain rights to intellectual property embodied in our current or future product candidates pursuant to the Bayh-Dole Act of 1980, or Bayh-Dole Act. For example, under the “march-in” provisions of the Bayh-Dole Act, the government may have the right under limited circumstances to require the patent owners to grant exclusive, partially exclusive or non-exclusive rights to third parties for intellectual property discovered through the government-funded program. The government can exercise its march-in rights if it determines that action is necessary because the patent owner fails to achieve practical application of the new invention or because action is necessary to alleviate health concerns or address the safety needs of the public. Intellectual property discovered under the government-funded program is also subject to certain reporting requirements, compliance with which may require us or our licensors to expend substantial resources. Such intellectual property is also subject to a preference for U.S. industry, which may limit our ability to contract with foreign product manufacturers for products covered by such intellectual property. We may apply for additional U.S. government funding, and it is possible that we may discover additional compounds or product candidates as a result of such funding. Intellectual property under such discoveries would be subject to the applicable provisions of the Bayh-Dole Act. Similarly, intellectual property that we license in the future may have been made using government funding and may be subject to the provisions of the Bayh-Dole Act.

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

Competitors may infringe our patents, trademarks, copyrights or other intellectual property. We may be required to file infringement claims, which can be expensive and time consuming and divert the time and attention of our management and scientific personnel. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents, in addition to counterclaims asserting that our patents are invalid or unenforceable, or both. In any patent infringement proceeding, there is a risk that a court will decide that a patent of ours is invalid or unenforceable, in whole or in part, and that we do not have the right to stop the other party from using the invention at issue. There is also a risk that, even if the validity of such patents is upheld, the court will construe the patent’s claims narrowly or decide that we do not have the right to stop the other party from using the invention at issue on the grounds that our patent claims do not cover the invention. An adverse outcome in a litigation or proceeding involving our patents could limit our ability to assert our patents against those parties or other competitors, and may curtail or preclude our ability to exclude third parties from making and selling similar or competitive products. Any of these occurrences could adversely affect our competitive business position, business prospects and financial condition. Similarly, if we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this case, we could ultimately be forced to cease use of such trademarks.

 

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Even if we establish infringement, the court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may or may not be an adequate remedy. 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 litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of the ADSs. Moreover, there can be no assurance that we will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded. Even if we ultimately prevail in such claims, the monetary cost of such litigation and the diversion of the attention of our management and scientific personnel could outweigh any benefit we receive as a result of the proceedings.

In addition, we may from time to time become involved in disputes, including litigation, with respect to intellectual property. For example, in August 2013, a former vendor commenced an arbitration proceeding against us regarding a disputed license to the vendor’s technology. In July 2014, the vendor commenced a lawsuit against one of our service providers, whom we had previously agreed to indemnify for certain liabilities. In February 2016, we entered into a settlement agreement that provided for mutual releases and dismissal with prejudice of each of the pending arbitration and litigation claims. In connection with the settlement, we paid $725,000 to the vendor and agreed to withdraw and/or not refile certain pending patent applications in satisfaction of all of our obligations under the settlement agreement.

If we are sued for infringing intellectual property rights of third parties, such litigation could be costly and time-consuming and could prevent or delay us from developing or commercializing our product candidates.

Our commercial success depends, in part, on our ability to develop, manufacture, market and sell our product candidates without infringing the intellectual property and other proprietary rights of third parties. Third parties have U.S. and non-U.S. issued patents and pending patent applications relating to compounds and methods of use for the treatment of key indications for our priority programs, and we may be subject to claims that our research, development and commercialization activities infringe or otherwise violate patents or other intellectual property rights owned or controlled by third parties. If any third-party patents or patent applications are found to cover our product candidates or their methods of use, we may not be free to manufacture or market our product candidates as planned without obtaining a license, which may not be available on commercially reasonable terms, or at all.

There is a substantial amount of intellectual property litigation in the biotechnology and pharmaceutical industries, and we may become party to, or threatened with, litigation or other adversarial proceedings regarding intellectual property rights with respect to our products candidates, including derivation or interference proceedings, post grant and inter partes reviews, opposition proceedings, and the like in the US and in other jurisdictions. Third parties may assert infringement claims against us based on existing or future intellectual property rights. The outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. The pharmaceutical and biotechnology industries have produced a significant number of patents, and it may not always be clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we were sued for patent infringement, we would need to demonstrate that our product candidates, products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid or unenforceable, and we may not be able to do this. Proving invalidity is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings, which could significantly harm our business and operating results. In addition, we may not have sufficient resources to bring these actions to a successful conclusion. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or administrative proceedings, there is a risk that some of our confidential information could be compromised by disclosure. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have material adverse effect on our ability to raise additional funds or otherwise have a material adverse effect on our business, results of operations, financial condition and prospects.

If we are found to infringe a third party’s intellectual property rights, we could be forced, including by court order, to cease developing, manufacturing or commercializing the infringing product candidate or product. Alternatively, we

 

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may be required to obtain a license from such third-party in order to use the infringing technology and continue developing, manufacturing or marketing the infringing product candidate. 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 access to the same technologies licensed to us. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some 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.

Changes to the patent law in the United States and other jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our products.

As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involves both technological and legal complexity and is therefore costly, time consuming and inherently uncertain. Patent reform legislation in the United States and other countries, including the Leahy-Smith America Invents Act, or the Leahy-Smith Act, signed into law in September 2011, could increase those uncertainties and costs. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art and provide more efficient and cost-effective avenues for competitors to challenge the validity of patents. In addition, the Leahy-Smith Act has transformed the U.S. patent system into a “first to file” system. The first-to-file provisions, however, only became effective in March 2013. Accordingly, it is not yet clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could make it more difficult to obtain patent protection for our inventions and increase the uncertainties and costs surrounding the prosecution of our or our collaboration partners’ patent applications and the enforcement or defense of our or our collaboration partners’ issued patents, all of which could harm our business, results of operations and financial condition.

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. Additionally, there have been recent proposals for additional changes to the patent laws of the United States and other countries that, if adopted, could impact our ability to enforce our proprietary technology. Depending on future actions by the U.S. Congress, the U.S. courts, the USPTO and the relevant law-making bodies in other countries, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.

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

Periodic maintenance fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the patents and patent applications covering our product candidates, our competitive position would be adversely affected.

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

Filing, prosecuting and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive. The requirements for patentability may differ in certain countries, particularly in developing countries. Competitors may use our technologies in jurisdictions where we have not pursued and obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we may obtain patent protection, but where patent enforcement is not as strong as that in the United States. These

 

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products may compete with our products 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.

Moreover, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in foreign intellectual property laws. Additionally, laws of some countries outside of the United States and Europe do not afford intellectual property protection to the same extent as the laws of the United States and Europe. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, including China, India and other developing countries, do not favor the enforcement of patents and other intellectual property rights. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. Consequently, we may not be able to prevent third parties from practicing our inventions in certain countries outside the United States and Europe. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection, if our ability to enforce our patents to stop infringing activities is inadequate. These products may compete with our products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and resources from other aspects of our business. Furthermore, while we intend to protect our intellectual property rights in major markets for our products, we cannot ensure that we will be able to initiate or maintain similar efforts in all jurisdictions in which we may wish to market our products. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate.

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

Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest U.S. non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents covering our product candidates are obtained, once the patent life has expired, we may be open to competition from competitive products, including generics or biosimilars. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

If we do not obtain patent term extension and data exclusivity for any product candidates we may develop, our business may be materially harmed.

Depending upon the timing, duration and specifics of any FDA marketing approval of any product candidates we may develop, one or more of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Action of 1984, or Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent term extension of up to five years as compensation for patent term lost during the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, only one patent may be extended and the extension only applies to those claims covering the approved drug, a method for using it, or a method for manufacturing it. However, we may not be granted an extension because of, for example, failing to exercise due diligence during the testing phase or regulatory review process, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents, or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our business, financial condition, results of operations and prospects could be materially harmed. Furthermore, in the United States, only a single patent can be extended for each qualifying FDA approval, and any patent can be extended only once and only for a single product. Laws governing analogous patent term extensions in foreign jurisdictions vary widely, as do laws governing the ability to obtain multiple patents from a single patent family. Because both elamipretide and SBT-20 compositions-of-matter are protected by a single family

 

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of patents and applications, we may not be able to secure patent term extensions for both of these product candidates in all jurisdictions where these product candidates are or may be approved, including the United States.

We may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.

Many of our employees and our licensors’ employees, including our senior management, were previously employed by others, including universities and other biotechnology and pharmaceutical companies, some of which are our competitors or potential competitors. Some of these employees, including each member of our senior management, executed proprietary rights, non-disclosure and non-competition agreements, or similar agreements, in connection with such previous employment. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such third party. Litigation may be necessary to defend against such claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel or sustain damages. Such intellectual property rights could be awarded to a third party, and we could be required to obtain a license from such third party to commercialize our technology or products. Such a license may not be available on commercially reasonable terms, or at all. 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 we typically require our employees, consultants and contractors who may be involved in the 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 develops intellectual property that we regard as our own, which may result in claims by or against us related to the ownership of such intellectual property. If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to our senior management and scientific personnel.

Risks Related to Regulatory Approval and Other Legal Compliance Matters

Even if we complete the necessary preclinical and clinical studies, the marketing approval process is expensive, time consuming and uncertain and may prevent us or any future collaborators from obtaining approvals for the commercialization of some or all of our product candidates. As a result, we cannot predict when or if, and in which territories, we, or any future collaborators, will obtain marketing approval to commercialize a product candidate.

The research, testing, manufacturing, labeling, approval, selling, marketing, promotion and distribution of drug products are subject to extensive regulation by the FDA and comparable foreign regulatory authorities, which regulations differ from country to country. We, and any future collaborators, are not permitted to market our product candidates in the United States or in other countries until we, or they, receive approval of an NDA from the FDA or marketing approval from applicable regulatory authorities outside the United States. Our product candidates are in various stages of development and are subject to the risks of failure inherent in drug development. We have not submitted an application for or received marketing approval for any of our product candidates in the United States or in any other jurisdiction. We have limited experience in conducting and managing the clinical trials necessary to obtain marketing approvals, including FDA approval of an NDA.

The process of obtaining marketing approvals, both in the United States and abroad, is lengthy, expensive and uncertain. It may take many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved.

In addition, changes in marketing approval policies during the development period, changes in or the enactment or promulgation of additional statutes, regulations or guidance or changes in regulatory review for each submitted product application may cause delays in the approval or rejection of an application. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate. Any marketing approval we, or any future collaborators, ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

 

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Any delay in obtaining or failure to obtain required approvals could materially adversely affect our ability or that of any future collaborators to generate revenue from the particular product candidate, which likely would result in significant harm to our financial position.

Failure to obtain marketing approval in foreign jurisdictions would prevent our product candidates from being marketed abroad.

In order to market and sell our products in key potential markets, we, and any future collaborators, must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The marketing approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We, and any future collaborators, may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA.

On June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the European Union, commonly referred to as Brexit. On March 29, 2017, the country formally notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. Since a significant proportion of the regulatory framework in the United Kingdom is derived from European Union directives and regulations, the referendum could materially impact the regulatory regime with respect to the approval of our product candidates in the United Kingdom or the European Union. Any delay in obtaining, or an inability to obtain, any marketing approvals in the United Kingdom, as a result of Brexit or otherwise, would prevent us from commercializing our product candidates in the United Kingdom and reduce our ability to generate revenue and achieve and sustain profitability. If any of these outcomes occur, we may be forced to restrict or delay efforts to seek regulatory approval in the United Kingdom for our product candidates, which could significantly and materially harm our business.

Furthermore, other European countries may seek to conduct referenda with respect to continuing membership with the European Union. We do not know to what extent Brexit or other comparable initiatives, or any resulting changes, would affect our ability to conduct clinical trials or obtain marketing approval in these jurisdictions, and each could materially impact our ability to conduct clinical trials or obtain marketing approval on a timely basis, or at all.

We have obtained Fast Track designation from the FDA for elamipretide for the treatment of primary mitochondrial myopathy, Barth, LHON and dry AMD with geographic atrophy. However, Fast Track designation may not actually lead to a faster development, regulatory review or approval process.

If a product is intended for the treatment of a serious or life-threatening condition and the product candidate demonstrates the potential to address unmet needs for this condition, the treatment sponsor may apply for FDA Fast Track designation. If the Fast Track designation is obtained, the FDA may initiate review of sections of an NDA, before the application is complete. This “rolling review” is available if the applicant provides, and the FDA approves, a schedule for submission of the individual sections of the application. In December 2015, the FDA notified us that we had obtained Fast Track designation for elamipretide for the treatment of primary mitochondrial myopathy, in November 2017, the FDA notified us that we had obtained Fast Track designation for elamipretide for the treatment of Barth and LHON and in November 2018, the FDA notified us that we had obtained Fast Track designation for elamipretide for the treatment of patients with geographic atrophy, an advanced form of dry AMD. Fast Track designation does not ensure that we will experience a faster development, regulatory review or approval process compared to conventional FDA procedures or that we will ultimately obtain regulatory approval of elamipretide. Additionally, the FDA may withdraw Fast Track designation if it believes that the designation is no longer supported by data from our clinical development program.

We have obtained orphan drug designation from the FDA for elamipretide for the treatment of primary mitochondrial myopathy, Barth and LHON. However, we, or any future collaborators, may not be able to obtain orphan drug designation or orphan drug exclusivity for our other product 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, the FDA may designate a product as an orphan

 

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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 annually in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. We have received orphan drug designation for elamipretide for primary mitochondrial myopathy, Barth and LHON. We, or any future collaborators, may seek orphan drug designations for other product candidates or in other jurisdictions and may be unable to obtain such designations.

Even for product candidates for which we, or any future collaborators, may obtain orphan drug designation, we, or they, may not be able to obtain orphan drug exclusivity for that product candidate. Generally, if a product candidate with an orphan drug designation receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes FDA from approving another marketing application for a product that constitutes the same drug treating the same indication for that marketing exclusivity period, except in limited circumstances. If another sponsor receives such approval before we do (regardless of our orphan drug designation), we will be precluded from receiving marketing approval for our product for the applicable exclusivity period. The applicable period is seven years in the United States. The exclusivity period in the United States can be extended by six months if the sponsor submits pediatric data that fairly respond to a written request from FDA for such data. Orphan drug exclusivity may be revoked if any regulatory agency determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the product to meet the needs of patients with the rare disease or condition.

Even if we, or any future collaborators, obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition. In the United States, even after an orphan drug is approved, FDA may subsequently approve another drug for the same condition if FDA concludes that the latter drug is not the same drug or is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care. In the European Union, marketing authorization may be granted to a similar medicinal product for the same orphan indication if:

 

   

the second applicant can establish in its application that its medicinal product, although similar to the orphan medicinal product already authorized, is safer, more effective or otherwise clinically superior;

 

   

the holder of the marketing authorization for the original orphan medicinal product consents to a second orphan medicinal product application; or

 

   

the holder of the marketing authorization for the original orphan medicinal product cannot supply sufficient quantities of orphan medicinal product.

Even if we, or any future collaborators, obtain marketing approvals for our product candidates, the terms of approvals and ongoing regulation of our products may limit how we, or they, manufacture and market our products, which could materially impair our ability to generate revenue.

Once marketing approval has been granted, an approved product and its manufacturer and marketer are subject to ongoing review and extensive regulation. We, and any future collaborators, must therefore comply with requirements concerning advertising and promotion for any of our product candidates for which we or they obtain marketing approval. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved labeling. Thus, we and any future collaborators will not be able to promote any products we develop for indications or uses for which they are not approved.

In addition, manufacturers of approved products and those manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to cGMPs, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation and reporting requirements. We, our contract manufacturers, any future collaborators and their contract manufacturers could be subject to periodic unannounced inspections by the FDA to monitor and ensure compliance with cGMPs.

Accordingly, assuming we, or any future collaborators, receive marketing approval for one or more of our product candidates, we, and any future collaborators, and our and their contract manufacturers will continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production, product surveillance and quality control.

 

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If we, or any of our future collaborators, are not able to comply with post-approval regulatory requirements, we, and any such future collaborators, could have the marketing approvals for our products withdrawn by regulatory authorities and our, or any future collaborators’, ability to market any future products could be limited, which could adversely affect our ability to achieve or sustain profitability. Further, the cost of compliance with post-approval regulations may have a negative effect on our operating results and financial condition.

Any of our product candidates for which we, or any future collaborators, obtain marketing approval in the future could be subject to post-marketing restrictions or withdrawal from the market and we, or any future collaborators, may be subject to substantial penalties if we, or they, fail to comply with regulatory requirements or if we, or they, experience unanticipated problems with our products following approval.

Any of our product candidates for which we, or any future collaborators, obtain marketing approval in the future, as well as the manufacturing processes, post-approval studies and measures, labeling, advertising and promotional activities for such product, among other things, will be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, including the requirement to implement a Risk Evaluation and Mitigation Strategy.

The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacy of a product. The FDA and other agencies, including the Department of Justice, closely regulate and monitor the post-approval marketing and promotion of products to ensure that they are manufactured, marketed and distributed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we, or any future collaborators, do not market any of our product candidates for which we, or they, receive marketing approval for only their approved indications, we, or they, may be subject to warnings or enforcement action for off-label marketing. Violation of the FDCA and other statutes, including the False Claims Act, relating to the promotion and advertising of prescription drugs may lead to investigations or allegations of violations of federal and state health care fraud and abuse laws and state consumer protection laws, which violations can result in the imposition of significant administrative, civil and criminal penalties.

In addition, later discovery of previously unknown adverse events or other problems with our products or their manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

 

   

restrictions on such products, manufacturers or manufacturing processes;

 

   

restrictions on the labeling or marketing of a product;

 

   

restrictions on product distribution or use;

 

   

requirements to conduct post-marketing studies or clinical trials;

 

   

warning letters or untitled letters;

 

   

withdrawal of the products from the market;

 

   

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

 

   

recall of products;

 

   

restrictions on coverage by third-party payors;

 

   

fines, restitution or disgorgement of profits or revenues;

 

   

suspension or withdrawal of marketing approvals;

 

   

refusal to permit the import or export of products;

 

   

product seizure; or

 

   

injunctions or the imposition of civil or criminal penalties.

 

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Healthcare legislative reform measures may increase the difficulty and cost for us and any future collaborators to obtain marketing approval of and commercialize our product candidates and affect the prices we, or they, may obtain.

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability, or the ability of any future collaborators, to profitably sell any products for which we, or they, obtain marketing approval. We expect that current laws, as well as other healthcare reform measures that will be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we, or any future collaborators, may receive for any approved products.

For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the Affordable Care Act, became law in 2010 and includes the following provisions of potential importance to our product candidates:

 

   

an annual, non-deductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents;

 

   

an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;

 

   

a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for certain drugs and biologics that are inhaled, infused, instilled, implanted or injected;

 

   

expansion of federal healthcare fraud and abuse laws, including the False Claims Act and the federal healthcare Anti-Kickback Statute, new government investigative powers and enhanced penalties for noncompliance;

 

   

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% (and 70% commencing January 1, 2019) point-of-sale discounts off negotiated prices;

 

   

extension of manufacturers’ Medicaid rebate liability;

 

   

expansion of eligibility criteria for Medicaid programs;

 

   

expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;

 

   

new requirements to report financial arrangements with physicians and teaching hospitals;

 

   

a new requirement to annually report drug samples that manufacturers and distributors provide to physicians;

 

   

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research;

 

   

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

 

   

establishment a licensure framework for follow on biologic products.

Some of the provisions of the Affordable Care Act have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the Affordable Care Act. Since January 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of the Affordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. Congress has considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the Affordable Care Act have been signed into law. The Tax Cuts and Jobs Act of 2017, or the Tax Act, includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. On January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the

 

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implementation of certain Affordable Care Act-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. The Bipartisan Budget Act of 2018, or the BBA, among other things, amends the Affordable Care Act, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. In July 2018, CMS published a final rule permitting further collections and payments to and from certain Affordable Care Act qualified health plans and health insurance issuers under the Affordable Care Act risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas ruled that the individual mandate is an inseverable feature of the Affordable Care Act, and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the Affordable Care Act are invalid as well. While the Trump Administration and CMS have both stated that the ruling will have no immediate effect, it is unclear how this decision and subsequent appeals, if any, and other efforts to repeal and replace the Affordable Care Act will impact the Affordable Care Act and our business.

The timing and scope of any potential future legislation to repeal and replace Affordable Care Act provisions is highly uncertain in many respects. Such reforms, if enacted, could have an adverse effect on anticipated revenue from product candidates that we may successfully develop and for which we may obtain marketing approval and may affect our overall financial condition and ability to develop or commercialize product candidates. We expect that the Affordable Care Act, if retained in its current form, as well as other healthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and additional downward pressure on the price that we receive for any approved product and/or the level of reimbursement physicians receive for administering any approved product we might bring to market. Reductions in reimbursement levels may negatively impact the prices we receive or the frequency with which our products are prescribed or administered by physicians. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. These changes included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and due to legislative amendments to the statute, including the BBA, will remain in effect through 2027 unless additional Congressional action is taken. The American Taxpayer Relief Act of 2012, 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. These new laws may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used.

Moreover, there has been heightened governmental scrutiny recently over pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics. Such scrutiny has resulted in several recent Congressional inquiries and proposed and enacted federal and state legislation 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 products. At the federal level, the Trump administration’s budget proposal for fiscal year 2019 contains further drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. Further, the Trump administration released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. The U.S. Department of Health and Human Services has already started the process of soliciting feedback

 

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on certain of these measures and, additionally, is immediately implementing others under its existing authority. For example, in September 2018, CMS announced that it will allow Medicare Advantage Plans the option to use step therapy for Part B drugs beginning January 1, 2019, and in October 2018, CMS proposed a new rule that would require direct-to-consumer television advertisements of prescription drugs and biological products, for which payment is available through or under Medicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost, or list price, of that drug or biological product. Although a number of these, and other potential, proposals will require authorization through additional legislation to become effective, Congress and the executive branch have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

Additionally, on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017 was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new drug products that have completed a Phase I clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is no obligation for a drug manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act.

Legislative and regulatory proposals have also been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the United States Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us and any future collaborators to more stringent product labeling and post-marketing testing and other requirements.

Our relationships with customers and third-party payors, among others, will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to penalties, including criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers and third-party payors will play a primary role in the recommendation and prescription of any products for which we obtain marketing approval. Our arrangements with third-party payors, healthcare providers and customers, if any, will subject us to broadly applicable fraud and abuse and other healthcare laws and regulations. These laws and regulations may constrain the business or financial arrangements and relationships through which we market, sell and distribute any products for which we obtain marketing approval. These include the following:

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

False Claims Laws. The federal civil and criminal false claims laws, including the False Claims Act, and civil monetary penalties laws, which provides for civil whistleblower or qui tam actions, prohibit, among other things, individuals and entities from knowingly presenting, or causing to be presented false or fraudulent claims for payment by a federal healthcare program or making a false statement or record material to payment of a false claim or avoiding, decreasing or concealing an obligation to pay money to the federal government;

HIPAA. The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for, among other things, executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters, and, as amended by the Health Information Technology for Economic and Clinical Health Act and their implementing regulations, also imposes obligations, including mandatory contractual terms and physical, administrative and technical safeguards, with respect to maintaining the privacy, security and transmission of individually identifiable health information;

 

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Transparency Requirements. The federal Physician Payments Sunshine Act requires applicable manufacturers of covered drugs, biologics, devices and supplies to report payments and other transfers of value to physicians and teaching hospitals and ownership and investment interests by physicians; and

Analogous State and Foreign Laws. Analogous state and foreign fraud and abuse laws and regulations, such as state anti-kickback and false claims laws, which may be broader in scope, can apply to our business activities, including sales or marketing arrangements, and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers, and are generally broad and are enforced by many different federal and state agencies as well as through private actions. Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures. Certain state and local laws require the registration of pharmaceutical sales representatives. State and foreign laws also 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 pre-empted by HIPAA, thus complicating compliance efforts.

Efforts to ensure that our business arrangements with third parties comply with applicable healthcare laws and regulations involve substantial costs. 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, individual imprisonment, exclusion of products 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. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs.

Regulatory or legislative developments regarding privacy and data security matters could adversely affect our ability to conduct our business.

We are subject to data privacy and security regulation in the jurisdictions in which we conduct our business, particularly in light of increased regulatory scrutiny of and user expectations regarding the processing, collection, use, storage, dissemination, transfer and disposal of user data. The regulatory frameworks regarding privacy issues in many jurisdictions are constantly evolving and can be subject to significant changes from time to time, and therefore we may not be able to comprehensively assess the scope and extent of our compliance responsibility at a global level. In addition, state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways, thus complicating compliance efforts. Data privacy concerns may result in increased costs of operations and threats of lawsuits, enforcement actions and related liabilities, including financial penalties.

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

Our internal computer systems and those of our current and any future collaborators and other contractors or consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Such systems may be vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees, third-party vendors and/or business partners, or from cyber-attacks by malicious third parties. Cyber-attacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. Cyber-attacks could include the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of information. Cyber-attacks also could include phishing attempts or e-mail fraud to cause payments or information to be transmitted to an unintended recipient.

While we have not experienced a system failure, accident, cyber-attack or security breach that has resulted in a material interruption in our operations to date, if such an event were to occur, it could result in a material disruption

 

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of our development programs and our business operations, whether due to a loss of our trade secrets or other proprietary information or other similar disruptions. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data.

Additionally, any such event that leads to unauthorized access, use or disclosure of personal information, including personal information regarding our patients or employees, could harm our reputation, cause us not to comply with federal and/or state breach notification laws and foreign law equivalents and otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information. Security breaches and other inappropriate access can be difficult to detect, and any delay in identifying them may lead to increased harm of the type described above. While we have implemented security measures to protect our information technology systems and infrastructure, there can be no assurance that such measures will prevent service interruptions or security breaches that could adversely affect our business and the further development of our product candidates could be delayed.

The collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the EU, including personal health data, is subject to the EU General Data Protection Regulation, or the GDPR, which became effective on May 25, 2018. The GDPR is wide-ranging in scope and imposes numerous requirements on companies that process personal data, including requirements relating to processing health and other sensitive data, obtaining consent of the individuals to whom the personal data relates, providing information to individuals regarding data processing activities, responding to data subject requests, implementing safeguards to protect the security and confidentiality of personal data, providing notification of data breaches, and taking certain measures when engaging third-party processors. The GDPR also imposes strict rules on the transfer of personal data to countries outside the EU, including the United States, and permits data protection authorities to impose large penalties for violations of the GDPR, including potential fines of up to 20.0 million or 4% of annual global revenues, whichever is greater. The GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR. Compliance with the GDPR will be a rigorous and time-intensive process that may increase our cost of doing business or require us to change our business practices, and despite those efforts, there is a risk that we may be subject to fines and penalties, litigation, and reputational harm in connection with any European activities.

We are subject to U.S. and certain foreign export and import controls, sanctions, embargoes, anticorruption laws, and anti-money laundering laws and regulations. Compliance with these legal standards could impair our ability to compete in domestic and international markets. We can face criminal liability and other serious consequences for violations, which can harm our business.

We are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations, various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls, the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and other state and national anti-bribery and anti-money laundering laws in the countries in which we conduct activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees, agents, contractors, and other collaborators from authorizing, promising, offering, or providing, directly or indirectly, improper payments or anything else of value to recipients in the public or private sector. We may engage third parties to sell our products outside the United States, to conduct clinical trials, and/or to obtain necessary permits, licenses, patent registrations, and other regulatory approvals. We have direct or indirect interactions with officials and employees of government agencies or government-affiliated hospitals, universities, and other organizations. We can be held liable for the corrupt or other illegal activities of our employees, agents, contractors, and other collaborators, even if we do not explicitly authorize or have actual knowledge of such activities. Any violations of the laws and regulations described above may result in substantial civil and criminal fines and penalties, imprisonment, the loss of export or import privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, and other consequences.

 

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If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could significantly harm our business.

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

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

In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. Current or future environmental laws and regulations may impair our research, development or production efforts, which could adversely affect our business, financial condition, results of operations or prospects. In addition, failure to comply with these laws and regulations may result in substantial fines, penalties or other sanctions.

In the future, if we decide to market our products outside of the United States, such as in the European Union or China, we would need to obtain additional approvals and comply with additional regulatory requirements.

Our primary regulatory strategy is to apply first for approvals in the United States for our rare disease programs. We intend to seek approvals in China commencing in 2019. We may in the future apply for approvals in Europe, or clinical trial waivers in China, following receipt of marketing authorization in the United States. However, as we also plan to consider collaboration for commercialization efforts in Europe and China, we anticipate that potential commercialization partners may have input into regulatory strategies in those jurisdictions. To date, we have focused our regulatory efforts primarily on achieving approvals and marketing authorization in the United States. In order to market any product outside of the United States, we need to comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of products. Whether or not we obtain FDA approval for a product, we or our collaborators would need to obtain the necessary approvals by the comparable foreign regulatory authorities before marketing the product in those countries or jurisdictions. We cannot be sure whether and when we would be able to obtain the necessary approvals, which could adversely affect our business and prospects.

Governments outside the United States may impose strict price controls, which may adversely affect our revenues, if any.

In some countries, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we, or any future collaborators, may be required to conduct a clinical trial that compares the cost-effectiveness of our product to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be materially harmed.

Our employees may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements, which could cause significant liability for us and harm our reputation.

We are exposed to the risk of employee fraud or other misconduct, including intentional failures to comply with FDA regulations or similar regulations of comparable regulatory authorities, provide accurate information to the FDA or comparable regulatory authorities, comply with manufacturing standards we have established, comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable regulatory authorities, report financial information or data accurately or disclose unauthorized activities to

 

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us. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and 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 governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws, standards or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and results of operations, including the imposition of significant civil, criminal and administrative penalties, damages, fines, disgorgement, individual imprisonment, exclusion of products from government-funded healthcare programs, such as Medicare and Medicaid, additional reporting requirements and oversight if 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.

Risks Related to Employee Matters and Managing Growth

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

We are highly dependent on Reenie McCarthy, our Chief Executive Officer and a Director, as well as the other principal members of our management and scientific teams. Ms. McCarthy is employed “at will,” meaning we or she may terminate the employment relationship at any time. In the future, we may be dependent on other members of our management, scientific and development team. Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. Our industry has experienced a high rate of turnover of management personnel in recent years. If we lose one or more of our executive officers or other key employees, our ability to implement our business strategy successfully could be seriously harmed. Furthermore, replacing executive officers or other key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain marketing approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key employees on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions.

We rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by other entities and may have commitments under consulting or advisory contracts with those entities that may limit their availability to us. If we are unable to continue to attract and retain highly qualified personnel, our ability to develop and commercialize our product candidates will be limited.

We expect to grow our organization, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug manufacturing, regulatory affairs and sales, marketing and distribution. To manage these growth activities, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Our management may need to devote a disproportionate amount of its attention to managing these growth activities. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or identify, recruit and train additional qualified personnel. Our inability to manage the expansion of our operations effectively may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could also require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If we are unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate revenues could be reduced and we may not be able to implement our business strategy, including the successful commercialization of our product candidates.

 

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Risks Related to this Offering and Ownership of ADSs

After this offering, Morningside Venture (I) Investments Limited will continue to have a controlling ownership interest in our ordinary shares and the ability to substantially control all matters submitted to shareholders for approval.

Following the completion of this offering, Morningside Venture (I) Investments Limited, or MVIL, will beneficially own 64.4% of our ordinary shares (or 62.7% if the underwriters exercise their option to purchase additional ADSs in full). As a result, MVIL will be able to control any matter submitted to our shareholders for approval that requires an ordinary resolution and will have substantial control over any matters submitted to our shareholders for approval that requires a special resolution, as well as our management and affairs. For example, MVIL would control the election of directors and will have substantial control over approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership control may:

 

   

delay, defer or prevent a change in control;

 

   

entrench our management or the board of directors; or

 

   

impede a merger, consolidation, takeover or other business combination involving us that other shareholders may desire.

In addition, certain entities associated with our existing principal shareholder, Morningside Venture (I) Investments Limited, have indicated an interest in purchasing a significant amount of ADSs in this offering. If these entities do purchase such ADSs, they, together with Morningside Venture (I) Investments Limited, will be able to control all matters submitted to our shareholders for approval, including the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets, as well as exert substantial control over our management and affairs.

MVIL will own a controlling portion of our ordinary shares after this offering and may have conflicts of interest with us and other shareholders in the future.

MVIL will beneficially own approximately 64.4% of our ordinary shares (or 62.7% if the underwriters exercise their option to purchase additional ADSs in full) following the completion of this offering. The interests of MVIL may not always be consistent with the interests of our company or of our other shareholders. Accordingly, MVIL could cause us to enter into transactions or agreements of which other holders of our ordinary shares would not approve or make decisions with which such holders would disagree. Gerald L. Chan, one of our directors, is a co-founder of the Morningside group, a private investment group with venture, private equity and property investments. In addition, Reenie McCarthy, our Chief Executive Officer and a director, served as a member of the investment team at the Morningside group from 1993 through 2016, and remains a director of Morningside Technology Advisory, LLC, which provides advisory services to entities associated with the Morningside group.

Although Dr. Chan is not an officer, director or employee of MVIL and has neither voting nor dispositive control over the ordinary shares held by MVIL and does not otherwise beneficially own such shares, as a result of his ongoing relationship with the Morningside group, transactions between us and MVIL may present an actual or perceived conflict of interest. Although Ms. McCarthy is not an officer, director or employee of MVIL, and has neither voting nor dispositive control over our ordinary shares held by MVIL and does not otherwise beneficially own such shares, as a result of her historic relationship with the Morningside group and her ongoing relationship with Morningside Technology Advisory, LLC, transactions between us and MVIL may present an actual or perceived conflict of interest. Any actual or perceived conflicts of interest may lead Dr. Chan and Ms. McCarthy to recuse themselves from actions of our board of directors with respect to transactions involving MVIL and its affiliates. For example, in a situation in which MVIL is adverse to us, such as if it breaches an agreement with us, a conflict could arise. We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party.

MVIL is in the business of making investments in companies and could from time to time acquire and hold interests in businesses that compete with us. MVIL may also pursue acquisition opportunities that may be complementary to our business, and as a result, desirable acquisitions may not be available to us. So long as MVIL continues to own a significant amount of our equity, it will continue to be able to strongly influence or effectively control our decisions.

Certain entities associated with certain of our existing noteholders and/or our principal shareholder, Morningside Venture (I) Investments Limited, have indicated an interest in purchasing up to an aggregate of approximately $60.0 million of the ADSs in this offering at the initial public offering price and on the same terms as the other purchasers in this offering. However, because indications of interest are not binding agreements or commitments to purchase,

 

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these persons may determine to purchase fewer ADSs than they indicate an interest in purchasing or not to purchase any ADSs in this offering. It is also possible that these persons could purchase more ADSs in this offering. In addition, the underwriters could determine to sell fewer ADSs to any of these persons than they indicate an interest in purchasing or not to sell any ADSs to such persons.

If you purchase ADSs in this offering, you will suffer immediate dilution in the net tangible book value of your investment.

The initial public offering price of the ADSs is substantially higher than the net tangible book value per ADS. Therefore, if you purchase ADSs in this offering, you will pay a price per ADS that substantially exceeds our net tangible book value per ADS after this offering. Based on the initial public offering price of $12.00 per ADS, you will experience immediate dilution of $10.91 per ADS, representing the difference between our pro forma as adjusted net tangible book value per ADS after giving effect to this offering and the initial public offering price. In addition, purchasers of ADSs in this offering will have contributed approximately 17.0% of the aggregate price paid by all purchasers of our shares and will own approximately 18.9% of our ordinary shares outstanding after this offering, excluding any ordinary shares that they may have acquired prior to this offering. Furthermore, if the underwriters exercise their option to purchase additional ADSs or our previously issued options to acquire ordinary shares at prices below the initial public offering price are exercised, you will experience further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

The price of the ADSs is likely to be highly volatile, which could result in substantial losses for purchasers of the ADSs in this offering.

The price of the ADSs is likely to be highly volatile. The stock market in general and the market for smaller pharmaceutical and biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your ADSs at or above the initial public offering price and you may lose some or all of your investment. The market price for the ADSs may be influenced by many factors, including:

 

   

our ability to commercialize or obtain regulatory approval for our product candidates, or delays in commercializing or obtaining regulatory approval;

 

   

announcements relating to our clinical trials, including any periodic updates relating to enrollment of trial subjects, adverse events, site initiation, and timing of release of interim analyses and final trial results;

 

   

commencement or termination of collaborations for our development programs;

 

   

failure or discontinuation of any of our development programs;

 

   

results from, or any delays in, clinical trials relating to our product candidates, including our clinical trials for elamipretide;

 

   

any need to suspend or discontinue clinical trials due to side effects or other safety risks, or any need to conduct studies on the long-term effects associated with the use of our product candidates;

 

   

manufacturing issues related to our product candidates for clinical trials or future products for commercialization;

 

   

commercial success and market acceptance of our product candidates following regulatory approval;

 

   

undesirable side effects caused by product candidates after they have entered the market;

 

   

ability to discover, develop and commercialize additional product candidates;

 

   

announcements relating to collaborations that we may enter into with respect to the development or commercialization of our product candidates;

 

   

success of our competitors in discovering, developing or commercializing products;

 

   

strategic transactions undertaken by us;

 

   

additions or departures of key personnel;

 

   

product liability claims related to our clinical trials or product candidates;

 

   

business disruptions caused by earthquakes or other natural disasters;

 

   

disputes concerning our intellectual property or other proprietary rights;

 

   

FDA, EMA, NMPA or other regulatory actions affecting us or our industry;

 

   

healthcare reform measures in the United States;

 

   

future sales or issuances of equity or debt securities by us;

 

   

fluctuations in our semi-annual operating results;

 

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the issuance of new or changed securities analysts’ reports or recommendations regarding us;

 

   

announcement or expectation of additional financing efforts;

 

   

sales of our ordinary shares by us, our insiders or other shareholders;

 

   

actual and anticipated variations in our results of operations;

 

   

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

 

   

announcements by us of significant acquisitions, disposals, strategic alliances or joint ventures;

 

   

recruitment or loss of key personnel by us or our competitors;

 

   

market developments affecting us or the markets in which we operate;

 

   

regulatory or legal developments, including litigation;

 

   

the operating and share price performance of companies that investors consider to be comparable to us;

 

   

the depth and liquidity of the market for the ADSs;

 

   

the release or expiry of lock-up or other transfer restrictions on our ordinary shares and ADSs;

 

   

general economic, political and stock market conditions in the United States and the countries in which we operate and elsewhere in the world; and

 

   

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

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

No public market for the ADSs currently exists, and an active trading market for the ADSs may not develop.

Prior to this offering, there has been no public market for the ADSs. The initial public offering price for the ADSs was determined through negotiations with the underwriters. This price may not reflect the price at which investors in the market will be willing to buy and sell our ADSs following this offering. Although the ADSs have been approved for listing on The Nasdaq Global Market, an active trading market for the ADSs may never develop or, if developed, be maintained following this offering. If an active market for the ADSs does not develop or is not maintained, it may be difficult for you to sell ADSs you purchase in this offering without depressing the market price for the ADSs, or at all. An inactive trading market may also impair our ability to raise capital to continue to fund operations by selling shares or ADSs and may impair our ability to acquire other companies or technologies by using our shares or ADSs as consideration.

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

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of the ADSs. The failure by our management to apply these funds effectively could result in financial losses that could significantly harm our business, cause the price of the ADSs to decline and delay the development of our product candidates. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

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

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and plan 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 SOX 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, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In this prospectus, we have not included all of the executive compensation related information that would be required if we were not an emerging growth company and a foreign private issuer. We cannot predict whether investors will find the ADSs less attractive if we rely on these exemptions. If some investors find the ADSs less attractive as a result, there may be a less active trading market for the ADSs and the price of the ADSs may be more volatile.

 

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In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies. As a result, our financial statements may not be comparable to the financial statements of reporting companies that are required to comply with the effective dates for new or revised accounting standards that are otherwise applicable to public companies.

As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the Securities and Exchange Commission than U.S. companies. This may limit the information available to holders of the ADSs.

We are a “foreign private issuer,” as defined in the rules and regulations of the Securities and Exchange Commission, or the SEC, and, consequently, we are not subject to all of the disclosure requirements applicable to companies organized within the United States. For example, we are exempt from certain rules under the U.S. Exchange Act, that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act. In addition, our senior management and supervisory board members are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies. Accordingly, there may be less publicly available information concerning our company than there is for U.S. public companies.

In addition, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from the Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information. As a result of the above, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.

We intend to rely on Nasdaq Stock Market rules that permit us to comply with applicable Cayman Islands corporate governance practices, rather than the corresponding domestic U.S. corporate governance practices, and therefore your rights as a shareholder will differ from the rights you would have as a shareholder of a domestic U.S. issuer.

As a foreign private issuer whose ADSs are listed on The Nasdaq Global Market, we are permitted in certain cases to follow Cayman Islands corporate governance practices instead of the corresponding requirements of the Nasdaq Stock Market rules. A foreign private issuer that elects to follow a home country practice instead of Nasdaq requirements must submit to Nasdaq in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC each such requirement that it does not follow and describe the home country practice followed instead of any such requirement. In accordance with Cayman Islands law:

 

   

we do not require a remuneration committee to have entirely independent directors;

 

   

we do not require an independent director oversight of director nominations; and

 

   

we do not require the board of directors to have regularly scheduled meetings at which only independent directors are present.

For further information upon the differences between Delaware law and Cayman Islands law, please see “Description of Share Capital and Articles of Association—Differences in Corporate Law.”

We may lose our foreign private issuer status, which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to incur significant legal, accounting and other expenses.

As discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter. We would lose our foreign private issuer status if, for example, more than 50% of our ordinary shares are directly or indirectly held by residents of the United States and we fail to meet additional requirements necessary to maintain

 

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our foreign private issuer status. If we lose our foreign private issuer status on this date, we will be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms, which are more detailed and extensive than the forms available to a foreign private issuer. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, we will lose our ability to rely upon exemptions from certain corporate governance requirements under the Nasdaq listing rules. As a U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal, accounting and other expenses that we will not incur as a foreign private issuer, and accounting, reporting and other expenses in order to maintain a listing on a U.S. securities exchange. These rules and regulations could also make it more difficult for us to attract and retain qualified members of our board of directors and more expensive to procure director and officer liability insurance.

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

As a public company, and particularly after we are no longer an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of The Nasdaq Global Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. We expect that we will need to hire additional accounting, finance and other personnel in connection with our becoming, and our efforts to comply with the requirements of being, a public company and our management and other personnel will need to devote a substantial amount of time towards maintaining compliance with these requirements. These requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that the rules and regulations applicable to us as a public company may make it more difficult and more expensive for us to obtain director and officer liability insurance, which could make it more difficult for us to attract and retain qualified members of our board of directors. We are currently evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

Pursuant to SOX Section 404, we will be required to furnish a report by our management on our internal control over financial reporting. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with SOX Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants 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 we will not be able to conclude, within the prescribed timeframe, or at all, that our internal control over financial reporting is effective as required by SOX Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

A significant portion of our total outstanding shares is restricted from immediate resale, but may be sold into the market in the near future, which could cause the market price of the ADSs to decline significantly, even if our business is doing well.

Sales of a substantial number of ADSs in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of ordinary shares intend to sell ADSs, could reduce the market price of the ADSs. After this offering and after giving effect to (i) the issuance of 175,210,373 shares upon the conversion of the 2018 Notes, based on the initial public offering price of $12.00 per ADS, and (ii) the conversion of all outstanding Series A convertible preferred shares into an aggregate of 91,600,398 ordinary shares, both of which will occur automatically upon the closing of this offering, we will have 413,298,719 ordinary shares

 

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outstanding based on the 68,487,948 ordinary shares outstanding as of December 31, 2018 (or 424,998,719 shares if the underwriters exercise their option to purchase additional ADSs in full).

All ADSs we are selling in this offering may be resold in the public market immediately, unless purchased by our affiliates. The remaining ordinary shares are currently restricted under securities laws or as a result of lock-up or other agreements, but will be able to be sold, subject to any applicable volume limitations under federal securities laws with respect to affiliate sales. For additional information on applicable restrictions on sales of ordinary shares and ADSs after this offering, see the “Shares and ADS Eligible For Future Sale” section of this prospectus.

We, each of our directors, officers and holders of substantially all our outstanding equity securities have entered into lock-up agreements with the underwriters under which we and they have agreed, subject to certain exceptions described in the section titled “Underwriting”, not to, directly or indirectly, dispose of or hedge any ordinary shares, ADSs or securities convertible into or exchangeable for ordinary shares during the period from the date of the final prospectus for this offering continuing to and including 180 days after the date of the final prospectus for this offering without the prior written consent of Jefferies LLC and Evercore Group L.L.C. We refer to this period as the lock-up period. Upon the release of the foregoing restrictions, our securityholders subject to a lock-up agreement will be able to sell our ADSs in the public market, subject to volume limitations applicable to affiliates. In addition, Jefferies LLC and Evercore Group L.L.C. may, in their sole discretion, release all or some portion of the securities subject to lock-up agreements prior to the expiration of the lock-up period. For a description of the lock-up agreements, see the ‘‘Underwriting’’ section of this prospectus. Sales of a substantial number of such securities upon early release or expiration of the lock-up period or the perception that such sales may occur could cause the market price of ADSs to decline or make it more difficult for you to sell your ADSs at a time and at a price that you deem appropriate. We also plan to register all approximately 67.5 million ordinary shares 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 and once vested, subject to volume limitations applicable to affiliates and the lock-up agreements described above and in the “Underwriting” section of this prospectus.

We do not anticipate paying any cash dividends on the ADSs in the foreseeable future. Accordingly, holders of ADSs must rely on capital appreciation, if any, for any return on their investment.

We have never declared nor paid cash dividends on our share capital. We currently plan to retain all of our future earnings, if any, to finance the operation, development and growth of our business. In addition, the terms of our existing loan and security agreement preclude us from paying cash dividends without the consent of our lender. As a result, capital appreciation, if any, of the ADSs will be your sole source of gain for the foreseeable future. However, if we do pay a cash dividend on our ordinary shares in the future, we may only pay such dividend out of our profits or share premium (subject to applicable solvency requirements) under Cayman Islands law.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.

The trading market for the ADSs will likely depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us, or provide favorable coverage. If one or more analysts downgrade the ADSs or change their opinion of the ADSs, our share price would likely decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price of the ADSs or trading volume to decline.

We may be classified as a passive foreign investment company for any taxable year, which may result in adverse U.S. federal income tax consequence to U.S. holders.

Based on our estimated gross income and average value of our gross assets, taking into account the initial public offering price of the ADSs in this offering and the expected price of the ADSs following this offering, and the nature of our business, we do not believe that we were a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for our tax year ended December 31, 2017 and do not expect to be a PFIC during our tax year ending December 31, 2018. A corporation organized outside the United States generally will be classified as a PFIC for U.S. federal income tax purposes in any taxable year in which at least 75% of its gross income is passive income or on average at least 50% of the gross value of its assets is attributable to assets that produce passive income or are held for the production of passive income. Passive income for this purpose generally includes dividends, interest,

 

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royalties, rents and gains from commodities and securities transactions. Our status in any taxable year will depend on our assets and activities in each year, and because this is a factual determination made annually after the end of each taxable year, there can be no assurance that we will not be considered a PFIC for the current taxable year or any future taxable year. The market value of our assets may be determined in large part by reference to the market price of the ADSs, which is likely to fluctuate after the offering, and may fluctuate considerably given that market prices of biotechnology companies have been especially volatile. If we were to be treated as a PFIC for any taxable year during which a U.S. holder held the ADSs, however, certain adverse U.S. federal income tax consequences could apply to the U.S. holder. See “Taxation—Material U.S. Federal Income Tax Considerations for U.S. Holders—Passive Foreign Investment Company Rules” in this prospectus.

We may choose to list our ordinary shares on another securities exchange outside of the United States the ADSs following this offering, which may adversely affect the liquidity and value of our ADSs and subject us to additional obligations.

We have in the past considered, and may in the future seek to, list our ordinary shares on another exchange outside of the United States following this offering. If we decide to pursue a cross or dual listing of our ordinary shares, we cannot predict the effect any such listing would have on the value of our ordinary shares and ADSs. However, the cross listing of our ordinary shares and our ADSs may dilute the liquidity of these securities in one or both markets and may adversely affect the development of an active trading market for our ADSs in the United States. The price of our ADSs could also be adversely affected by trading in our ordinary shares on any other exchange. Furthermore, a listing on any other exchange could subject us to additional requirements and/or obligations, including financial and other reporting requirements, and could restrict our ability to undertake certain activities that would be beneficial for our shareholders and holders of our ADSs.

Holders of our ADSs have fewer rights than our shareholders and must act through the depositary to exercise their rights.

Holders of our ADSs do not have the same rights as our shareholders and may only exercise their voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Holders of the ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the ordinary shares represented by the ADSs. When a general meeting is convened, if you hold ADSs, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw the ordinary shares underlying your ADSs to allow you to vote directly with respect to any specific matter. We will make all commercially reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. Furthermore, the depositary will not be liable for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you request. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting. See “Description of American Depositary Shares.”

Holders of our ADSs may face limitations on transfer and withdrawal of underlying ordinary shares.

Our ADSs, which may be evidenced by American Depositary Receipts, or ADRs, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary think it is advisable to do so because of any requirement of law, government or governmental body, or under any provision of the deposit agreement, or for any other reason subject to your right to cancel your ADSs and withdraw the underlying ordinary shares. Temporary delays in the cancellation of your ADSs and withdrawal of the underlying ordinary shares may arise because the depositary has closed its transfer books or we have closed our transfer books, the transfer of ordinary shares is blocked to permit voting at a shareholders’ meeting or we are paying a dividend on our ordinary shares. In addition, you may not be able to cancel your ADSs and withdraw the underlying ordinary shares when you owe money for fees, taxes and similar charges and when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal of ordinary shares or other deposited securities. See “Description of American Depositary Shares.”

 

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ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

The deposit agreement governing the ADSs representing our ordinary shares provides that holders and beneficial owners of ADSs irrevocably waive the right to a trial by jury in any legal proceeding arising out of or relating to the deposit agreement or the ADSs, including in respect of claims under federal securities laws, against us or the depositary to the fullest extent permitted by applicable law. If this jury trial waiver provision is prohibited by applicable law, an action could nevertheless proceed under the terms of the deposit agreement with a jury trial. To our knowledge, the enforceability of a jury trial waiver under the federal securities laws has not been finally adjudicated by a federal court. However, we believe that a jury trial waiver provision is generally enforceable under the laws of the State of New York, which govern the deposit agreement, by a court of the State of New York or a federal court, which have non-exclusive jurisdiction over matters arising under the deposit agreement, applying such law. In determining whether to enforce a jury trial waiver provision, New York courts and federal courts will consider whether the visibility of the jury trial waiver provision within the agreement is sufficiently prominent such that a party has knowingly waived any right to trial by jury. We believe that this is the case with respect to the deposit agreement and the ADSs. In addition, New York courts will not enforce a jury trial waiver provision in order to bar a viable setoff or counterclaim sounding in fraud or one which is based upon a creditor’s negligence in failing to liquidate collateral upon a guarantor’s demand, or in the case of an intentional tort claim (as opposed to a contract dispute), none of which we believe are applicable in the case of the deposit agreement or the ADSs. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any provision of the federal securities laws. If you or any other holder or beneficial owner of ADSs brings a claim against us or the depositary in connection with such matters, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action, depending on, among other things, the nature of the claims, the judge or justice hearing such claims, and the venue of the hearing.

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law and many of our directors reside outside of the United States.

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs shall be governed by our Amended and Restated Memorandum and Articles of Association to be in effect upon the completion of this offering, referred to as our Articles of Association, the Companies Law (2018 Revision) of the Cayman Islands, referred to as the Companies Law, and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England and Wales, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. Similarly, the rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States, and some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. As a Cayman Islands exempted company, we may not have standing to initiate a derivative action in a federal court of the United States. As a result, you may be limited in your ability to protect your interests if you are harmed in a manner that would otherwise enable you to sue in a United States federal court. In addition, shareholders of Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts.

Shareholders of Cayman Islands exempted companies like us have very limited statutory rights under Cayman Islands law to inspect the corporate records of Cayman Islands exempted companies into which they are invested and have no statutory rights to obtain copies of registers of shareholders of Cayman Islands exempted companies. Although our shareholders may request access to our books and records, our directors have discretion under our Articles of Association to determine whether or not, and under what conditions, certain of our corporate records may be

 

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inspected by our shareholders. Under the Companies Law, shareholders are entitled to view our Articles of Association. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

Certain corporate governance practices in the Cayman Islands, which is the jurisdiction of our incorporation, differ significantly from requirements for companies incorporated in other jurisdictions such as the United States. To the extent we choose to follow practice in the Cayman Islands with respect to corporate governance matters, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.

The Cayman Islands has no legislation specifically dedicated to the rights of investors in securities or statutorily defined private causes of action to investors in securities such as those found under the Securities Act of 1933, or the Securities Act, or the Exchange Act. Subject to limited exceptions, under Cayman Islands law, a shareholder is not entitled to bring a derivative action against the board of directors. U.S.-style class action lawsuits are not recognized in the Cayman Islands, but groups of shareholders with identical interests may bring representative proceedings in a similar fashion.

As a result of all of the above, our shareholders may have more difficulty in protecting their interests in the face of actions taken by management, or members of the board of directors than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Law of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital and Articles of Association—Material Differences in Corporate Law.”

The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation.

Our corporate affairs and the rights of holders of ordinary shares are governed by our Articles of Association, the Companies Law, and the common law of the Cayman Islands. Certain rights and responsibilities of our shareholders, ADS holders and members of our board of directors under Cayman Islands law are different from those that apply to a Delaware corporation.

Directors of Cayman Islands exempted companies are required to observe certain fiduciary duties. These fiduciary duties are owed to the Cayman Islands company and include the duty to act in the best interests of the company and the shareholders as a whole. However, the fiduciary duties of a director of a Cayman Islands exempted company may not be the same as the fiduciary duty of a director of a U.S. corporation.

In addition, controlling shareholders of U.S. corporations owe fiduciary duties to minority shareholders, while shareholders (including controlling shareholders) of Cayman Islands companies generally owe no fiduciary duties to the company or other shareholders.

The rights of our shareholders to bring shareholders’ suits against us or our board of directors under Cayman Islands law are much more limited than those of shareholders of a U.S. corporation. For example, under Cayman Islands law, a shareholder who wishes to bring a claim against a director would generally need to obtain permission from the Grand Court of the Cayman Islands, or Cayman Islands Court, to bring a derivative action, in the name of the company, against the director. This is because the director of a Cayman Islands exempted company owes duties to the company and not to individual shareholders. As a result, our shareholders, including holders of ADSs, may have more difficulty protecting their rights in connection with actions taken by our directors than they would as shareholders of a U.S. corporation.

Minority shareholders in a Cayman Islands exempted company have more limited rights than minority shareholders in a U.S. corporation in relation to mergers and similar transactions that the company may carry out. For example, if a merger under the Companies Law involving a Cayman Islands exempted company is approved by the requisite majority of shareholders, a dissenting minority shareholder would have the right to be paid the fair value of their shares (which, if not agreed between the parties, will, following the course of legal proceedings, be determined by the Cayman Islands Court) if the shareholders follow the statutorily prescribed procedure for initiating such proceedings, subject to certain exceptions. Such dissenter rights differ substantially from the appraisal rights, which would ordinarily be available to dissenting shareholders of Delaware corporations. Further, if a takeover offer is made

 

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to the shareholders of a Cayman Islands exempted company and accepted by holders of 90% of the shares affected, the offeror may require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Cayman Islands Court, but this is unlikely to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion. A minority shareholder in this scenario would have no rights comparable to the appraisal rights which would generally be available to a dissenting shareholder of a U.S. corporation in similar circumstances. See the section of this prospectus titled “Description of Share Capital and Articles of Association” for a description of the principal differences between the provisions of Cayman Islands law applicable to us and the U.S. Delaware General Corporate Law relating to shareholders’ rights and protections.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. These statements include all matters that are not related to present facts or current conditions or that are not historical facts, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements regarding:

 

   

our plans to develop and commercialize elamipretide, SBT-20 and our other product candidates and to identify additional product candidates;

 

   

ongoing and planned clinical trials and preclinical studies for our product candidates, including SBT-272, including the timing of initiation of these trials and studies and the timing of the anticipated results;

 

   

our plans to possibly enter into collaborations for the development of product candidates and the potential benefits of any collaboration;

 

   

the timing of anticipated regulatory filings or regulatory approvals and plans and expectations for expedited regulatory review for our product candidates;

 

   

the potentials advantages and clinical utility of our product candidates;

 

   

our commercialization, marketing and manufacturing capabilities and strategy;

 

   

our intellectual property position and strategy;

 

   

our estimates regarding the potential market opportunity for our product candidates;

 

   

our expectations related to the use of proceeds from this offering; and

 

   

our estimates regarding expenses, future revenue, capital requirements, sufficiency of our current cash and cash equivalent and expected proceeds from this offering and our need for and ability to obtain additional funding.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Except as context otherwise requires, our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

You should read this prospectus, the documents that we reference in this prospectus and the documents that we 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. The forward-looking statements contained in this prospectus are made as of the date of this prospectus and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

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

 

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USE OF PROCEEDS

We estimate that the net proceeds from this offering will be approximately $70.3 million (or $81.2 million if the underwriters exercise their option to purchase additional ADSs in full), based on the initial public offering price of $12.00 per ADS, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

As of September 30, 2018, we had cash and cash equivalents of $4.1 million. We currently estimate that we will use the net proceeds from this offering, together with our existing cash and cash equivalents, as follows:

 

   

approximately $25.0 million to fund the continued clinical development of elamipretide for the treatment of primary mitochondrial myopathy through pivotal data from a Phase 3 clinical trial;

 

   

approximately $8.0 million to fund the continued clinical development of elamipretide for the treatment of Barth and LHON through anticipated upcoming regulatory interactions;

 

   

approximately $8.0 million to fund the continued clinical development of elamipretide for the treatment of dry AMD through initiation of a Phase 2b clinical trial;

 

   

approximately $6.0 million to fund the continued preclinical development of SBT-272 through IND-enabling studies and to fund a Phase 1 safety trial;

 

   

approximately $10.4 million for principal and interest payments that we are obligated to make over the next 12 months under our term loan facility with Hercules; and

 

   

the balance for working capital and other general corporate purposes, including advancement of our pipeline of discovery compounds.

As of September 30, 2018, we had $20.0 million of outstanding principal under our term loan facility with Hercules and an additional $20.0 million of available borrowings, subject to achievement of specified milestones. Borrowings under the term loan facility bear interest at a floating per annum rate equal to the greater of (i) the Wall Street Journal prime rate plus 5.50% or (ii) 9.50%. Beginning in December 2018, we are required to repay principal and interest on these borrowings in monthly installments through the scheduled maturity of January 1, 2021.

This expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our development of product candidates, the status of and results from clinical trials, as well as any collaborations that we may enter into with third parties, and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

We anticipate that, assuming our current operating plan, the net proceeds from this offering, together with our existing cash and cash equivalents, will only be sufficient to allow us to complete a Phase 3 clinical trial for elamiptretide for primary mitochondrial myopathy, to initiate but not complete our planned Phase 2b clinical trial for the treatment of dry AMD, and to conduct a Phase 1 trial of SBT-272. Based on our current operating plan, we will require additional capital to advance elamipretide through pivotal trials for indications other than primary mitochondrial myopathy and to advance our other product candidates through later-stage clinical development, as well as to commercialize any of our product candidates if we receive regulatory approval. We have based these estimates on assumptions that may prove to be wrong, including assumptions regarding the clinical trials necessary for FDA approval of our product candidates, and we could use our capital resources sooner than we currently expect. Due to the numerous risks and uncertainties associated with product development, including risks and uncertainties with respect to successful enrollment and completion of clinical trials, at this time we cannot reasonably estimate the amount of additional funding that will be necessary to complete the clinical development of any of our product candidates. If we receive regulatory approval for elamipretide, SBT-20 or any of our other product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources.

Pending use of the proceeds as described above, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our share capital. We intend to retain all of our future earnings, if any, to finance the growth and development of our business, and we do not intend to pay cash dividends to the holders of our ordinary shares for the foreseeable future. In addition, the terms of our existing loan and security agreement preclude us from paying cash dividends without the consent of our lender. However, if we do pay a cash dividend on our ordinary shares in the future, we may only pay such dividend out of our profits or share premium (subject to applicable solvency requirements) under Cayman Islands law.

 

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CAPITALIZATION

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

 

   

on an actual basis;

 

   

on a pro forma basis giving effect to (i) the conversion of all outstanding Series A convertible preferred shares into 91,600,398 ordinary shares and (ii) the effectiveness of our Amended and Restated Memorandum and Articles of Association upon the completion of this offering; and

 

   

on a pro forma as adjusted basis giving additional effect to (i) the issuance of 175,210,373 ordinary shares upon the conversion of our outstanding 2018 Notes in an aggregate principal amount of $132.4 million, based on the initial public offering price of $12.00 per ADS and (ii) the sale of ADSs offered in this offering, at the initial public offering price of $12.00 per ADS, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

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

 

 

 

     AS OF SEPTEMBER 30, 2018  
     ACTUAL     PRO FORMA     PRO FORMA
AS ADJUSTED
 
     (in thousands, except share data)  

Cash and cash equivalents

   $ 4,078     $ 4,078     $ 74,380  
  

 

 

   

 

 

   

 

 

 

Convertible notes payable

   $ 102,357     $ 102,357     $  

Long-term debt, less current portion

     12,467       12,467       12,467  

Series A convertible preferred shares, $0.0003 par value; 106,666,667 shares authorized, 91,600,398 issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     211,377              

Shareholders’ (deficit) equity:

      

Ordinary Shares, $0.0003 par value; 203,333,333 shares authorized, 68,474,614 shares issued and outstanding, actual; 750,000,000 shares authorized, 160,075,012 shares issued and outstanding, pro forma; 750,000,000 shares authorized, 413,285,385 shares issued and outstanding, pro forma as adjusted

     21       48       124  

Additional paid-in capital

     39,206       250,556       436,967  

Accumulated deficit

     (399,680     (399,680     (399,680
  

 

 

   

 

 

   

 

 

 

Total shareholders’ (deficit) equity

     (360,453     (149,076     37,411  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ (34,252   $ (34,252   $ 49,878  
  

 

 

   

 

 

   

 

 

 

 

 

The table above does not include:

 

   

15,550,986 ordinary shares issuable upon exercise of share options outstanding as of September 30, 2018, at a weighted-average exercise price of $1.05 per share;

 

   

9,965,096 ordinary shares available for future issuance as of September 30, 2018 under our 2006 share incentive plan, which shares will cease to be available for issuance following the closing of this offering;

 

   

47,692,934 ordinary shares reserved for issuance, in connection with this offering, under our 2019 share incentive plan, which plan includes provisions that automatically increase the number of ordinary shares reserved for issuance thereunder each year;

 

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3,972,565 ordinary shares reserved for issuance, in connection with this offering, under our 2019 employee share purchase plan, which plan includes provisions that automatically increase the number of ordinary shares reserved for issuance thereunder each year; and

 

   

500,000 ordinary shares issuable upon exercise of an outstanding warrant with an exercise price equal to $1.00 per share (based on the initial public offering price of $12.00 per ADS in this offering and reflected on an implied per ordinary share basis).

 

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DILUTION

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

Our historical net tangible book value as of September 30, 2018 was approximately $(149.1) million, or $(2.18) per ordinary share and $(26.13) per ADS. Each ADS represents 12 ordinary shares. Our historical net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of ordinary shares outstanding as of September 30, 2018.

Our pro forma net tangible book value as of September 30, 2018 was $(149.1) million, or $(0.93) per ordinary share and $(11.18) per ADS. Pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of ordinary shares outstanding after giving effect to the conversion of all outstanding Series A convertible preferred shares into an aggregate of 91,600,398 ordinary shares, which will occur automatically upon the closing of this offering.

After giving further effect to (i) the issuance of 175,210,373 ordinary shares upon the conversion of our outstanding 2018 Notes in an aggregate principal amount of $132.4 million based on the initial public offering price of $12.00 per ADS and (ii) the sale of 6,500,000 ADSs in this offering at the initial public offering price of $12.00 per ADS, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2018 would have been $37.4 million, or $0.09 per share and $1.09 per ADS. This amount represents an immediate increase in pro forma net tangible book value of $1.02 per share to our existing shareholders and an immediate dilution in pro forma net tangible book value of $10.91 per ADS to new investors purchasing ADSs in this offering.

The following table illustrates dilution on a per ADS basis:

 

 

 

Initial public offering price per ADS

     $ 12.00  

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

   $ (26.13  
  

 

 

   

Pro forma net tangible book value per ADS as of September 30, 2018

     (11.18  

Increase in pro forma as adjusted net tangible book value attributable to investors purchasing ADSs in this offering

     12.26    
  

 

 

   

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

       1.09  
    

 

 

 

Dilution per ADS to new investors

     $ 10.91  
    

 

 

 

 

 

If the underwriters exercise their option to purchase additional ADSs in full in this offering, the pro forma as adjusted net tangible book value per ADS would be $1.36, the increase in pro forma net tangible book value per ADS to existing shareholders would be $12.54 and the dilution per ADS to new investors would be $10.64, in each case based on the initial public offering price of $12.00 per ADS.

 

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The following table summarizes, on a pro forma as adjusted basis as of September 30, 2018, the differences between the number of shares (including in the form of ADSs) purchased from us, the total consideration in respect of such shares and the average price per share paid by existing shareholders and to be paid by new investors. The calculation below is based on the initial public offering price of $12.00 per ADS, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

 

     ORDINARY SHARES
PURCHASED
    TOTAL
CONSIDERATION
    AVERAGE PRICE
PER SHARE
 
     NUMBER      PERCENT     AMOUNT      PERCENT  

Existing shareholders

     335,285,385        81.1   $ 381,196,120        83.0   $ 1.14  

New investors

     78,000,000        18.9       78,000,000        17.0       1.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     413,285,385        100   $ 459,196,120        100     1.11  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

Certain entities associated with certain of our existing noteholders and/or our principal shareholder, Morningside Venture (I) Investments Limited, have indicated an interest in purchasing up to an aggregate of approximately $60.0 million of the ADSs in this offering at the initial public offering price and on the same terms as the other purchasers in this offering. However, because indications of interest are not binding agreements or commitments to purchase, these persons may determine to purchase fewer ADSs than they indicate an interest in purchasing or not to purchase any ADSs in this offering. It is also possible that these persons could purchase more ADSs in this offering. In addition, the underwriters could determine to sell fewer ADSs to any of these persons than they indicate an interest in purchasing or not to sell any ADSs to such persons.

If the underwriters exercise their option to purchase additional ADSs in full:

 

   

the percentage of ordinary shares held by existing shareholders will decrease to 78.9% of the total number of ordinary shares outstanding after this offering; and

 

   

the number of shares (including in the form of ADSs) held by new investors will increase to 89,700,000 shares, or 21.1% of the total number of ordinary shares outstanding after this offering.

The foregoing tables and calculations are based on the number of ordinary shares outstanding as of September 30, 2018, after giving effect to (i) the issuance of 175,210,373 ordinary shares upon the conversion of our outstanding convertible notes in an aggregate principal amount of $132.4 million, based on the initial public offering price of $12.00 per share and (ii) the conversion of all outstanding Series A convertible preferred shares into an aggregate of 91,600,398 ordinary shares upon the closing of this offering, and exclude:

 

   

15,550,986 ordinary shares issuable upon exercise of share options outstanding as of September 30, 2018 at a weighted-average exercise price of $1.05 per share;

 

   

9,965,096 ordinary shares available for future issuance as of September 30, 2018 under our 2006 share incentive plan, which shares will cease to be available for issuance following the closing of this offering;

 

   

47,692,934 ordinary shares reserved for issuance, in connection with this offering, under our 2019 share incentive plan, which plan includes provisions that automatically increase the number of ordinary shares reserved for issuance thereunder each year;

 

   

3,972,565 ordinary shares reserved for issuance, in connection with this offering, under our 2019 employee share purchase plan, which plan includes provisions that automatically increase the number of ordinary shares reserved for issuance thereunder each year; and

 

   

500,000 ordinary shares issuable upon exercise of an outstanding warrant with an exercise price equal to $1.00 per share (based on the initial public offering price of $12.00 per ADS in this offering and reflected on an implied per ordinary share basis).

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We have derived the following selected of consolidated statement of operations data for the fiscal years ended December 31, 2016 and 2017 and the summary consolidated balance sheet data as of December 31, 2016 and 2017 from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated statements of operations data for the nine months ended September 30, 2017 and 2018 and the consolidated balance sheet data as of September 30, 2018 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, the unaudited data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that should be expected for any future period. The selected consolidated financial data set forth below should be read together with our consolidated financial statements and the related notes to those statements, as well as the section of this prospectus captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

     YEAR ENDED DECEMBER 31,     NINE MONTHS ENDED
SEPTEMBER 30,
 
     2016     2017     2017     2018  
     (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

        

Operating expenses:

        

Research and development

   $ 48,445     $ 63,220     $ 46,212     $ 41,758  

General and administrative

     13,403       16,500       12,937       12,541  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     61,848       79,720       59,149       54,299  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (61,848     (79,720     (59,149     (54,299
  

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income, net

     799       (3,190     (1,691     (15,824
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

   $ (61,049   $ (82,910   $ (60,840   $ (70,123
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to ordinary shareholders—basic and diluted (1)

   $ 0.90     $ 1.21     $ 0.89     $ 1.02  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average ordinary shares used in net loss per share attributable to ordinary shareholders—basic and diluted (1)

     68,165,325       68,472,262       68,471,469       68,474,614  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to ordinary shareholders—basic and diluted (unaudited) (1)

     $ (0.42     $ (0.23
    

 

 

     

 

 

 

Pro forma weighted-average ordinary shares used in net loss per share attributable to ordinary shareholders—basic and diluted (unaudited) (1)

       190,610,424         244,608,268  
    

 

 

     

 

 

 

 

 

(1)   See Notes 2 and 15 to our audited consolidated financial statements and notes 2 and 13 to our unaudited interim condensed consolidated financial statements appearing elsewhere in this prospectus for further details on the calculation of basic and diluted net loss per share attributable to ordinary shareholders and pro forma basic and diluted net loss per share attributable to ordinary shareholders.

 

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     AS OF
DECEMBER 31,
    AS OF
SEPTEMBER 30,

2018
 
     2016     2017  
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 9,710     $ 4,119     $ 4,078  

Working capital deficit

     (338     (18,675     (31,027

Net assets

     1,546       (79,909     (149,076

Total assets

     13,322       7,155       11,630  

Total Series A convertible preferred shares

     211,377       211,377       211,377  

Total accumulated deficit

     (246,647     (329,557     (399,680

Total shareholders’ deficit

     (209,831     (291,286     (360,453

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes and other financial information appearing elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical-stage biotechnology company focused on the discovery, development and commercialization of novel therapies for diseases involving mitochondrial dysfunction. Mitochondria, found in nearly every cell in the body, are the body’s main source of energy production and are critical for normal organ function. Dysfunctional mitochondria characterize a number of rare genetic diseases, collectively known as primary mitochondrial diseases, and are also involved in many common age-related diseases. We believe our lead product candidate, elamipretide, has the potential to treat both rare genetic and common age-related mitochondrial diseases. Our mission is to be the leader in mitochondrial medicine, and we have assembled a highly experienced management team, board of directors and group of scientific advisors to help us achieve this mission.

We are studying elamipretide in the following indications:

Primary mitochondrial myopathy. Primary mitochondrial myopathy, characterized by debilitating skeletal muscle weakness, exercise intolerance and fatigue, which we believe affects an estimated 40,000 diagnosed individuals in the United States. There are no therapies approved by the FDA, the EMA or the NMPA, for the treatment of this indication. We have received Fast Track and Orphan Drug designation from the FDA for the development of elamipretide in this indication. We are conducting a Phase 3 pivotal trial in North America and in Europe and expect to have data from that trial by the end of 2019.

Barth. Barth, characterized by heart muscle weakness, or cardiomyopathy, neutropenia, or low white blood cell count (which may lead to an increased risk for infections), skeletal muscle weakness, delayed growth, fatigue and varying degrees of physical disability, is estimated to affect between one in 300,000 to one in 400,000 births in the United States and there are estimated to be less than 200 known living patients worldwide with Barth. There are no therapies approved by the FDA, EMA or NMPA for the treatment of Barth. We have received Fast Track and Orphan Drug designation from the FDA for the development of elamipretide in this indication. In December 2018, we completed the placebo-controlled portion of a Phase 2/3 clinical trial in patients with Barth. While the trial did not reach its primary endpoints, we observed trends toward improvement in the subset of patients with lower ratios of monolysocardiolipin to tetralinoleylcardiolipin, which we believe are the patients most likely to respond to therapy. We plan to meet with the FDA during the first half of 2019 to discuss a potential NDA submission.

LHON. LHON is characterized by central vision loss. We estimate that LHON affects approximately 10,000 individuals in the United States, of whom an estimated 70% have the genetic mutation, G11778A, that we are studying. There are no therapies approved by the FDA or NMPA for the treatment of LHON, and there is only one EMA-approved therapy. We have received Fast Track and Orphan Drug designation from the FDA for the development of elamipretide in this indication. We completed the placebo-controlled portion of a Phase 2 clinical trial during the first half of 2018, and continue to follow patients in open-label extension. While the trial did not reach its primary endpoint of change in best corrected visual acuity, we observed trends favoring elamipretide across a number of endpoints, and we are continuing to observe improvements in an ongoing open-label extension. We plan to meet with the FDA for an end-of-Phase 2 meeting during the first half of 2019. Following that meeting, we plan to submit a clinical trial application to the NMPA for inclusion of clinical trial sites in China in a potential Phase 3 clinical trial.

Dry AMD. Dry AMD, characterized by symptoms such as distorted vision, reduction in low light visual acuity, reduced overall visual acuity and blurred vision, is estimated to affect over 10 million individuals in the United States,

 

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representing 90% of all individuals with AMD in the United States, and is the leading cause of blindness among older adults in the developed world. There are no therapies approved by the FDA, EMA or NMPA for the treatment of dry AMD. We completed a Phase 1 trial in patients with drusen, an early form of dry AMD, and geographic atrophy, an advanced form of dry AMD, in which we observed statistically significant improvement over baseline in various parameters of visual function in both the drusen and geographic atrophy cohorts. We received Fast Track designation from the FDA for the development of elamipretide for patients with Dry AMD with geographic atrophy in November 2018. We plan to launch a Phase 2b clinical trial for the treatment of patients with geographic atrophy in the first quarter of 2019.

In addition to our clinical development programs for elamipretide, we plan to evaluate SBT-20, our second clinical-stage product candidate, for rare disease indications, such as peripheral neuropathies. We are developing SBT-272, a preclinical-stage product candidate, for rare neurodegenerative diseases. In addition, our internal discovery platform has generated a library of over 100 proprietary, differentiated compounds which could have clinical benefit for diseases related to mitochondrial dysfunction and from which we plan to designate potential product candidates. We may also utilize certain of these compounds as part of our carrier platform, in which they could potentially serve as scaffolds to deliver other beneficial compounds to the mitochondria.

Since our inception in 2006, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, acquiring and developing our proprietary technology, identifying potential product candidates and conducting preclinical and clinical studies of our product candidates. We have not generated any product revenue and have financed our operations primarily through the private placement of Series A convertible preferred shares and convertible notes and borrowings under a term loan. As of September 30, 2018, we have raised an aggregate of $362.6 million in gross proceeds from private placements of our securities and borrowings under the term loan. As of September 30, 2018, our principal source of liquidity was cash and cash equivalents, which totaled $4.1 million.

As of September 30, 2018, we had an accumulated deficit of $399.7 million. Our net loss was $61.0 million and $82.9 million for the years ended December 31, 2016 and 2017, respectively, and $70.1 million for the nine months ended September 30, 2018. We have incurred significant net operating losses in every year since our inception and expect to continue to incur increasing net operating losses and significant expenses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase significantly as we:

 

   

continue to advance our clinical programs and initiate additional clinical programs;

 

   

continue our current research programs and development activities;

 

   

seek to identify additional research programs and additional product candidates;

 

   

initiate preclinical testing and clinical trials for any product candidates we identify;

 

   

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

 

   

hire additional research, clinical and scientific personnel; and

 

   

incur additional costs associated with operating as a public company, including expanding our operational, finance and management teams.

We believe that our available funds subsequent to this offering will be sufficient to fund our operations for the next 12 months. We do not expect to generate revenues from product sales unless and until we successfully complete development and obtain regulatory approval for a product candidate, which is subject to significant uncertainty. We currently use contract research organizations, or CROs, and contract manufacturing organizations, or CMOs, to carry out our preclinical and clinical development activities, and we do not yet have a commercial organization. If we obtain regulatory approval for our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we may seek to fund our operations through public or private equity or debt financings or other sources, including strategic collaborations. We may, however, be unable to raise additional funds or enter into such other arrangements when needed on favorable terms, if at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our current product candidates, or any additional product candidates, if developed.

 

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Without giving effect to the anticipated net proceeds from this offering, we expect that our existing cash will be sufficient to fund our operating expenses and capital expenditure requirements into the first quarter of 2019. Beyond that point, we will need to raise additional capital to finance our operations, which cannot be assured. We have concluded that this circumstance raises substantial doubt about our ability to continue as a going concern within one year after the issuance date of our consolidated financial statements for the nine-months ended September 30, 2018. See Note 1 to our unaudited interim condensed consolidated financial statements appearing at the end of this prospectus for additional information on our assessment.

Similarly, in its report on our consolidated financial statements for the year ended December 31, 2017, our independent registered public accounting firm included an explanatory paragraph stating that our recurring losses from operations since inception and required additional funding to finance our operations raise substantial doubt about our ability to continue as a going concern.

Financial Overview

Revenue

We have not generated any revenue from product sales or otherwise and do not expect to do so in the near future. We expect that any revenue will be less than our expenses for the foreseeable future and that we will experience increasing losses as we continue our development of, and seek regulatory approvals for, our product candidates and begin to commercialize any approved products. Our ability to generate revenues for any product candidate for which we receive regulatory approval will depend on numerous factors, including competition, commercial manufacturing capability and market acceptance of our products.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including development of our preclinical and clinical product candidates, which include:

 

   

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

 

   

expenses incurred under agreements with CROs, CMOs and independent contractors that conduct research and development, preclinical and clinical activities on our behalf;

 

   

costs of purchasing lab supplies and non-capital equipment used in our preclinical activities and in manufacturing preclinical study and clinical trial materials;

 

   

consulting, licensing and professional fees related to research and development activities; and

 

   

facility costs, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies.

We expense research and development costs as incurred. We recognize costs for certain development activities, such as preclinical studies and clinical trials, based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors such as patient enrollment or clinical site activations for services received and efforts expended.

Research and development activities are central to our business model. We expect research and development costs to increase significantly for the foreseeable future as our current development programs progress and new programs are added.

 

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We track certain external research and development expenses for our lead product candidates. We manage certain activities, such as contract research and manufacturing of our product candidates and our discovery programs, through our third-party vendors and have captured the costs of these activities on an individual product basis from our financial records. We use our employee, consultant and infrastructure resources across our development programs and do not track and do not allocate the cost of these activities on a program-by-program basis. The following summarizes our research and development expenses:

 

 

 

     YEAR ENDED
DECEMBER 31,
     NINE MONTHS
ENDED SEPTEMBER 30,
 
     2016      2017            2017                  2018        
    

(in thousands)

 

Product expenses:

           

Elamipretide

   $ 30,775      $ 40,530      $ 30,365      $ 26,115  

SBT-20

     1,090        1,697        1,261        615  

SBT-272

                          332  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total costs directly allocated to products

     31,865        42,227        31,626        27,062  
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses not directly allocated to products:

           

Research and development programs

     4,468        6,179        3,296        2,563  

Consultants and professional expenses

     3,921        4,457        3,706        4,094  

Employee expenses, including cash compensation, benefits and share-based compensation

     8,191        10,357        7,584        8,038  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses not directly allocated to products

     16,580        20,993        14,586        14,696  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 48,445      $ 63,220      $ 46,212      $ 41,758  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Because of the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration and completion costs of the current or future preclinical studies and clinical trials or if, when, or to what extent we will generate revenues from the commercialization and sale of our product candidates. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs and timing of preclinical studies and clinical trials and development of our product candidates will depend on a variety of factors, including:

 

   

successful completion of preclinical studies and investigational new drug-enabling studies;

 

   

successful enrollment in and completion of clinical trials;

 

   

receipt of marketing approvals from applicable regulatory authorities;

 

   

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

 

   

obtaining and maintaining patent and trade secret protection and non-patent exclusivity;

 

   

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

 

   

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

 

   

effectively competing with other therapies and treatment options;

 

   

continued acceptable safety profile following approval;

 

   

enforcing and defending intellectual property and proprietary rights and claims; and

 

   

achieving desirable therapeutic properties for the intended indications.

A change in the outcome of any of these factors could mean a significant change in the costs and timing associated with the development of our current and future preclinical and clinical product candidates. For example, if the FDA or other regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development, or if we experience significant delays in execution of or

 

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enrollment in any of our preclinical studies or clinical trials, we could be required to expend significant additional financial resources and time on the completion of preclinical and clinical development. We expect our research and development expenses to increase for the foreseeable future as we continue the development of product candidates.

General and Administrative Expenses

General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and share-based compensation for personnel in executive, finance, pre-commercial, facility operations and administrative functions. Significant costs are incurred in our pre-commercial activities including market research, public relations, patient advocacy, advisory boards and conferences and professional consulting. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to intellectual property and patent prosecution and maintenance, other legal fees and fees for accounting, tax and consulting services.

We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities, potential commercialization of our product candidates and increased costs of operating as a public company. These increases will likely include costs related to the hiring of additional personnel and fees to outside consultants, attorneys and accountants, among other expenses. We expect the increased costs associated with being a public company to include expenses related to services associated with maintaining compliance with the requirements of Nasdaq and the SEC, director and officer insurance and investor and public relations costs.

Other Income (Expense), Net

Other income (expense), net, primarily consists of interest expense incurred on convertible notes payable and incurred on our term loan facility, interest income earned on a shareholder demand note receivable and on cash and cash equivalents and changes in the fair value of our warrant liability.

Results of Operations

Comparison of the Nine Months Ended September 30, 2017 and 2018

The following table summarizes our results of operations for the nine months ended September 30, 2017 and 2018, together with the dollar change in those items:

 

 

 

     NINE MONTHS ENDED
SEPTEMBER 30,
    DOLLAR
CHANGE
 
     2017     2018  
     (in thousands)  

Operating expenses:

      

Research and development

   $ 46,212     $ 41,758     $ (4,454

General and administrative

     12,937       12,541       (396
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     59,149       54,299       (4,850

Loss from operations

     (59,149     (54,299     4,850  

Other income/(expense), net

     (1,691     (15,824     (14,133
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (60,840   $ (70,123   $ (9,283
  

 

 

   

 

 

   

 

 

 

 

 

Research and Development Expenses

Research and development expenses decreased by $4.4 million to $41.8 million for the nine months ended September 30, 2018 from $46.2 million for the nine months ended September 30, 2017. This decrease was primarily due to a $3.6 million net decrease in clinical trial related costs as several trials ended in 2018, offset by increased costs associated with our Phase 3 primary mitochondrial myopathy trial, which was active for only a small portion of the nine months ended September 30, 2017. Consulting and professional services increased by $1.0 million as we began integrated safety summary reporting and new drug application initiatives.

General and Administrative Expenses

General and administrative expenses decreased by $0.4 million to $12.5 million for the nine months ended September 30, 2018 from $12.9 million for the nine months ended September 30, 2017. The decrease in general and administrative expenses was primarily attributable to a $1.3 million reduction in legal and professional costs

 

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partially offset by an increase in intellectual property expenses of $0.6 million and an increase in pre-commercial activities of $0.3 million.

Other Income (Expense)

Other expense increased by $14.1 million to $15.8 million for the nine months ended September 30, 2018 from $1.7 million for the nine months ended September 30, 2017. This increase was driven by (i) interest expense recorded as a result of the debt discount on the convertible debt of $7.8 million, (ii) an increase in interest expense of $4.8 million due to the debt being for the full nine month period in 2018 and (iii) interest expense on additional convertible debt and an additional advance on our term loan facility. The change in valuation of our warrant liability was $1.7 million. This increase in other expense was partially offset by increased interest income of $0.1 million, as we had greater bank balances in 2018, and a $0.1 million gain on the change in the warrant liability valuation.

 

 

Comparison of the Years Ended December 31, 2016 and 2017

The following table summarizes our results of operations for the years ended December 31, 2016 and 2017, together with the dollar change in those items:

 

 

 

     YEAR ENDED
DECEMBER 31,
    DOLLAR
CHANGE
 
     2016     2017  
     (in thousands)  

Operating expenses:

  

Research and development

   $ 48,445     $ 63,220     $ 14,775  

General and administrative

     13,403       16,500       3,097  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     61,848       79,720       17,872  
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (61,848     (79,720     (17,872

Other income (expense), net

     799       (3,190     (3,989
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (61,049   $ (82,910   $ (21,861
  

 

 

   

 

 

   

 

 

 

 

 

Research and Development Expenses

Research and development expenses increased by $14.8 million to $63.2 million for the year ended December 31, 2017 from $48.4 million for the year ended December 31, 2016. This increase was primarily due to a $10.2 million increase in clinical trial related costs, mainly relating to our primary mitochondrial myopathy program, which increased by $4.4 million due to initiation of our pre-Phase 3 trial registry and Phase 3 clinical trial, a $2.9 million increase in manufacturing costs for elamipretide and a $1.6 million increase in employee-related costs as we expanded our team to support later stage clinical development.

General and Administrative Expenses

General and administrative expenses increased by $3.1 million to $16.5 million for the year ended December 31, 2017 from $13.4 million for the year ended December 31, 2016. The increase in administrative expenses was primarily attributable to an increase of $2.8 million in legal and professional costs related to a potential financing initiative that was deferred to 2018 due to market considerations, as well as an increase of approximately $0.3 million in market research activities.

Other Income (Expense)

Other income (expense) was $3.2 million of other expense for the year ended December 31, 2017, consisting primarily of interest expense in connection with convertible promissory notes issued in 2017 and interest expense related to our term loan facility, which we entered into in June 2017. Other income (expense) was $0.8 million in other income for the year ended December 31, 2016, consisting of interest received on a note receivable, which was repaid in full by the end of 2016.

 

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Liquidity and Capital Resources

Overview

We have funded our operations from inception through September 30, 2018 primarily through gross proceeds of $362.6 million from the sale of Series A convertible preferred shares, the issuance of convertible promissory notes, and a term loan. As of September 30, 2018, we had cash and cash equivalents of $4.1 million.

Indebtedness

Term Loan Facility

On June 30, 2017, we entered into a loan and security agreement providing for a $40.0 million term loan facility with Hercules Capital, Inc., or Hercules, which we refer to as the term loan facility. The loan and security agreement was amended in March 2018, July 2018 and October 2018.

Borrowings under the term loan facility bear interest at a floating per annum rate equal to the greater of (i) the Wall Street Journal prime rate plus 5.50% or (ii) 9.50%. In an event of default, as defined in the loan and security agreement, the interest rate applicable to borrowings under such agreement will be increased by 4.0%. Interest payments are due monthly in arrears. Under the term loan facility, as amended, we make interest only payments through November 30, 2018, at which time payments are made in equal monthly installments of principal and interest, continuing through the scheduled maturity date of January 1, 2021.

We may voluntarily prepay all, but not less than all, of the outstanding principal at any time prior to the maturity date, subject to a prepayment fee, which ranges from 0.5% to 3.0% of the outstanding principal depending on when the prepayment is made. A final payment of $1.25 million is due upon the earlier to occur of the maturity of the loan, the acceleration or prepayment of all outstanding principal or the termination of the term loan facility.

Borrowings under the term loan facility are secured by a first priority lien on all of our assets, excluding our intellectual property. We have agreed to a negative pledge on our intellectual property. The term loan facility contains customary events of default and affirmative and negative covenants, including restrictions on our ability to pay dividends and incur additional debt, but does not contain any financial covenants. An event of default had not occurred as of September 30, 2018.

In connection with our entry into the term loan facility, we issued to Hercules a warrant to purchase our ordinary shares. See “Description of Share Capital and Articles of Association—Warrant” for a description of the warrant.

Convertible Notes

During 2017, pursuant to a note purchase agreement with Morningside Venture (I) Investments Limited, or MVIL, as the same was amended and restated, we issued convertible promissory notes to MVIL in an aggregate principal amount of $50.0 million, or the 2017 Shareholder Notes. In January 2018, we entered into a note exchange agreement with MVIL pursuant to which MVIL exchanged the 2017 Shareholder Notes for a new convertible note in the principal amount of $52.4 million, representing the aggregate principal amount of the 2017 Shareholder Notes plus accrued interest, or the January 2018 Shareholder Note. The exchange terminated the existing 2017 Shareholder Notes. The January 2018 Shareholder Note has substantially the same terms as the notes described in the following paragraph.

In January 2018, we entered into a note purchase agreement with new investors, or the 2018 Note Purchase Agreement. Under the 2018 Note Purchase Agreement, as subsequently amended, we issued convertible promissory notes in the aggregate principal amount of $50.0 million, or the 2018 New Investor Notes. The 2018 New Investor Notes accrue interest at 7% per annum, which compounds annually, and upon such compounding, is added to the outstanding principal amount. The 2018 New Investor Notes are convertible upon a qualified financing, which means (i) the closing of an initial public offering or (ii) a subsequent financing occurring after January 10, 2019. Effective upon the closing of a qualified financing, the outstanding principal and accrued interest plus a 25% premium, defined as the sum of principal plus interest multiplied by 25%, will automatically convert into shares of the same class and series of our shares issued to other investors in the qualified financing at the same price per share. Unless earlier repaid, retired, discharged, or automatically converted into our shares, all amounts outstanding become due and payable on the later of (i) January 10, 2020 and (ii) five business days after the date on which the term loan with Hercules is repaid, terminated and discharged in full.

 

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In October 2018, we entered into an additional note purchase agreement with MVIL, under which we have borrowed an aggregate principal amount of $30.0 million pursuant to notes issued in October 2018, December 2018 and January 2019. The notes issued under the October 2018 note purchase agreement are convertible upon a qualified initial public offering, or qualified IPO, in the United States at the qualified IPO price per share giving effect to any applicable ratio of ADS to ordinary shares. A qualified IPO is defined under these notes as firm commitment underwritten public offering of ordinary shares or ADSs in which aggregate gross proceeds equal or exceed $35 million pursuant to an effective registration statement under the Securities Act. Effective upon the closing of a qualified IPO, the outstanding principal and accrued interest plus a 25% premium of such principal and interest will automatically convert into shares of the same class and series of our shares issued to other investors in the qualified IPO. These notes accrue interest at 7% per annum and accrued interest compounds annually, and upon such compounding, is added to the outstanding principal amount. Unless earlier converted into shares, these notes become due and payable on the later of (i) October 3, 2020 and (ii) five business days after the date on which the term loan facility with Hercules is repaid, terminated and discharged in full.

We refer to the January 2018 Shareholder Note, the 2018 New Investor Notes, and the notes issued under the October 2018 note purchase agreement collectively as the 2018 Notes.

Cash Flows

The following table provides information regarding our cash flows for each of the periods presented:

 

 

 

     YEAR ENDED
DECEMBER 31,
    NINE MONTHS ENDED
SEPTEMBER 30,
 
     2016     2017     2017     2018  
    

(in thousands)

 

Net cash (used in) provided by:

      

Operating activities

   $ (54,020   $ (69,836   $ (51,366   $ (50,915

Investing activities

     (183     (173     (140     (12

Financing activities

     50,292       64,418       64,418       50,886  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (3,911   $ (5,591   $ 12,912     $ (41
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Net Cash Used in Operating Activities

The use of cash for operating activities in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital.

Net cash used in operating activities decreased by $0.5 million to $50.9 million during the nine months ended September 30, 2018 from $51.4 million during the nine months ended September 30, 2017. Cash used in operating activities during the nine months ended September 30, 2018 consisted of our net loss of $70.1 million, partially offset by non-cash charges including $4.8 million in non-cash interest expense and $1.0 million in share-based compensation, and changes in operating assets and liabilities including $1.4 million in increases in accounts payable, accrued expenses and other current liabilities and a $0.9 million decrease in prepaid expenses and other current assets. Cash used in operating activities during the nine months ended September 30, 2017 consisted of our net loss of $60.8 million, partially offset by non-cash charges including $1.3 million in non-cash interest expense and $1.0 million in share-based compensation, as well as changes in operating assets and liabilities including $7.1 million in increases in accounts payable, accrued expenses and other current liabilities.

Net cash used in operating activities was $69.8 million during the year ended December 31, 2017, compared to $54.0 million during the year ended December 31, 2016. Cash used in operating activities during the year ended December 31, 2017 consisted of our net loss of $82.9 million, partially offset by non-cash charges including $2.5 million in non-cash interest expense and $1.3 million in share-based compensation, and changes in operating assets and liabilities including $8.2 million in increases in accounts payable, accrued expenses and other current liabilities. Cash used in operating activities during the year ended December 31, 2016 consisted of our net loss of $61.0 million, partially offset by non-cash charges of $1.8 million in share-based compensation and $0.3 million in depreciation and amortization, and changes in operating assets and liabilities including $3.3 million in increases in

 

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accounts payable, accrued expenses and other current liabilities and $1.5 million in decreases in prepaid expenses and other current assets.

Net Cash Used in Investing Activities

Net cash used in investing activities was $0.1 million during the nine months ended September 30, 2017. Net cash used in investing activities was $0.2 million during the years ended December 31, 2016 and 2017.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $64.4 million during the nine months ended September 30, 2017, compared to $50.9 million during the nine months ended September 30, 2018. Cash provided by financing activities in the nine months ended September 30, 2017 was attributable to net proceeds of $50.0 million in connection with the issuance of convertible promissory notes to a shareholder, as well as $14.4 million related to net proceeds from the term loan facility. Cash provided by financing activities in the nine months ended September 30, 2018 was attributable to net proceeds of $50.0 million in connection with the issuance of convertible promissory notes to new investors and $5.0 million in net proceeds from the term loan facility offset by deferred public offering costs of $4.1 million.

Net cash provided by financing activities was $64.4 million during the year ended December 31, 2017, compared to $50.3 million during the year ended December 31, 2016. Cash provided by financing activities in the year ended December 31, 2017 was attributable to net proceeds of $50.0 million in connection with the issuance of convertible promissory notes to a shareholder, as well as $14.4 million related to net proceeds from the term loan facility. Cash provided by financing activities in the year ended December 31, 2016 was attributable to net proceeds of $50.7 million related to a demand note receivable offset by deferred public offering costs of $0.4 million.

Funding Requirements

We expect our expenses to increase in connection with our ongoing clinical activities, particularly as we continue to develop and conduct clinical trials with respect to elamipretide and new compounds, including our ongoing and planned clinical trials; advance the development of pipeline programs; initiate new research and preclinical development efforts; and seek marketing approval for any product candidates that we successfully develop. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to establishing sales, marketing, distribution and other commercial infrastructure to commercialize such products. Furthermore, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements for the next 12 months.

We have based our projections of operating capital requirements on assumptions that may prove to be incorrect, and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with the research, development and commercialization of our product candidates, we are unable to estimate the exact amount of our operating capital requirements. Our future capital requirements will depend on many factors, including:

 

   

scope, progress, timing, costs and results of our current and future clinical trials;

 

   

research and preclinical development efforts for any future product candidates that we may develop;

 

   

our ability to enter into and the terms and timing of any collaborations, licensing agreements or other arrangements;

 

   

number of future product candidates that we pursue and their development requirements;

 

   

outcome, timing and costs of seeking regulatory approvals;

 

   

costs of commercialization activities for any of our product candidates that receive marketing approval to the extent such costs are not the responsibility of any future collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

 

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subject to receipt of marketing approval, revenue, if any, received from commercial sales of our current and future product candidates;

 

   

our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure;

 

   

costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims; and

 

   

costs of operating as a public company.

Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes many years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

Until such time, if ever, that we can generate substantial revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a holder of ADSs. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise funds through future collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. We believe that several accounting policies are important to understanding our historical and future financial performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and we could have used different estimates which also would have been reasonable. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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

Accrued Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed for us 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 the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our

 

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estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to:

 

   

CROs in connection with clinical trials;

 

   

CMOs with respect to clinical materials, intermediates, drug substance and drug product;

 

   

vendors in connection with research and preclinical development activities; and

 

   

vendors related to manufacturing, development and distribution of clinical supplies.

We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of subjects and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly. To date, there have been no material differences from our estimates to the amounts actually incurred.

Share-based Compensation

We account for share-based compensation awards in the consolidated statements of operations based on their grant-date fair value. We recognize compensation costs related to employees based on the estimated fair value of the awards on the date of grant and over the associated service periods, using the straight-line method. The options vest in accordance with the terms of the applicable agreements and expire no later than ten years after the date of grant. Compensation expense is recognized for the fair value of the consideration received, or the equity instruments issued, whichever is more reliably measurable. We measure share-based awards granted to non-employees based on the fair value of the award on the date on which the related service is complete. Compensation expense is recognized over the period during which services are rendered by such non-employees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then-current fair value of our ordinary shares and updated assumption inputs in the Black-Scholes option-pricing model, or Black-Scholes.

We estimate the fair value of our share-based awards to employees and non-employees using Black-Scholes, which requires the input of assumptions, some of which are highly subjective, including:

 

   

expected volatility of our ordinary shares;

 

   

expected term of the award;

 

   

risk-free interest rate;

 

   

expected dividends; and

 

   

estimated fair value of our ordinary shares on the measurement date.

Due to the lack of a public market for the trading of our ordinary shares and a lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of comparable companies that are publicly traded. For these analyses, we selected representative companies from the life sciences industry with characteristics similar to ours, including enterprise value, risk profiles, position within the industry and historical share price information, sufficient to meet the expected life of the share-based awards. We compute the historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of our share-based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own share price becomes available. We use a dividend yield of 0% based on the fact that we have never declared cash dividends and have no current intention of paying cash dividends over the expected term of the option.

The expected term of options granted represents the weighted average of previously transacted awards plus the minimum and maximum expected life of the outstanding awards based on vest and expiry. For non-employee

 

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options, we have determined the expected life based on the respective contractual life. The risk-free interest rates for periods within the expected life of the option are based on the U.S. Treasury yield curve in effect during the period the options were granted and with maturity dates equivalent to the expected term of the options.

The fair value of each share option granted to employees and directors was estimated on the date of grant using Black-Scholes, with the following assumptions:

 

 

 
     YEAR ENDED DECEMBER 31,     NINE MONTHS
ENDED
SEPTEMBER 30,
2017
 
     2016     2017  

Risk free interest rate

     1.23%-2.42     1.89%-2.83     2.65%-3.02

Expected dividend yield

                  

Expected term (in years)

     6.4       6.0       6.1  

Expected volatility

     50     57     59

Underlying fair value of ordinary shares

     $1.14       $1.38       1.53  

 

 

 

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

The following table presents information regarding share options granted from October 1, 2017 through the date of this prospectus, along with the corresponding exercise price for each option grant and our current estimate of the fair value per share of our ordinary shares on each grant date, which we utilized to calculate share-based compensation expense:

 

 

 

DATE OF GRANT

   NUMBER OF SHARES
UNDERLYING OPTIONS
GRANTED
     EXERCISE
PRICE
PER
SHARE
    FAIR VALUE OF
ORDINARY
SHARES
ON GRANT
DATE
     PER SHARE
ESTIMATED
FAIR VALUE OF
AWARD ON
GRANT DATE (1)
 

October 22, 2017

     255,000      $ 1.38     $ 1.38      $ 0.75  

February 28, 2018

     1,138,750      $ 1.20     $ 1.20      $ 0.69  

June 10, 2018

     210,833      $ 2.22 (2)     $ 2.22      $ 1.29 (3)  

June 27, 2018

     175,000      $ 2.22 (2)     $ 2.22      $ 1.29 (3)  

October 19, 2018

     251,667      $ 1.53     $ 1.53      $ 0.87  

December 13, 2018

     83,333      $ 1.53     $ 1.53      $ 0.87  

 

 

(1)    Reflects the fair value of options as estimated at the date of grant using Black-Scholes.
(2)    In October 2018, the exercise price per share of these options was reduced from $2.22 to $1.53 per share.
(3)    As a result of the repricing of these options in October 2018, the per share estimated fair value of these awards will be adjusted as of the date of the repricing using Black-Scholes.

Share-based compensation totaled $1.8 million and $1.3 million for the years ended December 31, 2016 and 2017, respectively, and $1.0 million and $1.0 million for the nine months ended September 30, 2017 and 2018, respectively. As of December 31, 2017 and September 30, 2018, unrecognized compensation expense related to non-vested options, net of related forfeiture estimates, was $1.8 million and $2.0 million, respectively. We expect to recognize our remaining share-based compensation expense as of December 31, 2017 over a weighted-average remaining vesting period of approximately 2.6 years. We expect our share-based compensation expense to increase in future periods due to the potential increase in the value of our ordinary shares and future option grants to new and current employees, directors and consultants.

 

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Determination of the Fair Value of Ordinary Shares on Grant Dates

Following the consummation of this offering, the fair value of our ordinary shares will be determined based on the quoted market price of our ADSs. We have historically granted share options at exercise prices not less than the fair value of our ordinary shares. Our board of directors has determined the fair value of our ordinary shares considering, in part, the work of an independent valuation specialist. Our board of directors determined the estimated per share fair value of our ordinary shares at various dates considering contemporaneous valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-held Company Equity Securities Issued as Compensation, or the Practice Aid.

Our ordinary share valuations were prepared using the Hybrid Method. The Hybrid Method is a hybrid between the Probability Weighted Expected Returns Method and the option-pricing method, or OPM. It is used to estimate the probability weighted value across multiple scenarios, but uses OPM to estimate the allocation of value within one or more of those scenarios. The market approach was selected to determine our enterprise value under various initial public offering, or IPO, and merger and acquisition, or M&A, scenarios, and OPM was utilized to allocate the value between the share classes under an M&A scenario, resulting in a value for the ordinary shares.

The ordinary share value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available, as well as the rights of each class of security. The estimated future value under each outcome is discounted back to the valuation date at an appropriate risk- adjusted discount rate and probability weighted to arrive at an indication of value for an ordinary share. OPM treats common and preferred shares as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, an ordinary share has value only if the funds available for distribution to equity holders exceeds the value of the preferred security liquidation preference at the time of the liquidity event, such as a strategic sale or a merger.

Each valuation of our ordinary shares depends upon judgments and estimates. The underlying ordinary share value could vary based on changes in these judgments and estimates. Accordingly, investors are cautioned not to place reliance on the foregoing valuation methodologies as an indicator of future share prices. We performed ordinary share valuation, with the assistance of an independent valuation specialist as of: December 15, 2016, resulting in a valuation of $1.38 per share; December 31, 2017, resulting in a valuation of $1.20 per share; May 31, 2018, resulting in a valuation of $2.22 per share; and September 30, 2018, resulting in a valuation of $1.53 per share. In conducting the valuations, the independent valuation specialist considered objective and subjective factors that it believed to be relevant for each valuation conducted in accordance with the Practice Aid, including our best estimate of our business condition, prospects and operating performance at each valuation date. Other significant factors included:

 

   

the prices of our convertible preferred shares sold to investors and the rights, preferences and privileges of our preferred shares, including the liquidation preferences of our convertible preferred shares, as compared to those of our ordinary shares;

 

   

our stage of development and business strategy and the material risks related to our business and industry;

 

   

valuations of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed M&A of guideline companies;

 

   

our results of operations and financial position;

 

   

the composition of and changes to our management team and board of directors;

 

   

the lack of liquidity of our ordinary shares;

 

   

any external market conditions affecting the life sciences and biotechnology industry sectors;

 

   

the likelihood of achieving a liquidity event for the holders of our ordinary shares and share options, such as an IPO or M&A, given prevailing market conditions; and

 

   

the state of the IPO market for similarly situated privately held life sciences companies.

The dates of our contemporaneous valuations have not always coincided with the dates of our share option grants. In determining the exercise prices of the share options set forth in the table above, our board of directors considered, among other things, the most recent valuation of our ordinary shares and their assessment of additional objective and

 

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subjective factors that were relevant as of the grant dates. The estimates of fair value of our ordinary shares are highly complex and subjective. There are significant judgments and estimates inherent in the determination of the fair value of our ordinary shares. These judgments and estimates include assumptions regarding our future operating performance, the time to complete an IPO or other liquidity event, the related valuations associated with these events, and the determinations of the appropriate valuation methods at each valuation date. The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management judgment. If we had made different assumptions, our share-based compensation expense, net loss and net loss per share applicable to holders of ordinary shares could have been materially different.

Contractual Obligations

The following table summarizes our outstanding contractual obligations as of payment due date by period at December 31, 2017:

 

 

 

     TOTAL      LESS THAN
1 YEAR
     1 TO 3 YEARS      3 TO 5 YEARS      MORE THAN
5 YEARS
 
     (in thousands)  

Convertible promissory notes (1)

   $ 50,000      $      $ 50,000      $      $     —  

Operating leases

     1,813        608        1,205                

Term loan facility (2)

     15,000        2,242        12,160        598         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 66,813      $ 2,850      $ 63,365      $ 598      $  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1)    Represents principal amount of convertible notes outstanding as of December 31, 2017. In January 2018, such notes were exchanged for a convertible promissory note in the aggregate amount of $52.4 million. Also in January 2018, we entered into a note purchase agreement pursuant to which we issued convertible promissory notes in an aggregate principal amount of $50.0 million, and in October 2018, we entered into a note purchase agreement pursuant to which we issued convertible promissory notes in an aggregate principal amount of $30.0 million.
(2)    In March 2018, we drew an additional $5.0 million under the term loan facility.

We enter into contracts in the normal course of business with CROs and clinical sites for the conduct of clinical trials, professional consultants and other vendors for clinical supply, manufacturing or other services. These contracts are not included in the table above as they provide for termination on notice and, therefore, are cancelable contracts and do not include any minimum purchase commitments.

We have entered into several license agreements with Cornell and the IRCM, pursuant to which Cornell and IRCM granted us an exclusive, worldwide rights under patents related to elamipretide, SBT-20 and other technology. In connection with the licenses granted under the original Cornell agreement, we issued Cornell 666,667 ordinary shares. With respect to the other Cornell license agreements, we are obligated to pay Cornell upfront license fees of $55,000 and royalties on net sales, if any, by us and our sublicensees of any licensed product. Subject to specified reductions and royalty offsets, such royalties are calculated as a tiered, low-to-mid single digit percentage of net sales of licensed products under each of the Cornell license agreements, except that for licensed products under the original Cornell agreement, such royalties are calculated as a tiered, low single-digit to sub-teen double-digit percentage of net sales, depending on patent coverage, amount of net sales and type of licensed product. Our obligation to pay royalties as to any licensed product extends until the later of the expiration of the last-to-expire valid claim of any licensed patent covering such licensed product or 15 years after the date of our first commercial sale of such licensed product. If a licensed product is covered by licenses granted under the original Cornell agreement and another Cornell license agreement, then, for each unit of product, royalties will only be due under the original Cornell agreement.

We are obligated to pay Cornell a low double-digit percentage of specified payments we receive in connection with granting a sublicense under the Cornell license agreements. We have also agreed to reimburse Cornell for its out-of-pocket expenses incurred in preparing, filing, prosecuting and maintaining the licensed patents, except for any licensed patents as to which we elect to waive our licensed rights. We also have agreed to pay Cornell annual license maintenance fees in dollars in the mid-five-digits for the original Cornell agreement, and mid-four-digits for each of the other Cornell license agreements starting on the date specified in each such agreement, in all cases until the first commercial sale of a specified type of licensed product under such agreement.

 

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Off-balance Sheet Arrangements

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

Recent Accounting Pronouncements

Note 2, “Summary of Significant Accounting Policies,” in the accompanying notes to the consolidated financial statements includes a discussion of recent accounting pronouncements. There were no new accounting pronouncements adopted during 2017 that had a material effect on our consolidated financial statements.

Emerging Growth Company Status

The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies. As a result, our financial statements may not be comparable to the financial statements of reporting companies that are required to comply with the effective dates for new or revised accounting standards that are otherwise applicable to public companies.

Qualitative and Quantitative Disclosures about Market Risk

We are minimally exposed to market risk related to changes in interest rates. As of September 30, 2018, we had cash and cash equivalents of $4.1 million, consisting primarily of money market funds. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our cash equivalents are held in short-term money market funds. We do not believe we are materially at risk to sudden drops in interest rates based on the amounts subject to these potential changes.

 

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BUSINESS

Overview

We are a clinical-stage biotechnology company focused on the discovery, development and commercialization of novel therapies for diseases involving mitochondrial dysfunction. Mitochondria, found in nearly every cell in the body, are the body’s main source of energy production and are critical for normal organ function. Dysfunctional mitochondria characterize a number of rare genetic diseases, collectively known as primary mitochondrial diseases, and are also involved in many common age-related diseases. We believe our lead product candidate, elamipretide, has the potential to treat both rare genetic and common age-related mitochondrial diseases. We are studying elamipretide in the following primary mitochondrial diseases: primary mitochondrial myopathy, Barth and LHON. We are also studying elamipretide in dry AMD. Our other pipeline candidates include SBT-20, which we are evaluating for rare peripheral neuropathies, and SBT-272, which we are evaluating for rare neurodegenerative disease indications. We have optimized our discovery platform to identify novel mitochondrial targeted compounds, which may be nominated as therapeutic product candidates or utilized as scaffolds to deliver other compounds to mitochondria. Our mission is to be the leader in mitochondrial medicine, and we have assembled a highly experienced management team, board of directors and group of scientific advisors to help us achieve this mission.

Elamipretide is a small peptide that targets and binds reversibly to cardiolipin, an essential structural element of mitochondria, stabilizing it under conditions of oxidative stress. This novel mechanism of action has shown potential clinical benefit in both rare genetic and common age-related mitochondrial diseases. We are studying elamipretide in the following indications:

 

   

primary mitochondrial myopathy, for which we are conducting a Phase 3 pivotal clinical trial in North America and in Europe;

 

   

Barth, for which we have conducted a Phase 2/3 clinical trial in the United States;

 

   

LHON, for which we have conducted a Phase 2 clinical trial in the United States and plan to apply for approval to open clinical sites in China in conjunction with a potential Phase 3 clinical trial; and

 

   

dry AMD, for which we have conducted a Phase 1 clinical trial in the United States and plan to initiate a Phase 2b clinical trial in the United States for geographic atrophy, an advanced form of dry AMD, in the first quarter of 2019.

Elamipretide has been generally well-tolerated in over 900 subjects exposed to it systemically and 53 subjects exposed to it topically as of December 31, 2018.

In addition to our clinical development programs for elamipretide, we plan to evaluate SBT-20, our second clinical-stage product candidate, for which we have completed two Phase 1 clinical safety trials in healthy volunteers, for rare peripheral neuropathies. We are developing SBT-272, a preclinical-stage product candidate, for rare neurodegenerative diseases. In addition, our in-house discovery platform has generated a library of over 100 proprietary, differentiated compounds that could have clinical benefit for diseases related to mitochondrial dysfunction and from which we plan to designate potential product candidates. We may also utilize certain of these compounds as part of our carrier platform, in which they could potentially serve as scaffolds to deliver other beneficial compounds to the mitochondria.

As of December 31, 2018, we held exclusive world-wide rights or an option for exclusive world-wide rights under 374 issued patents and 298 patent applications to protect our platform and product candidates. Since licensing elamipretide and SBT-20, we and our collaborators have published approximately 100 peer-reviewed articles highlighting the activity of our compounds in several disease models, including heart failure, kidney disease, skeletal muscle weakness, diabetic retinopathy and neurodegenerative diseases. Our compounds have been evaluated in pre-clinical and clinical studies at academic and clinical institutions, including Charité Berlin, Children’s Hospital of Philadelphia, Columbia University, Cornell University, Duke University, Massachusetts General Hospital, Mayo Clinic, Stanford University, University of California Los Angeles, University of California San Diego and University of Washington.

 

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Our Pipeline

The following table summarizes our development pipeline, including preclinical studies and ongoing and planned clinical trials of our product candidates we have advanced, or expect to advance in the next year, to clinical development.

 

 

LOGO

We previously completed a Phase 1/2 clinical trial for the evaluation of SBT-20 in subjects with early-stage Huntington’s disease and a Phase 1 healthy volunteer study. We are currently evaluating preclinical disease models for the selection of an indication ahead of planning for a Phase 2 clinical trial.

Our Strategy

We aim to continue the development of mitochondrial medicine to improve the lives of patients with unmet medical needs. There are no treatments approved by the FDA, the EMA or the NMPA for primary mitochondrial myopathy, Barth or dry AMD, and there are no FDA or the NMPA approved treatments for LHON. We are pioneering the development of treatments for these diseases with unmet medical needs and believe we are well-positioned to be among the first to address these largely untapped markets in the United States, Europe and China. Although our initial development focus is on rare primary mitochondrial diseases, we believe that over the longer term there could be significant opportunities with regard to common age-related diseases, including dry AMD. Our strategies include:

Rapidly advance the clinical development of elamipretide in rare mitochondrial diseases

We are developing elamipretide for rare mitochondrial diseases, including primary mitochondrial myopathy, Barth and LHON. We have received Fast Track and Orphan Drug designations in the United States for each of these indications. We are enrolling subjects into our ongoing Phase 3 clinical trial for the treatment of primary mitochondrial myopathy, which we expect to have fully enrolled during the first half of 2019. We have completed the placebo-controlled portion of a Phase 2/3 clinical trial for the treatment of Barth, which did not meet its primary efficacy endpoints, and are continuing to evaluate efficacy endpoints during an open-label extension, in which all subjects are eligible to continue receiving elamipretide. Eight subjects are continuing in the open-label extension phase. We plan to meet with the FDA regarding this program during the first half of 2019 to discuss a potential NDA submission. We have completed the placebo-controlled portion of a Phase 2 clinical trial for the treatment of LHON, which did not meet its primary efficacy endpoints, and are continuing to evaluate efficacy endpoints during an open-label extension trial, in which all subjects are eligible to continue receiving the study drug. We plan to meet with the FDA for an end-of-Phase 2 meeting regarding this program during the first half of

 

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2019. Following that meeting, we plan to submit a clinical trial application to the NMPA for the inclusion of clinical sites in China in a potential Phase 3 clinical trial, which we believe may help expedite clinical trial enrollment. We will continue to evaluate development of elamipretide for additional rare disease indications.

Accelerate the clinical development of elamipretide for dry AMD

We are advancing development of elamipretide for dry AMD, an age-related disease, which is the leading cause of blindness in older adults. Dry AMD is estimated to impact approximately 10 million individuals in the United States and is the leading cause of blindness among older adults in the developed world. We received Fast Track designation in the United States for dry AMD with geographic atrophy in November 2018. Dry AMD would provide a significantly larger potential market size than our rare disease indications if we are able to successfully develop and commercialize elamipretide or one of our pipeline compounds for this indication. In our Phase 1 clinical trial of elamipretide, we observed evidence of clinical benefit for patients with dry AMD. We plan to initiate a Phase 2b placebo-controlled clinical trial for the treatment of patients with geographic atrophy, an advanced form of dry AMD, in the first quarter of 2019.

Expand clinical development efforts in China under new regulatory pathways

The prevalence of primary mitochondrial diseases, such as primary mitochondrial myopathy, Barth and LHON, is thought to be comparable in China to that in the United States because evidence suggests that prevalence does not vary by race or ethnicity for mitochondrial diseases. China has recently implemented policies to expedite regulatory pathways for rare diseases, including publication of a list of rare diseases that includes mitochondrial related diseases such as LHON. For primary mitochondrial myopathy, with respect to which we are currently conducting a pivotal trial in the United States and Europe, and Barth, we may apply to the NMPA for clinical trial waivers and expedited approval if and when we receive FDA approval for these indications. For LHON, we plan to submit a clinical trial application to the NMPA for the inclusion of Chinese clinical sites in our subsequent clinical trials, which may be used to support FDA approval. We believe that inclusion of Chinese sites may help expedite enrollment of clinical trials in rare diseases, as well as progress potential commercial collaboration opportunities for the China market for our product candidates, if approved.

Advance the development of pipeline mitochondrial medicines in rare diseases

We believe that our mitochondrial targeted product candidates may be beneficial in rare diseases involving mitochondrial dysfunction and hope to nominate compounds from our pipeline for select rare disease indications. We plan to evaluate our second clinical product candidate, SBT-20, for which we have completed two Phase 1 clinical safety trials in healthy volunteers, for rare peripheral neuropathies. We are evaluating our lead pipeline compound, SBT-272, for rare neurodegenerative diseases, such as amyotrophic lateral sclerosis, or ALS. We expect to initiate a Phase 1 clinical safety trial for SBT-272 by the end of 2019.

Advance the development of pipeline mitochondrial medicines in common age-related diseases

We believe that mitochondrial medicine may be a promising approach for many common age-related diseases beyond AMD, including neurodegenerative diseases. We believe that the United States, Europe and China are important markets for the clinical development of age-related diseases, and we are evaluating further development of our product candidates and pipeline compounds for age-related indications in these markets.

Expand our carrier platform

We have extensive experience in optimizing delivery of our compounds to the mitochondria, which has been a challenge for other drug delivery technologies. We have demonstrated capability to deliver beneficial payloads to mitochondria by conjugating them with our proprietary compounds, which serve as vectors or carriers to the mitochondria, conferring organelle specificity to promising therapies. These payloads could include small molecules, proteins, oligonucleotides and complex formulations, such as DNA, siRNA and miRNA, nanoparticles and liposomes. This delivery platform, which we call our carrier platform, could enable delivery of missing proteins or even gene therapy to address inherited mitochondrial disorders.

Explore potential strategic partnerships and alliances to maximize the value of our development programs

We hold worldwide exclusive rights for our two clinical-stage assets, elamipretide and SBT-20, from the Cornell Research Foundation, Inc. and the Institut de recherches cliniques de Montréal. We have full ownership of our preclinical compound library, including SBT-272. We may explore select strategic partnerships and alliances to support our drug development programs, while preserving significant development and commercialization rights, if

 

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we believe that such alliances may allow us to leverage the financial support and therapeutic area expertise and resources of a strategic partner to accelerate the development and commercialization of our drug candidates, particularly in common disease indications. We plan to retain rights to lead the development and commercialization of elamipretide for primary mitochondrial myopathy, Barth, LHON and dry AMD in the United States but will consider collaborating in Europe and China.

Expand our intellectual property portfolio in the field of mitochondrial medicine

We continue to invest in our mitochondrial medicine discovery platform to identify new approaches to improve absorption, distribution, metabolism and excretion of active mitochondrial compounds. We have an active discovery and development program focused on novel compounds targeting mitochondria. We believe the differentiated mitochondrial targeting characteristics of our compounds, our development of proprietary assays to screen new compounds for mitochondrial targeting and activity characteristics, and our experience working with various models of mitochondrial dysfunction position us to be a leader in next generation development of mitochondrial product candidates that are improved relative to elamipretide and SBT-20. We intend to use our insight into mitochondrial biology to continue developing additional intellectual property as we pursue additional novel therapeutic compounds that target mitochondrial disease. As of December 31, 2018, our intellectual property portfolio included 374 issued patents and 298 patent applications relating to mitochondrial medicine, either wholly-owned or in-licensed, in select commercially relevant jurisdictions, including the United States, key European countries, China, Japan and Canada.

Our Team

We have assembled a highly experienced leadership team with decades of experience leading drug discovery and development programs, including at GlaxoSmithKline, Novo Nordisk, Pfizer and Sanofi Genzyme. Our largest shareholder is a member of the Morningside group, a worldwide investment group.

Background

Mitochondria

Mitochondria, found in almost all human cells, are the “powerhouse of the cell.” Mitochondria produce 90% of our energy by converting food into adenosine triphosphate, or ATP, a molecule that carries energy within cells. Mitochondria produce approximately our body weight in ATP daily, providing the energy that allows cardiac muscles, for example, to beat an estimated 100,000 times every 24 hours, or 2.5 billion times by age 70, without stopping. Our skeletal muscle, heart, kidney, eyes and brains are among the highest producers and users of mitochondrial ATP in our bodies, as ATP is required for their critical functions such as the contraction of skeletal, cardiac, vasculature

 

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and lung muscle, maintenance of cell membrane potential, cellular transport and secretion of hormones and neurotransmitters. Normal mitochondrial function is essential for human life and for the proper functioning of many systems in our bodies, as illustrated below.

 

 

 

LOGO

Mitochondria are highly specialized structures. They have their own DNA, called mitochondrial DNA, or mtDNA, which is inherited only from our mothers and is separate and distinct from nuclear DNA, or nDNA. Mitochondria are located within the cell, which is protected by the cell membrane, and they also have their own inner and outer membrane, which create further barriers to the effective delivery of therapeutics to these specialized organelles. In normal mitochondria, the inner mitochondrial membrane, or IMM, is highly folded, creating curves, called cristae. The cristae house the electron transport chain, or ETC, which is composed of five protein complexes responsible for mitochondrial ATP production through a process known as oxidative phosphorylation. The curved architecture of the cristae in the IMM is essential to keep the electron transport chain complexes in optimal close configuration for normal oxidative phosphorylation. Our product candidates target and bind to cardiolipin, an important structural component of the cristae and the IMM, stabilizing it from degradation due to dysfunction caused by inherited or acquired mutations in mtDNA or nDNA. An illustration of a healthy mitochondria and its curved cristae structure is shown below.

 

 

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Mitochondrial Dysfunction, Aging and Human Disease

Mitochondrial dysfunction most often arises from mutations in mtDNA or nDNA, that can either be inherited or, in the case of mtDNA mutations, can occur as we age. Dysfunctional mitochondria not only produce less ATP, which impairs the normal functioning of our major organ systems, but they also generate unhealthy levels of reactive oxygen

 

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species, or ROS, which damages cardiolipin. ROS-mediated damage of cardiolipin can lead to pathological oxidative stress, causing the inflammation, fibrosis and cell death which are causal or contributory to the process of human aging, as illustrated below.

 

 

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Mitochondrial diseases arising from inherited genetic defects, called primary mitochondrial diseases, are typically rare diseases which can impact multiple organ systems within the body and may lead to reduced lifespan. Symptoms of primary mitochondrial disease, including chronic pain, vision problems, cardiovascular problems and kidney problems, may be compared to “accelerated aging” as described by individuals with the disease and their caregivers.

Although mtDNA is originally inherited from our mothers, it is replicated within cells as mitochondria reproduce and is highly susceptible to mutation within specific cells and organ systems as we age. Mitochondrial diseases arising from these spontaneous mutations in our mtDNA, called secondary mitochondrial diseases, include senescence, neurodegenerative diseases (such as Alzheimer’s, Parkinson’s and amyotrophic lateral sclerosis), heart disease (such as heart failure and atherosclerosis), diabetes, ophthalmic conditions (such as age-related macular degeneration, glaucoma, diabetic retinopathy and diabetic macular edema), cancer, diabetes, skeletal muscle dysfunction (such as sarcopenia) and kidney diseases.

Mitochondrial dysfunction, whether inherited or acquired, often impacts high energy-demanding organs such as the skeletal muscle, cardiac, renal, visual, neurological, central nervous, circulatory or endocrine systems.

Targeting Mitochondrial Dysfunction: Role of Cardiolipin

Our product candidates target cardiolipin in the IMM, stabilizing it under conditions of oxidative stress.

Cardiolipin is a conically shaped phospholipid that plays an important role in establishing the cristae architecture within the IMM and optimizing the function of the ETC. Reduced and damaged cardiolipin content has been observed in many diseases, and a deficiency of normal cardiolipin is thought to be centrally involved in mitochondrial dysfunction.

Cardiolipin is essential for normal oxidative phosphorylation, the process by which ATP is made. Cardiolipin congregates in and around the cristae of the IMM. Cardiolipin’s conical shape is responsible for creating the curved architecture of the cristae. This curvature helps to keep the electron transport chain complexes in close association with one another, increasing the efficiency of ATP production and minimizing the electron leak that leads to oxidative stress, as illustrated below.

 

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Cardiolipin is embedded within the complexes of the ETC, as can be seen above, and its interaction with the ETC complexes facilitates super-complex association, a process by which electron transport chain complexes selectively associate with, or merge with, one another, to optimize the efficiency of the oxidative phosphorylation process.

Correct mitochondrial morphology is also essential for mitochondrial network connectivity and function. Mitochondrial networks exhibit coordination of inner mitochondrial membrane cristae at inter-mitochondrial junctions, as illustrated below.

 

 

LOGO

Mitochondrial network connectivity is associated with cellular signaling pathways, including:

 

   

fusion, in which mitochondria join to spread metabolites, enzymes, and mitochondrial gene products through the mitochondrial network, optimizing mitochondrial function and counteracting the accumulation of mitochondrial mutations during aging;

 

   

fission, or the division of mitochondria, which plays an important role in the removal of damaged organelles;

 

   

mitophagy, a mechanism to remove damaged mitochondria;

 

   

ROS-mediated pathways, including the PI3K/Akt pathway, an intracellular signaling pathway important in regulating the cell cycle, and the tumor necrosis factor alpha (TNFa) signaling pathway, a proinflammatory pathway involved in various biological processes including regulation of cell proliferation, differentiation, apoptosis and immune response;

 

   

calcium regulation, entailing the transfer of calcium from the endoplasmic reticulum to the mitochondrial to facilitate mitochondrial respiration;

 

   

various transcription factors, which are proteins that control the rate of transcription of genetic information from DNA to messenger RNA; and

 

   

certain protein kinase C (PKC) signaling pathways that can affect cardiomyocyte function and are involved in the induction of mitophagy.

Cardiolipin is susceptible to peroxidation, or degradation, by oxidative stress produced by dysfunctional mitochondria. When cardiolipin is degraded, it can lose its conical shape, compromising the structural integrity of the IMM by leading to a relaxation of the cristae and a drifting apart of the electron transport chain complexes. Shuttling of electrons through the electron transport chain becomes less efficient with the complexes further apart from one another, resulting in lower ATP production and higher ROS generation. Disruption of mitochondrial morphology also impairs fission and fusion, impacting signaling pathways including mitophagy. This can trigger the

 

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cellular and extra- cellular cascades involving inflammation, fibrosis and cell death that underlie many diseases. The images below show healthy mitochondria, on the left, with normal cardiolipin content and cristae structure, and unhealthy mitochondria, on the right, with reduced cardiolipin content and collapsed cristae.

 

 

LOGO

Various diseases alter cardiolipin composition and reduce cardiolipin content within the mitochondria. Biopsies from patients with primary mitochondrial disease arising from mitochondrial encephalitis, lactic acidosis and stroke-like episodes, or MELAS, and multiple mitochondrial DNA deletions were found to have approximately 15% less normal cardiolipin composition than normal. Experiments in Barth patient-derived lymphoblastoid cell lines showed 50%-60% less cardiolipin than control cell lines, and work done in Barth patient-derived cardiomyocytes showed up to 75% less cardiolipin than control cardiomyocytes. Aging has also been shown to decrease cardiolipin content in high energy-demanding organs, such as the heart, brain, liver and kidney, as well as the epidermis. Studies suggest that oxidative stress and peroxidation of cardiolipin may contribute to the overall loss of cardiolipin content in these diseases.

Our Approach to Mitochondrial Medicine

We have exclusive worldwide rights to elamipretide and SBT-20, both of which we licensed from Cornell and IRCM, in 2006. The unique mitochondrial activity of elamipretide was first published in The Journal of Biological Chemistry in August 2004. Since licensing elamipretide and SBT-20, we and our collaborators have published approximately 100 peer-reviewed articles highlighting the activity of our compounds in several disease models, including heart failure, kidney disease, skeletal muscle weakness, diabetic retinopathy and neurodegenerative diseases. We have discovered and own over 100 compounds that also target the mitochondria and form the basis of our broad proprietary pipeline of mitochondrial targeted product candidates. We have focused our development efforts on diseases and conditions that affect the organs in the body that generate significant energy because of the high mitochondrial content found in the cells comprising these organs.

Our lead product candidate, elamipretide, along with several of our pipeline compounds, target and bind reversibly to cardiolipin, stabilizing it under conditions of oxidative stress, thereby preserving the curved architecture of the IMM, as illustrated below.

 

 

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In preclinical studies or clinical trials, we have observed that elamipretide normalized function in dysfunctional mitochondria, including as outlined in the table below. The below table references p-values, which is a conventional statistical method for measuring the statistical significance of clinical trial results. A p-value of 0.05 or less represents statistical significance, meaning that there is a 1-in-20 or less statistical probability that the observed results occurred by chance.

 

FUNCTIONAL FINDING

  

PRECLINICAL STUDY

Reduced peroxidation of, or damage to, cardiolipin    In a study of dogs with induced heart failure published in Circulation: Heart Failure in February 2016, researchers at Henry Ford Health System observed that cardiolipin content was restored to near-normal levels in seven dogs treated with elamipretide versus seven dogs treated with placebo once daily subcutaneous injections for three months (p<0.05).
Increased mitochondrial respiration, the process in which mitochondria produce energy    In a study of human heart tissue explanted from 21 heart transplant subjects with heart failure conducted by researchers at the University of Colorado and presented in 2017, researchers observed that elamipretide significantly improved mitochondrial respiration and increased it to levels comparable to those measured in healthy heart tissue levels, as compared to placebo (p<0.0005).
Improved ATP levels    In a preclinical study at the University of Washington published in Aging Cell in October 2013, two groups of between five and seven 27-months old (equivalent to 80-year-old human) and five-month old (equivalent to 30-year-old human) mice were injected with a single dose of 3 mg/kg of elamipretide or placebo. In the older mice, researchers observed that a single dose of elamipretide significantly increased the maximum capacity of the mitochondria to produce ATP, called ATPmax, to near normal levels, as compared to placebo (p<0.01).
Reduced formation of ROS, or oxidative stress    Researchers at the University of Florida conducted a study, published in the Journal of Applied Physiology in August 2011, of 72 mice, 24 of which received no treatment, 24 of which received placebo and hind limb immobilization to induce muscle atrophy (cast), and 24 of which received 1.5 mg/kg subcutaneous once daily elamipretide and hind limb immobilization (cast), in each case for 14 days. Researchers observed that elamipretide-treated immobilized mice had significantly lower levels of mitochondrial ROS production than the placebo-treated immobilized mice (p<0.05), as well as significantly reduced levels of H2O2, a precursor of ROS, in the soleus and plantaris calf muscles as compared to placebo (p<0.05).
Reduced inflammation, fibrosis and cell death    In a preclinical study at the Mayo Clinic, published in the Journal of the American Heart Association in May 2016, two groups of seven pigs—each with unilateral renal artery stenosis—were injected with a 0.1 mg/kg dose of elamipretide for five consecutive days per week for four weeks or placebo, following percutaneous transluminal renal angioplasty, or PRTA. Four weeks later, researchers observed that elamipretide treated animals demonstrated significantly improved diastolic function, mitochondrial biogenesis improvement and oxidative stress and fibrosis reduction relative to placebo. In a separate preclinical study of pigs with unilateral renal artery stenosis published in the Journal of Hypertension in January 2014, researchers at the Mayo Clinic observed improvements in cardiac function and oxygenation and reductions in apoptosis, oxidative stress, inflammation (p<0.05) and fibrosis (P<0.05), each as compared to placebo, four weeks following PTRA concurrent with a continuous 0.05 mg/kg intravenous infusion of elamipretide.
No observed effect on normal mitochondria    An important safety aspect of elamipretide is that it has not had any observed effect on normal mitochondria. In the study of explanted human heart tissue

 

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FUNCTIONAL FINDING

  

PRECLINICAL STUDY

   described above, mitochondrial respiration in the normal donor heart tissue was unchanged following exposure to elamipretide. In the study of young and old mice described above, ATPmax levels in the young mice were unchanged following treatment with elamipretide.

Following treatment with elamipretide and SBT-20, we observed normalization of mitochondrial morphology across various disease models, including models of diabetic retinopathy, as illustrated by the electron microscopic images below, and kidney reperfusion injury, each of which were published in Clinical Pharmacology & Therapeutics in December 2014.

 

 

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Our Product Candidates

We believe that our product candidates have significant potential to address the various diseases associated with mitochondrial dysfunction. In addition to our focus on rare diseases, including primary mitochondrial myopathy, Barth and LHON, we have conducted preclinical studies and Phase 1 clinical trials on common diseases and conditions that affect the organs in the body that have significant mitochondrial content to meet their high energy needs; these include the heart, the kidney, the brain (inclusive of the visual system), and active skeletal muscle. We believe that our product candidates may be most relevant for these organs, which are highly dependent on mitochondrial bioenergetics, and we expect these to be key focus areas with respect to some of our pipeline compounds.

We believe that there is significant potential for mitochondrial medicine beyond the indications we are currently studying, including with respect to common diseases associated with aging. In addition to our lead product candidate, we have a growing pipeline of over 100 compounds in preclinical testing that have been screened for mitochondrial activity, including in some cases preferential mitochondrial targeting characteristics and improved tissue distribution in targeted tissues, such as the heart and brain. Some of these compounds, including SBT-272, may be suitable for oral formulations, and we believe they may be more appropriate for development for common diseases associated with aging. We have also designed proprietary compounds, which we refer to as carriers, that can potentially deliver beneficial payloads to mitochondria; for example, if genetic mutations impact the production of certain proteins necessary for proper mitochondrial function, this proprietary technology might help us deliver those missing proteins to mitochondria.

Elamipretide

Elamipretide is a small peptide that targets and binds reversibly to cardiolipin, stabilizing mitochondrial structure and function under conditions of oxidative stress. Elamipretide has been reported to be well-tolerated in over 900 people exposed to it systemically and 53 subjects exposed to it topically as of December 31, 2018. See “—Elamipretide Safety Data” below. We are evaluating elamipretide in primary mitochondrial diseases where there is a genetic basis for the underlying mitochondrial dysfunction and where we have the potential for expedited regulatory review, including primary mitochondrial myopathy, Barth and LHON, for which we have received Fast

 

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Track and Orphan Drug designations from the FDA. We also believe that elamipretide and our pipeline compounds may be able to address the significant unmet medical needs of larger populations affected by common diseases associated with aging. We are progressing our development of elamipretide for dry AMD with geographic atrophy, for which we have received Fast Track designation from the FDA, and we plan to evaluate clinical trials for other common age-related disease indications in conjunction with our pipeline compounds.

Elamipretide Clinical Programs—Primary Mitochondrial Diseases

We are studying the effect of elamipretide in an ongoing Phase 3 pivotal trial for the treatment of primary mitochondrial myopathy. We plan to meet with the FDA to discuss the treatment of Barth, and to discuss data from our Phase 2 clinical trial for the treatment of LHON. Individuals with these primary mitochondrial diseases are born with a genetic mutation that causes mitochondrial dysfunction, leading to clinical signs and symptoms of disease. These diseases can result in reduced lifespan, as in Barth and, in some cases, mitochondrial myopathy, and can impair vital organ functions, such as vision, in the case of LHON, skeletal muscle function, in the case of primary mitochondrial myopathy and Barth, and cardiac function, in the case of Barth.

Primary mitochondrial myopathy (MMPOWER Trials)

We estimate that approximately 40,000 individuals in the United States have mitochondrial myopathy. There are no therapies approved by the FDA, EMA or NMPA for the treatment of primary mitochondrial myopathy. We have received Fast Track designation and Orphan Drug designation from the FDA for the development of elamipretide in this indication.

Primary mitochondrial myopathy is characterized by debilitating skeletal muscle weakness, exercise intolerance and fatigue accompanied by a confirmed molecular genetic diagnosis of primary mitochondrial disease. Individuals with this disease may experience muscle pain, muscle wasting, muscle cramps, rhabdomyolysis, or breakdown of muscle, progressive external ophthalmoplegia characterized by drooping of the eyelids, which often impairs vision, abnormal tilting of the head due to shortening of the neck muscles, difficulty swallowing, low muscle tone (also known as floppy infant syndrome), respiratory insufficiency and reduced deep tendon reflexes. These symptoms can result in significant deterioration of quality of life, such that routine activities of daily living (such as walking, climbing stairs, vacuuming, reaching, driving, reading or carrying out normal job functions) are limited by poor endurance and easy fatigue. Severely impacted individuals can lose their ability to walk entirely.

Morphology of mitochondria in individuals with primary mitochondrial myopathy is abnormal, and, unlike mitochondria in normal skeletal muscle cells, as shown below on the left, can be characterized by inclusion of abnormal rectangular-shaped, crystal-like structures, as shown below on the right.

 

 

  LOGO      LOGO
  Normal skeletal muscle mitochondria      Mitochondrial myopathy mitochondria

We are assessing elamipretide in subjects with primary mitochondrial myopathy irrespective of their specific primary mitochondrial disease genotype. This strategy offers us the potential to treat all individuals with genetic mitochondrial disease who experience myopathic symptoms, estimated at greater than 90% of the primary mitochondrial disease population, which is a much larger target market than any specific genetic mutation or syndrome within it.

 

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We are currently enrolling subjects with primary mitochondrial myopathy in MMPOWER-3, a Phase 3 clinical trial, in which we have enrolled 86 out of a targeted 202 subjects in the United States, Canada and Europe as of September 30, 2018. We have established a pre-trial registry for MMPOWER-3 at our Phase 3 sites, and have registered over 400 subjects who have been pre-screened for eligibility for MMPOWER-3. We expect that this registry will expedite timely enrollment of MMPOWER-3 since many eligible subjects are already identified.

We have completed two clinical trials in this indication, MMPOWER, completed in April 2016, and MMPOWER-2, completed in March 2017. In MMPOWER, we observed an improvement in the distance walked in six minutes (the six-minute walk test, or 6MWT) in subjects treated with elamipretide—a primary efficacy endpoint of the study and a standard accepted test of functional exercise capacity. In MMPOWER-2, we observed an improvement in the 6MWT in subjects treated with elamipretide, a primary efficacy endpoint of the study, and in secondary efficacy endpoints, including several endpoints measuring fatigue, a hallmark symptom of primary mitochondrial myopathy. Twenty-four subjects remain enrolled in an ongoing open-label extension trial, in which they continue to receive once daily elamipretide and during which we continue to collect safety and select efficacy data, primarily to add to our safety database.

MMPOWER-3

MMPOWER-3 is a Phase 3, double-blind, placebo-controlled, parallel group trial enrolling an estimated 202 subjects ranging from 16 to 80 years old, with primary mitochondrial myopathy at up to 28 sites in North America and Europe, including the United States, Canada, Denmark, Hungary, Italy, Germany and the United Kingdom to evaluate the efficacy and safety of once daily subcutaneous injections of elamipretide. Subjects are randomized in a one-to-one ratio to either 40 mg once daily subcutaneous elamipretide or placebo injection for an initial treatment period of 24 weeks, following which subjects will be eligible to participate in an open-label extension trial.

The objectives of the trial are to evaluate the safety, tolerability and efficacy of once daily subcutaneous elamipretide injections in individuals with primary mitochondrial myopathy. Subjects will complete assessments including the 6MWT, at initial screening, at baseline (prior to receiving the first dose), at week four, at week 12 and at week 24, which is the end of treatment. In addition, the primary mitochondrial myopathy symptom assessment, or PMMSA, a patient reported outcome questionnaire developed based upon interviews of individuals with primary mitochondrial disease to measure the fatigue and muscle weakness that are hallmark symptoms of the disease, will be completed daily. Based on observations from our MMPOWER-2 clinical trial and post-hoc observations from our MMPOWER clinical trial, which suggest that subjects walking more than 100 meters (because lesser distances may be indicative of co-morbidities in this population) and less than 450 meters (because an above 500 meter 6MWT distance is not indicative of impairment) at baseline on the 6MWT are more likely to improve in meters walked following elamipretide treatment, we have endeavored to enrich our Phase 3 population by excluding individuals who walk less than 100 meters or more than 450 meters at their screening or baseline visits.

The primary efficacy analysis will compare mean changes as between the elamipretide and placebo treatment groups in:

 

(i)

distance walked on the 6MWT from baseline to the week 24 visit, and

 

(ii)

PMMSA Total Fatigue score, measuring tiredness at rest, tiredness during activities, muscle weakness at rest and muscle weakness during activities, from baseline to the week 24 visit.

The 6MWT and PMMSA Total Fatigue score together comprise a family of primary endpoints. The trial design contemplates a statistical analysis under which we will meet our primary endpoint if both endpoints are met at the p<0.05 level of significance, or if one of the two is met at the p<0.025 level of significance. The PMMSA Total Fatigue score not only measures improvements in the fatigue and weakness, which are the hallmark clinical symptoms of the disease, but it was also highly sensitive to change (p=0.0006) in our prior 30-patient Phase 2 clinical trial, MMPOWER-2.

 

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Secondary endpoints include the following, listed in order of interest:

 

ASSESSMENT

  

DESCRIPTION

Neuro-QoL Fatigue Short- Form (Neuro-QoL Fatigue)    A standard questionnaire developed by the National Institutes of Health to assess fatigue in neuromuscular indications, with respect to which a reduction in score indicates reduced fatigue.
PMMSA Most Bothersome Symptom    The first-time subjects complete the PMMSA, they are asked to identify which of the 10 items on the questionnaire is the “most bothersome” symptom of their disease; this is then assessed at trial completion to ascertain any changes in this symptom of interest. A similar endpoint approach is endorsed in the FDA’s Guidance on Developing Drugs for Acute Treatment of Migraine (2014). By focusing on the most severe symptoms for each subject, there is inherent clinical relevance in the individualized symptom endpoint.
Patient global impression scale of change    A single question allowing the patient to assess his or her general health.
Clinical global impression scale of change    A single question allowing the physician or caregiver to assess the patient’s general health.
PMMSA Total Fatigue During Activities    Comprised of two questions from the PMMSA, assessing tiredness during activities and muscle weakness during activities.
Neuro-QoL Activities of Daily Living    Specific questions from the Neuro-QoL Fatigue long-form questionnaire, a 19-question questionnaire developed by the National Institutes of Health, which assess the impact of fatigue on subjects’ activities of daily living. The FDA requested that we include activities of daily living questions in MMPOWER-3, and indicated that it would be appropriate for us to utilize the activities of daily living questions from the Neuro-QoL which were responsive to change in MMPOWER-2, including questions 4 (I was too tired to do my household chores), 6 (I was frustrated by being too tired to do the things I wanted to do), 8 (I had to limit my social activity because I was tired), 9 (I needed help doing my usual activities because of my fatigue), 12 (I had trouble finishing things because I was too tired), 13 (I was too tired to take a short walk), 18 (I had to limit my social activity because of weakness) and 19 (I had to force myself to get up and do things because I was physically too weak).

We have registered over 400 subjects with signs and symptoms of primary mitochondrial myopathy in a multi-national pre-trial registry, participation in which is a prerequisite to participation in MMPOWER-3. As of September 30, 2018, 86 subjects were enrolled in MMPOWER-3, and 11 sites in the United States, one site in Canada and two sites in Europe, out of an anticipated 28 sites, were initiated for enrollment. Our goal is to achieve full enrollment in the trial in early 2019.

MMPOWER-2

We initiated MMPOWER-2, our second clinical trial for the treatment of individuals with primary mitochondrial myopathy, with the goals of understanding whether subjects with primary mitochondrial myopathy would tolerate once daily subcutaneous dosing of elamipretide, and exploring efficacy endpoints in addition to the 6MWT that we could use to assess potential benefit in our Phase 3 pivotal trial.

MMPOWER-2 was a Phase 2, double-blind, placebo-controlled crossover trial to evaluate the safety and efficacy of once daily subcutaneous administration of elamipretide in subjects previously enrolled in MMPOWER. The trial was conducted at Massachusetts General Hospital, University of California-San Diego, University of Pittsburgh Medical Center and Akron Children’s Hospital. Thirty of the 36 MMPOWER subjects enrolled in MMPOWER-2, although one subject discontinued the trial in the second four-week treatment period due to injection site pain. Subjects were randomized in a one-to-one ratio to either 40 mg once daily subcutaneous elamipretide, which is slightly lower than the average dose exposure achieved in the high dose cohort in MMPOWER and equivalent to the dose we are testing

 

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in MMPOWER-3, or placebo injection for an initial treatment period of four weeks. After treatment period one, treatment was discontinued for a four-week wash-out period. The subjects were then crossed over to the other treatment arm for a second four-week treatment period. After finishing both treatment periods, subjects were eligible to continue on elamipretide during an open-label extension trial, in which we continue to assess safety to support a potential regulatory submission and conduct limited efficacy assessments.

The objectives of the trial were to evaluate the safety, tolerability and efficacy of once daily subcutaneous elamipretide injections in individuals with primary mitochondrial myopathy. Subjects completed assessments, including the 6MWT, at initial screening, at baseline (prior to receiving the first dose) at week four, the last visit for the first treatment period at week eight, the beginning of the second treatment period at week 12, the end of the second treatment period and at week 14.

Efficacy endpoints were assessed by comparing values for subjects randomized to elamipretide at the end of each treatment period to values for subjects randomized to placebo at the end of each treatment period; exploratory biomarkers and activity counts were also evaluated. Although the primary efficacy endpoint was difference in the 6MWT from end of treatment on elamipretide to end of treatment on placebo, an important objective in conducting this trial was to identify other efficacy endpoints which might be sensitive to change, which we have now brought forward into MMPOWER-3.

We observed statistically significant results for elamipretide across multiple endpoints, as shown in the table below.

MMPOWER-2 Summary of Data

 

 

 

ENDPOINT

   LEAST SQUARED MEAN
(CONFIDENCE INTERVAL)
     P-VALUE  

6MWT (meter)

     19.8 (-2.8, 42.5)        0.0833  

6MWT Treatment Period 1 (meter)*

     45.3 (3.7, 85.9)        0.0340  

3TUG (seconds)

     -0.2 (-2.7, 2.2)        0.8423  

Neuro-QoL (T-score)

     -4.0 (-7.0, -1.0)        0.0115  

PMMSA Total Fatigue (mean score)

     -1.7 (-2.6, -0.8)        0.0006  

PMMSA Fatigue During Activity (mean score)

     -0.8 (-1.2, -0.3)        0.0018  

PMMSA Muscle Pain (mean score)

     -0.4 (-0.6, -0.1)        0.0079  

PMMSA Muscle Weakness During Activity (mean score)

     -0.4 (-0.7, -0.2)        0.0019  

PMMSA Subject Reported Most Bothersome Symptom

     -0.3 (-0.5, -0.1)        0.0111  

Patient Global Assessment (mean score)

     -0.3 (-0.6, 0.0)        0.0421  

Physician Global Assessment (mean score)

     -0.3 (-0.5, 0.0)        0.0638  

 

*   Post-hoc sequence effect among subjects walking <450 meters at baseline (p=0.047 6MWT; p=0.0006 3TUG), triggered post-hoc Treatment Period 1 analysis.

 

 

Regulatory agencies such as the FDA recommend that sponsors present data sets in forest plots, in which the treatment effect across various endpoints is rescaled to a common standard error unit of one and we utilized the forest plot construct in our FDA submissions. We believe this presentation to the FDA is useful to demonstrate whether there is alignment of benefit across endpoints, since concordance of benefit across multiple endpoints may provide more persuasive evidence of a treatment effect.

In the elamipretide-treated group, we observed a 19.8-meter improvement on the distance walked on the 6MWT relative to the placebo-treated group, although this was not statistically significant (p=0.0833).

We observed that the subjects who were more impaired on the 6MWT at baseline, walking under 450 meters, may derive greater benefit from elamipretide treatment, as shown below. We incorporated this observation into our MMPOWER-3 trial by excluding subjects who walk 450 meters or more on the 6MWT at screening or baseline, which we believe may enrich MMPOWER-3 trial for subjects more likely to respond on this endpoint.

 

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BASELINE WALK DISTANCE

   CHANGE (LEAST-SQUARED-MEANS DIFFERENCE)
ELAMIPRETIDE VS. PLACEBO

Low Walker (under 450m) (n=22)

   24.3 meters

High Walker (at/over 450m) (n=8)

     8.6 meters

 

 

The PMMSA Total Fatigue score was designed to assess the fatigue and weakness that are the hallmark symptoms of primary mitochondrial myopathy. The worst (most fatigued) possible score was 16; the best (least fatigued) possible score was four. Subjects treated with elamipretide reported a clinically meaningful reduction in total fatigue from their baseline values (2.2 point, or 19%, reduction relative to baseline) and as compared to placebo (1.7 point reduction relative to placebo)(p=0.0006). Notably, subjects did not report meaningful changes in their fatigue while on placebo (0.1 points) and, for subjects on elamipretide, their fatigue levels increased toward baseline levels after withdrawal of elamipretide, as shown below.

 

 

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Our interpretation of the other secondary endpoints is summarized below.

 

ENDPOINT

   P-VALUE   

INTERPRETATION

Neuro-QoL

Fatigue

   0.0115    The Neuro-QoL Fatigue Short-Form showed a reduction in fatigue in the elamipretide-treated population, with a least-squared-means difference T-score, a converted standardized score, of (-4) (p=0.0115) relative to placebo.

PMMSA Fatigue

During

Activities

   0.0018    The worst (most fatigued) possible score was an 8; the best (least fatigued) possible score was a 2. Comparing the values from the final week of treatment period 1 and the final week of treatment period 2, elamipretide-treated subjects reported lower Total Fatigue During Activities relative to placebo- treated subjects, scoring a least-squared-means difference of (-0.8).
PMMSA Most Bothersome Symptom    0.0111    We observed an improvement in the subjects’ “most bothersome” symptom of their disease.
Triple Time Up and Go Test (TUG)    0.8423    The TUG showed no difference between those treated with elamipretide and those receiving placebo; however, subjects were not found to be significantly impaired on this assessment at baseline relative to healthy historic controls. This assessment was also completed in less than one-minute, which may be sub-optimal for measuring endurance-related skeletal muscle weakness and fatigue.
Patient global impression scale    0.0421    Elamipretide-treated subjects reported a least-squared-means (-0.28) improvement in their general health relative to placebo.
Physician global impression scale    0.0636    Physicians reported a least-squared means (-0.26) improvement in subject’s general health, however this was not statistically significant.

Based on FDA feedback, we developed our Phase 3 secondary endpoint, the Neuro-QoL Activities of Daily Living, consisting of the following activities of daily living questions from the Neuro-QoL questionnaire developed by the National Institutes of Health which were responsive to change in MMPOWER-2, as shown below.

 

 

 

QUESTION

   ELAMIPRETIDE
(N =30)
     PLACEBO
(N = 30)
     P-VALUE  

I was too tired to do my household chores

     2.6        3.2        0.0025  

I was frustrated by being too tired to do the things I wanted to do

     2.8        3.3        0.0296  

I had to limit my social activity because I was tired

     2.6        2.9        0.1652  

I needed help doing my usual activities because of my fatigue

     2.3        2.7        0.0520  

I had trouble finishing things because I was too tired

     2.5        3.0        0.0189  

I was too tired to take a short walk

     2.4        3.0        0.0025  

I had to limit my social activity because of weakness

     2.2        2.7        0.0145  

I had to force myself to get up and do things because I  was physically too weak

     2.2        2.8        0.0260  

 

 

Twenty-seven of the 29 subjects who completed MMPOWER and/or MMPOWER-2 enrolled in MMPOWER-OLE, an open-label extension trial we are conducting which will contribute to our safety database in this population and includes periodic efficacy assessments to support the durability of any effects observed in the controlled phase of the trial. In addition, one of the subjects from MMPOWER who did not participate in MMPOWER-2 has subsequently enrolled in MMPOWER-OLE. While we have not observed meaningful changes in 6MWT during ongoing assessments, we have observed maintenance of the reduced PMMSA Total Fatigue through 12-months of therapy (which 24 subjects have now completed) during this open-label extension trial.

MMPOWER

MMPOWER was a Phase 1/2, multiple ascending dose, double-blind, placebo-controlled trial with 36 subjects between the ages of 16 and 65 with genetic confirmation of mitochondrial disease and a clinical diagnosis of primary mitochondrial myopathy. The trial was conducted at Massachusetts General Hospital, University of

 

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California-San Diego, University of Pittsburgh Medical Center and Akron Children’s Hospital. Nine subjects received a low dose of elamipretide (0.01 mg/kg hour, for an average actual drug exposure of 1.4 mg), nine subjects received a mid-dose of elamipretide (0.10 mg/kg hour, for an average actual drug exposure of 12.7 mg), nine subjects received a high dose of elamipretide (0.25 mg/kg hour, for an average actual drug exposure of 29.6 mg) and nine subjects received a placebo dose once daily by two-hour IV infusion over a treatment period of five days. The high dose of elamipretide tested in MMPOWER is slightly lower than the 40mg subcutaneous dose we tested in MMPOWER-2 and are testing in MMPOWER-3.

The objectives of the trial were to evaluate the safety, tolerability and efficacy of elamipretide in individuals with primary mitochondrial myopathy. Subjects completed efficacy assessments, including the 6MWT (the primary efficacy endpoint) at initial screening, at baseline (prior to receiving the first dose), on the fifth day (after the last dose), and on the seventh day (two days after the last dose).

We observed a dose-dependent increase in six-minute walk distance (p=0.0142 by linear trend test) after five days of treatment. The data showed that subjects who received the high dose of elamipretide, which was the primary dose of interest, walked an average of 64.5 meters further after five days of treatment with elamipretide than they walked before receiving elamipretide. As adjusted for the 20.4 meter improvement observed in the placebo-treated group, this represents a 44.1-meter least-squares mean improvement relative to placebo (p=0.053). A post-hoc adjustment for gender and baseline distance walked, the factors most responsible for variability within the data, as published in Neurology in March 2018 by our principal investigators, demonstrated a 51.2-meter least-squares mean improvement relative to placebo (p=0.03), as depicted below.

 

 

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As noted above, a post-hoc analysis of the data revealed that subjects’ performance on the 6MWT at baseline was predictive of how much they may improve after elamipretide treatment (a treatment by baseline interaction, with an R-squared value of 0.42, meaning approximately 42% of the variability in the data as a whole is explained by the model). This analysis demonstrated that the more impaired subjects, walking less than 450 meters at baseline, were more likely to improve with elamipretide, whereas less impaired subjects, walking more than 450 meters at baseline, had less potential for improvement. A healthy individual can typically walk between 500 and 600 meters on the 6MWT, which may suggest that those walking over 450 meters at baseline are not substantially impaired in their ability to perform this assessment. As discussed above, we observed similar preferential benefit for more impaired subjects in MMPOWER-2 and have accordingly enriched our MMPOWER-3 trial population by excluding subjects who walk more than 450 meters on the 6MWT at screening or baseline.

We explored other secondary and exploratory efficacy endpoints in MMPOWER, including questionnaires and biomarkers, but we did not observe meaningful findings in these other endpoints.

Elamipretide Clinical Programs—Barth Syndrome

Barth is estimated to affect between one in 300,000 to one in 400,000 births in the United States and there are estimated to be less than 200 known living patients worldwide with Barth. There are no therapies approved by the FDA, EMA or NMPA for the treatment of Barth. We have received Fast Track designation and Orphan Drug designation from the FDA for the development of elamipretide in Barth.

 

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Barth typically presents in infancy or early childhood. The disease is characterized by reduced muscle tone, muscle weakness, undeveloped skeletal muscles, delayed growth, fatigue, varying degrees of physical disability, heart muscle weakness, or cardiomyopathy, which makes it harder for the heart to pump blood to the rest of the body, and low white blood cell count, or neutropenia, which can compromise the body’s ability to fight off infections. Some individuals with Barth require one or more heart transplants, including during infancy. Implantable cardioverter defibrillators may be used to prevent sudden death due to life-threatening ventricular arrhythmias, and other heart failure medications including ACE-inhibitors and beta blockers may also be used to help manage cardiac symptoms. In addition to medical and surgical intervention, individuals with Barth may require physiotherapists and occupational therapists, speech and language therapists, psychologists and educational support workers. Barth can be a lethal infantile and early childhood disease, and mortality is highest in the first four years of life. Although improvements in the management of the disease have increased survival for some patients, with reports of individuals with Barth living into their late 40s and a single individual with Barth reported as surviving to age 51, the disease nevertheless is associated with premature death.

Barth is caused by a genetic mutation in the TAZ gene that leads to decreased production of tafazzin, an enzyme required to assemble cardiolipin; as a result there is an abnormal composition of cardiolipin, particularly in the heart and skeletal muscle mitochondria in individuals with Barth. Barth patients have less tetralinoleylcardiolipin, or L4-CL, and increased amounts of monolysocardiolipin, or MLCL, than healthy subjects, and the disease can be diagnosed by the ratio of MLCL to L4-CL, called the MLCL:CL ratio or genetic testing. MLCL, a phospholipid found in the inner mitochondrial membrane, is considered to be an immature form of cardiolipin. As illustrated below, MLCL is structurally differentiated from L4-CL due to its lack of a fourth acyl chain, which alters the typical conical structure of the lipid causing alterations to mitochondrial morphology. These morphological alterations result in destabilization of respiratory chain supercomplexes and increased oxidative stress. Studies have shown increased susceptibility of cardiolipin to peroxidation in Barth patient derived pluripotent stem cells, leading to increased accumulation of MLCL.

 

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The images of lymphoblast mitochondria below indicate that, compared to normal mitochondria, the mitochondria of individuals with Barth have unhealthy morphology, including a lack of inner membranes, a poor alignment of cristae, which are the curves of the IMM, and swollen or collapsed segments of cristae.

 

 

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The Barth Syndrome Foundation, an advocacy group for Barth awareness and research, asked us to conduct a clinical trial of elamipretide for Barth. As the mechanism of elamipretide is to bind reversibly to cardiolipin, which is deficient in individuals with Barth, we undertook preclinical work to better characterize the safety profile of elamipretide for Barth as well as to gain insight into whether there would be adequate target engagement for elamipretide given the severe depletion of cardiolipin that characterizes this disease. Analyses of cardiolipin levels in Barth patient-derived lymphoblasts have shown up to 60% lower levels of cardiolipin than in healthy control cells, as shown below; this cardiolipin deficit has been found to range to up to 95% in other Barth cell lines or animal models.

 

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Preliminary preclinical results from a study in mice in which the TAZ gene was “knocked down” did not indicate any safety concerns.

Additionally, as shown below, ex vivo studies of elamipretide in cardiomyocytes, or heart cells, derived from individuals with Barth demonstrated elamipretide’s potential to improve Barth oxygen consumption rate, or OCR, an indicator of mitochondrial respiration, despite an approximate 80% reduction in cardiolipin levels. In this study, the ‘resting’ period, which represents a ‘basal’ state, is when substrates required for ATP production are present and respiration and ATP production is occurring. Then, oligomycin, an ATP synthase inhibitor, is added to block ATP production. At this stage, respiration represents requirements to keep the mitochondrial membrane potential in place without energy required to synthesize ATP. Next, inhibitors (Antimycin and Rotenone) are added to block respiration completely. Maximal respiration was achieved by the addition of carbonilcyanide p-triflouromethoxyphenylhydrazone, or FCCP, an uncoupler of mitochondrial oxidative phosphorylation which stimulates increased respiration.

 

 

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In laboratory experiments, elamipretide interacted with the abnormal MLCL found in Barth cardiac and skeletal muscle tissue in a similar ratio as it interacted with normal cardiolipin, which is believed to be a two cardiolipin to one elamipretide molar ratio. In another experiment, lipid vesicles that model the IMM were synthesized, and the effect of membrane lipid composition on membrane structure (area) was determined. Cardiolipin comprises approximately 20% of inner membrane lipids, and the addition of cardiolipin was observed to increase membrane area, consistent with the cone-shaped structure of cardiolipin. Losses of cardiolipin were modeled based on changes typically seen in diseases including heart failure and renal disease and the loss of cardiolipin was associated with decreased membrane area. We observed that elamipretide-mediated aggregation of cardiolipin ameliorated the loss by acutely restoring the membrane area, as shown below. In diseases characterized by pronounced loss of cardiolipin such as Barth, there is a profound decrease in membrane structure that was attenuated with elamipretide. These observations suggest that elamipretide’s therapeutic benefit may be more pronounced or more rapidly observed in subjects with more moderate cardiolipin loss.

 

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While Barth patients have some normal cardiolipin, the ratio of abnormal MLCL to normal cardiolipin (the MLCL:CL ratio) may vary from patient to patient. For example, in the study we conducted with Barth patient-derived cardiomyocytes, described above, we observed an approximate 80% reduction in normal cardiolipin, whereas other studies of patient-derived lymphoblasts have shown an approximate 60% reduction in normal cardiolipin, as discussed above. Up to 95% reduction has, at times, been reported in the literature.

The MLCL:CL ratio has been observed to correlate with functional impairment; patients with a lower MLCL:CL ratio are typically less impaired than those with a higher MLCL:CL ratio. For example, a prior observational study of 34 Barth patients suggests that the MLCL:CL ratio is inversely correlated with performance on the 6MWT (p=0.00014). Accordingly, if elamipretide’s reaction to normal cardiolipin is critical to therapeutic effect, such therapeutic effect may also vary among patients, and as a result may only benefit a subset of such patients.

We initiated TAZPOWER, a clinical trial of elamipretide for individuals diagnosed with Barth, in the third quarter of 2017 at Johns Hopkins. TAZPOWER is a double-blind, placebo-controlled cross-over trial to evaluate the efficacy of once daily subcutaneous administration of elamipretide in 12 individuals who are 12 years of age or older and have been diagnosed with Barth. Subjects were randomized in a one-to-one ratio to either 40 mg elamipretide administered daily by subcutaneous injection or placebo for an initial 12-week treatment period. After this initial treatment period, treatment is discontinued for a four-week wash-out period, following which the subjects cross over to the other treatment arm for a second 12-week treatment period.

Subjects enrolled in TAZPOWER are eligible for participation in an optional open-label extension trial that will contribute to our safety database and may include periodic efficacy assessments to support the durability of any effects observed in the controlled phase of the trial. We have completed the placebo-controlled portion of TAZPOWER, and are continuing to assess efficacy endpoints during the open-label extension phase, in which eight subjects are currently enrolled.

The objectives of the trial were to evaluate the safety, tolerability and efficacy of once daily subcutaneous elamipretide injections in individuals with Barth. During each of treatment periods one and two, subjects completed assessments including the 6MWT at the beginning of each treatment period, four weeks into each treatment period, and at the end of each treatment period; certain assessments were also conducted at initial screening, and at a follow-up visit, four weeks following the end of the second treatment period. In addition, the Barth Syndrome Symptom Assessment, or BTHSA, a patient reported outcome questionnaire developed based upon interviews of individuals with Barth to measure the fatigue and muscle weakness associated with the disease, was completed by subjects daily, and assessed based on the average of seven days of daily values preceding the assessment date.

Elamipretide was reported to be well-tolerated by patients with Barth. Other than injection site reactions, which were experienced in both groups but with higher frequency in the elamipretide treatment group, there were overall less events reported during the elamipretide treatment periods of the trial, as compared to the placebo treatment periods.

TAZPOWER did not meet its primary efficacy endpoints of (i) change in the 6MWT between end of treatment on elamipretide and end of treatment on placebo or (ii) change in Total Fatigue on the BTHSA, which is composed of three questions from the BTHSA, assessing tiredness at rest and during activities and muscle weakness during activities, between end of treatment on elamipretide and end of treatment on placebo. With respect to the Clinical Global Impression of Change, a secondary endpoint involving an overall assessment by the investigator of each subject’s Barth symptoms, we observed an improvement between end of treatment on elamipretide and end of treatment on placebo, with the investigator reporting positive change for nine out of the 12 patients over the elamipretide treatment period. Additionally, eight of 11 caregivers completing the Caregiver’s Global Impression of Change also reported positive changes in Barth symptoms during the elamipretide treatment period.

 

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We conducted a prespecified subgroup analysis intended to assess whether elamipretide’s association with normal cardiolipin is related to therapeutic effect, that is, whether elamipretide may provide greater benefit to a subset of Barth patients who have lower MLCL:CL ratios. This entailed an assessment of the six patients above (“high ratio subjects”) and six patients below (“low ratio subjects”) the median MLCL:CL ratio of the subjects enrolled in TAZPOWER, which was 17.3. In this subgroup analysis, we observed a correlation between improvements in 6MWT and baseline ratios, as shown below. We believe this suggests that elamipretide therapy may preferentially affect low ratio subjects.

 

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We assessed performance between high ratio and low ratio subjects on other key efficacy endpoints. From this analysis, we observed that low ratio subjects showed overall greater improvement on elamipretide therapy than on placebo, particularly as compared to high ratio subjects, as reflected below. We believe these signals, coupled with data from the ongoing open-label extension portion of the trial, may support submission of an NDA for this indication. We plan to discuss a potential NDA submission with the FDA during the first half of 2019.

 

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The 21st Century Cures Act, or the Cures Act, elevates the role of the patient in the development of drugs, giving patients a greater voice when developing treatments for their diseases. Under this Act, sponsors are encouraged to incorporate the patient experience in their regulatory submissions. Accordingly, all subjects participating in the TAZPOWER trial were eligible to participate in a qualitative study in which we conducted videotaped interviews with trial participants through a smartphone application to explore their experiences during and after the trial and to

 

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better understand the treatment outcomes that are meaningful to them. For subjects participating in open-label extension, interviews were conducted after three-months of open-label extension therapy, unless sooner terminated. As of November 30, 2018, nine of the 12 TAZPOWER subjects and/or their caregivers have participated in this study. Interview questions addressed life before elamipretide injections (shots), daily life today (i.e., as of the date of each participant’s interview), fatigue and weakness today, other aspects of Barth today, shots: round 1, stopping the shots, and shots: round 2. Eight of the nine participating subjects reported improvement while on elamipretide therapy during open-label extension, and six of those eight subjects correctly identified during which of the two double-blind treatment periods they were receiving elamipretide.

Subjects characterized the improvement in fatigue in relation to their activities of daily living and quality of life. For example, one subject was able to go swimming and hiking with his friends at Boy Scout camp, which he had not previously been able to do. Another subject was able to walk his dog without stopping to rest and required less recovery time from that exertion. Two subjects reported being able to participate in physical education class at school instead of having to sit out. Several subjects reported increased appetite.

Two of the four study participants randomized to elamipretide in the placebo-controlled portion of the TAZPOWER trial reported reversion to their baseline symptoms quickly after withdrawal of therapy during the washout period. One reported a perceived decline in quality of life less than 48 hours from stopping therapy, which he characterized as depressing. Another reported that his grades declined because he found it harder to focus and was falling asleep at school again.

We are observing continued improvement in distance walked on the 6MWT during the open-label extension portion of the TAZPOWER trial, in which 10 subjects enrolled and two subjects have completed 36 weeks of treatment, an additional five subjects have completed 24 weeks of treatment, and an additional two subjects have completed 12 weeks of treatment, as shown below. We are conducting a review of the natural history of Barth to evaluate this and any other longitudinal trends we may observe during open-label treatment.

 

 

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We plan to request a meeting with the FDA, which we expect to have during the first half of 2019. The objective of the meeting will be to discuss our plan to submit an NDA for elamipretide for the treatment of Barth and to seek alignment regarding our regulatory path forward. We believe the data from our MMPOWER program may be supportive of our Barth development efforts. We also believe our development efforts in Barth may support the development of elamipretide in primary mitochondrial myopathy, given that patients with Barth have even lower levels of cardiolipin and we have still seen evidence of target engagement. We also believe that our experience from a compassionate use protocol for an infant with Sengers syndrome may provide further support.

Elamipretide Compassionate Use—Sengers syndrome

Sengers syndrome (Sengers) is an autosomal recessive mitochondrial disorder characterized by early onset hypertrophic cardiomyopathy, congenital cataracts and hypotonia. The prevalence of Sengers is unknown, however, according to Orphanet, a European reference portal for information on rare diseases, approximately 40 cases had been reported worldwide as of June 2014. Approximately half of the patients diagnosed with Sengers die within the first year of life due to cardiac failure associated with a fatal neonatal form of the disease. Sengers and Barth are thought to have overlapping phenotypes since both lead to depletion of mitochondrial cardiolipin and both are known to cause severe hypertrophic cardiomyopathy.

 

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In June 2018, we collaborated with doctors at the Department of Pediatrics, Barnaspitali Hringsins and the Department of Genetics and Molecular Medicine, Landspitali University Hospital, both in Reykjavik, Iceland, and the McKusick-Nathans Institute of Genetics Medicine at Johns Hopkins University to implement an elamipretide compassionate care protocol for a 3-month old infant diagnosed with the neonatal form of Sengers being treated at the neonatal intensive care unit at Landspitali University Hospital. In the first few months of life, the child was noted to have severe hypertrophic cardiomyopathy, bilateral cataracts and significant hypotonia. Average published survival of children presenting at this age is approximately 4.2 months.

The child received 0.25 mg/kg/day of elamipretide intravenously for the first six weeks, and thereafter received 0.5 mg/kg/day elamipretide therapy once daily. The patient’s cardiac function improved in the first few weeks of treatment and remained stable through November 30, 2018, with a 53% increase in left ventricular internal dimension in end-diastole and stabilization of left ventricle septal and posterior wall thickness despite a 40% weight gain due to normal growth. After approximately six months of elamipretide therapy, the patient improved from markedly ill to borderline ill as reported by a clinical global impression of severity of illness assessment, as shown below. This assessment, which is based on weekly evaluations, suggests that the patient improved at over 60% of the evaluations conducted since starting elamipretide therapy and was only thought to worsen on one occasion. The patient was subsequently discharged to home. Elamipretide appeared to be well-tolerated by this patient with no obvious associated side effects. The treating physician expressed a belief that elamipretide contributed to the patient’s disease stabilization.

After a surgical procedure in December 2018, prior to which the patient had been stable, the patient experienced severe cardiac decompensation and multi-organ failure and succumbed to his disease at approximately nine months of age.

 

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Elamipretide Clinical Programs—LHON

We estimate that approximately 10,000 individuals in the United States have LHON. Currently, there are no treatments approved by the FDA or the NMPA for the treatment of LHON. Raxone (idebenone), a synthetic form of Coenzyme Q10, has been approved by the EMA for the treatment of LHON, although actual availability varies by country. Raxone has orphan designation, and its marketing authorization was granted by the EMA under its authority to grant marketing authorization under “exceptional circumstances” due to the lack of comprehensive data on efficacy and safety.

 

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We have received Fast Track status and Orphan Drug designation from the FDA for the development of elamipretide for this indication. China has recently included LHON as an orphan disease on its published list of orphan diseases.

We have conducted a Phase 1 clinical trial of elamipretide topical ophthalmic drops for this indication, in which we observed some trends in response rates suggestive of therapeutic effect, for which we are continuing to assess efficacy data in an ongoing open-label extension trial. We plan to expand the open-label portion of this trial to include additional patients in the United States and China. We have engaged regulatory advisors in China to begin preparation for this expansion and expect to file our pre-clinical trial application to the NMPA by the end of 2018.

LHON is a mitochondrially inherited genetic disorder passed from a mother carrying the mutation to her children. LHON causes degeneration of the optic nerve in the back of the eye and leads to bilateral blindness, and primarily affects young men between the ages of 18 and 30, although it can affect women as well as younger children. The initial clinical expression of LHON is often a sudden, painless, acute or sub-acute central vision loss, often accompanied by loss of color vision and reduced visual acuity. A typical presentation involves a young man experiencing increased oxidative stress, sometimes from increased alcohol and/or tobacco consumption, leading to sudden vision loss in one eye that typically progresses within six months of onset to bilateral blindness. The disease has a substantial impact on day-to-day functioning, making it difficult to read and perform everyday activities, including employment-related activities and driving. The disease has a severe negative impact on quality of life and LHON individuals may require social services, occupational rehabilitation and visual aids.

A subclass of LHON patients also present symptoms, including muscle weakness, poor coordination, and numbness, tremors and abnormalities of the electrical signals that control the heartbeat (cardiac conduction defects). Some families have particularly severe manifestations, including ataxia, juvenile onset encephalopathy, spastic dystonia and psychiatric disturbances. These phenotypes have been called “LHON plus syndromes.”

Mitochondria are central to retinal cell function and survival and dysfunctional mitochondria may lead to death of retinal ganglion cells, which are neurons located near the inner surface of the retina. Mitochondrial dysfunction is a key factor in LHON and other genetic optic neuropathies characterized by loss of visual function resulting from impaired cellular energetics within retinal ganglion cells and the optic nerve.

Electron microscopy imaging of mitochondria from LHON subjects shows abnormal morphology suggestive of dysfunctional mitochondria. This abnormal mitochondrial morphology has also been observed in the retinal ganglion cells in a mouse model of LHON. The images below show retinal ganglion cells from a wild-type mouse, left, and an LHON mutant mouse model, middle. The image on the right shows an enlarged image of the mitochondria in the retinal ganglion cells of the mutant mouse.

 

 

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We believe based on pre-clinical and early clinical findings that systemic elamipretide may be beneficial for subjects with LHON and LHON plus, in which the mitochondrial dysfunction is the result of a mutation in a subunit of Complex I of the electron transport chain which impacts the retinal ganglion cells and the optic nerve. Preclinically, elamipretide has been observed to improve mitochondrial function under oxidative stress conditions in mouse-derived retinal ganglion cells, the type of cells most affected by LHON, by dose-dependently reducing ROS production, mitochondrial depolarization, cytochrome c release, morphological change, apoptosis and cell death. Ongoing experiments in a mouse model of acute traumatic optic neuropathy also suggest that systemic administration of

 

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elamipretide post-trauma may improve retinal ganglion cell survival and visual function, supporting the plausibility of therapeutic benefit in the presence of LHON associated, oxidative-stress mediated damage of the optic nerve.

In our MMPOWER and MMPOWER-2 clinical trials, in which most subjects are believed to have had some degree of Complex I dysfunction, we observed clinical benefit following systemic elamipretide administration. One LHON plus subject who enrolled in both studies and continues to receive elamipretide during the open-label extension trial experienced improvement in various disease symptoms, including improvement in vision such that the subject received medical clearance to drive for the first time in seven years. In addition, we believe we are observing trends suggestive of potential clinical benefit in our ReSIGHT Phase 2 clinical trial of topical ophthalmic drops for patients with the G11778A mutation of LHON, in which subjects are continuing treatment with elamipretide during an open-label extension trial.

ReSIGHT, our first clinical trial of elamipretide for the treatment of LHON, was a 52-week, randomized, double-masked, vehicle-controlled clinical trial of elamipretide topical ophthalmic drops in 12 subjects with LHON. Subjects were randomized to a single drop of elamipretide 1.0% ophthalmic solution or placebo, twice daily, with four subjects receiving elamipretide dosed in both eyes and eight subjects receiving elamipretide in one eye and placebo in the other eye. The endpoints were safety, tolerability and efficacy. The primary efficacy endpoint was change in best corrected visual acuity, or BCVA, during the period from week 20 through the end of treatment at week 52; secondary endpoints included changes in color vision, changes in photopic negative response electroretinography, a biomarker measuring the response of the retinal ganglion cells to light, changes in the retinal nerve fiber layer and retinal ganglion layer thickness, and changes in visual field, or field of vision, as measured by the Humphrey visual field score, which is the expanse of space visible at a given instant without moving the eyes. Subjects enrolled in ReSIGHT were eligible for participation in an optional open-label extension trial that will both contribute to our safety database and include periodic efficacy assessments to support the durability of any effects observed in the controlled phase of the trial. Eleven of the 12 subjects are currently participating in the open-label extension trial.

ReSIGHT enrolled individuals with the G11778A LHON genetic mutation who experienced loss of vision in both eyes of greater than one year and less than ten years, because the degree of visual impairment in these patients was expected to remain stable absent therapeutic intervention. It is considered unlikely that individuals with the G11778A genetic mutation will experience visual recovery spontaneously, meaning without any therapeutic intervention; the partial recovery rate, most commonly occurring within the first year following vision loss, has been reported to be between 4% and 33% for these individuals.

 

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We observed trends suggestive of therapeutic effect in ReSIGHT, but the trial did not meet its primary endpoint of change in BCVA as the average change over week 20 to 52 from baseline. We believe this was largely due to unexpected variability in the placebo group, in which two subjects experienced gains in BCVA of more than 20 letters on a standard eye chart and one subject experienced a loss of more than 20 letters, resulting in no change overall between elamipretide and placebo treated groups. However, improvement in elamipretide-treated eyes was observed across a number of other endpoints over the treatment period, as shown below.

The following table sets out certain data with respect to the ReSIGHT clinical trial measuring the endpoints from baseline to week 52 (averaged, in the case of BCVA, Humphrey Visual Field and Color Discrimination, over the entire treatment period). We plan to utilize a forest plot construct in our submission of the ReSIGHT data to the FDA.

ReSIGHT Summary of Data

 

 

 

ENDPOINT

   LEAST SQUARED MEAN
(CONFIDENCE INTERVAL)
     P-VALUE  

BCVA (letters)

     0.6 (-0.9, 2.1)        0.4370  

Humphrey Visual Field (mean deviation)

     0.8 (0.1, 1.4)        0.0173  

Color Discrimination

     0.2 (0.0, 0.4)        0.0826  

Retinal Nerve Fiber Layer Thickness

     1.9 (-3.3, 7.0)        0.4390  

Retinal Ganglion Cell Layer Thickness

     1.6 (-0.5, 3.7)        0.1274  

Visual Function Questionnaire Composite*

     6.0 (2.1, 9.9)        0.0063  

 

*   Post-hoc analysis of change from baseline (all subjects).

 

 

The below further summarizes certain post hoc analysis of the data from ReSIGHT, which was conducted with a central field analysis.

 

LOGO

 

All subjects participating for at least three months in the open-label extension part of the ReSIGHT trial were eligible to participate in a qualitative study in which we conducted videotaped interviews with trial participants through a smartphone application to explore their vision experiences during and after the trial and to better understand the treatment outcomes that are meaningful to them. Nine of the 12 ReSIGHT subjects participated in this study. Interviews addressed aspects of changes in vision with respect to general vision, testing their eyes, screens and magnification, daily living, color and light and summary. A number of subjects reported improvements in visual function as well as quality of life, as summarized in the charts below, which were prepared by external evaluators who analyzed written transcripts of the interviews pursuant to pre-identified conceptual frameworks. With respect to improvements in activities of daily living, one subject reported being able to see the denomination of money better, another remarked that he can see faces better and now has the vision he needs to get to his classes independently, another remarked that he does not rely upon accessibility devices such as CCTV as much as he used to, and is able to see street crossing signs now. Another advised that he can now see when to cross the street from the distance of across the street, another reported he does not rely upon friends for help cooking or doing laundry as much as he

 

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used to, and another mentioned he can now ride his bike again and has experienced improvement in his activities of daily living. We believe these interviews help qualify the clinical relevance and meaningfulness of changes in endpoints observed during the ReSIGHT trial.

 

LOGO

 

LOGO

We also observed continued improvement in parameters of visual function, including BCVA, color sensitivity, contrast sensitivity and visual field, particularly central visual field, as illustrated below.

 

LOGO

 

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Our original discussions with the FDA presumed we would conduct a pivotal Phase 3 trial following ReSIGHT. We plan to discuss the results of the ReSIGHT trial with the FDA to inform next steps with respect to the regulatory path forward in the United States, including whether a second trial will be required to support approval and the design of any such trial. We have identified sites in China willing to participate in a subsequent trial, and are preparing our NMPA clinical trial application to submit following our end-of-Phase 2 meeting with the FDA. We may consider increasing the dose or frequency of administration of topical ophthalmic drops or administering elamipretide subcutaneously based upon the results of our discussions with the FDA and NMPA. If we decide to conduct a Phase 3 clinical trial, we expect it would include sites in the United States and China. We believe the inclusion of sites in China may help expedite enrollment.

Patient-focused Drug Development and 21st Century Cures Act in the Context of Primary Mitochondrial Myopathy, Barth and LHON

The FDA’s Patient-Focused Drug Development initiative is an FDA commitment under the fifth authorization of the Prescription Drug User Fee Act to more systematically gather patients’ perspectives on their condition and available therapies to treat their condition. As part of this commitment, the FDA is holding a series of public meetings, each focused on a specific disease area. Pursuant to this initiative, the FDA met with Barth patients and advocates in July 2018, and has agreed to meet with primary mitochondrial myopathy patients and advocates in March 2019, in each case to hear directly from patients, patient caretakers and other patient representatives about their experiences with their debilitating conditions, including the disease symptoms and daily impacts that matter most to patients. At the Barth meeting, for example, patients and their caretakers spoke about the severe impact that fatigue has upon the quality of life for Barth patients. There was also a discussion of treatment options for Barth, during which a father of twin sons enrolled in our TAZPOWER trial remarked that he believed one of his sons was on elamipretide in treatment period one, and the other in treatment period two, before both went into open-label extension. He commented on his perceived positive impact of the study on his sons, including better appetites, improved energy levels and increased physical activity. We believe these meetings are important to educate the FDA about the significant clinical burden of these diseases and their devastating impact on patient’s activities of daily living, and we have supported advocacy groups’ efforts to prepare for these meetings. Other than educating regulators about the burden of these diseases in which we are studying elamipretide as a potential therapy, these meetings have no direct impact on our clinical development efforts.

The video protocols we conducted or are conducting as part of our MMPOWER-3, TAZPOWER and ReSIGHT programs will enable us to incorporate the patient experience in our regulatory submissions as encouraged by the Cures Act. The video protocol will be open during the open-label extension for subjects that participated in MMPOWER-3 at U.S. sites. Our approach to incorporate the patient voice under the Cures Act in this manner was informed by prior experience in our MMPOWER and MMPOWER-2 programs. In MMPOWER, certain of our clinical trial sites collected videotaped interviews of consenting subjects at baseline, before treatment commenced, at day five, which was the end of treatment, and at day seven, which was two days after treatment stopped. Our review of those interviews revealed important anecdotal learnings about certain subjects’ perceptions of changes in their symptoms over the course of the trial, as described in several examples below:

 

   

one subject reported that following five days of high dose elamipretide, he no longer needed to use his walker for support while ambulating and he was able to complete more daily activities, such as shaving, due to his increased strength; his clinician observed increases in his muscle tone;

 

   

one subject reported that following five days of mid-dose elamipretide, she experienced more energy and felt more sensations, such as being able to feel the air she inhaled when taking a deep breath, which she had not realized she was unable to feel before she received elamipretide treatment;

 

   

one subject reported improved ability to walk, including being able to go up hills without her legs burning and her heart racing, and to see, including improvements in her double vision and ability to read; and

 

   

one subject sent us videos chronicling her disease manifestation, diagnostic journey and perceived improvement during (i) MMPOWER, in which she progressed from needing a wheelchair or scooter to walk, at the beginning of the trial, to being able to walk without assistance, after five days of mid-dose elamipretide, (ii) MMPOWER-2, after which she was able to dance, was cleared to drive for the first time in seven years due to visual improvement and was able to reduce her pain medications, and (iii) the open-label extension trial, during which she reported continued improvement.

 

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Although reports of this nature are anecdotal in nature and not all subjects report improvements following treatment with elamipretide, we do think accounts of this nature will help encapsulate the patients’ perspective on any benefits they experience in our MMPOWER-3, TAZPOWER and ReSIGHT programs consistent with the Cures Act.

Elamipretide Clinical Programs—Diseases Associated with Aging

We believe that there is significant potential for mitochondrial medicine in diseases related to aging. We are evaluating the potential clinical utility of elamipretide in dry AMD, a disease associated with aging. We have also evaluated the potential clinical utility of elamipretide in proof-of-concept clinical trials in aging skeletal muscle weakness, acute kidney injury and heart failure, which are also associated with aging. Although we saw signs of clinical benefit in some of these studies, we do not plan to progress development of elamipretide for indications other than dry AMD in the United States. We may consider development of certain of these indications for other territories, including China, and we also believe that certain of these indications may be suitable for new pipeline compounds.

Ophthalmic Diseases

Normal mitochondria play a critical role for ocular function, and dysfunctional mitochondria are implicated in several common diseases of the eye, many of which are associated with aging. Ophthalmologic diseases that have not traditionally been considered to have obvious mitochondrial origins are increasingly recognized to result in part from impaired mitochondrial function, increased oxidative stress and increased apoptosis. As a high energy-demand organ, the eye is particularly susceptible to the consequences of mitochondrial damage. Oxidative damage that results over time from mtDNA instability leads to cumulative mitochondrial damage, which is recognized to be an important pathogenic factor in age-related ophthalmologic disorders such as diabetic retinopathy, glaucoma and dry AMD.

Delivery of therapeutic compounds to various sections of the human eye can be challenging. The eye has evolved to protect itself by washing foreign substances such as eye drops from the surface, with tears capable of removing as much as 95% of an eye drop. The vitreous in the interior of the eye also poses a barrier to delivery of therapies from the front of the eye to the retina. For systemic delivery, the blood—retinal barrier can prevent substances, particularly large molecules, from entering the tissue of the retina. We have evaluated both systemic and topical delivery of elamipretide in both preclinical studies and clinical trials.

Dry AMD

We are advancing development of elamipretide for dry AMD, an ophthalmic disease associated with aging and the leading cause of blindness among older adults. Dry AMD is estimated to impact approximately 10 million individuals in the United States and is the leading cause of blindness among older adults in the developed world. There are no treatments approved by the FDA, the EMA or the NMPA for the disease.

The earliest clinical manifestation of dry AMD is often a reduction in low luminance, or low light, visual acuity, which can make it challenging to conduct normal daily activities such as reading in artificial light, driving at dusk or at night and navigating indoors in low light. The disease may progress to entail blurred vision and loss of central vision, which can impair facial recognition, mobility, watching television and computer use, and can eventually lead to blindness. These limitations may impair the independence of older adults and have been associated with increased depression.

The pathophysiology of dry AMD includes the formation of cellular debris, called drusen, which disrupt the retinal pigment epithelium, a layer of cells between the retina, which collects light and converts it into neural signals to transmit to the brain, and the choroid, or vascular membrane, at the back of the eye. The disease may also involve the gradual deterioration, or geographic atrophy, of the central part of retina, known as the macula. The retinal pigment epithelium provides nutrition to the retina, which has a very active metabolism. The eye is the highest consumer of mitochondrial ATP in the central nervous system, due to the intensive bioenergetics required to support visual function. Preclinical studies suggest that diseases of the retinal pigment epithelium, such as dry AMD, may be exacerbated by light- induced mitochondrial dysfunction, and that mitochondrial DNA mutations appear to accumulate over time in diseased retinal pigment epithelium as a consequence of chronic and ongoing oxidative stress. Cigarette smoking and high fat diets, both of which contribute to mitochondrially deleterious oxidative stress, are known to be environmental risk factors for dry AMD onset and progression. These findings suggest a key role for mitochondrial dysfunction in the pathology of the disease.

 

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The table below provides a summary of our completed and planned trials for dry AMD.

 

TRIAL

  

INDICATION

  

STAGE;
STATUS

  

TRIAL DESIGN

ReCLAIM    dry AMD    Phase 1; completed in March 2018    Open label, single-center clinical trial involving 19 subjects with non-central geographic atrophy, which occurs when the photoreceptors no longer work and the patients develop a blind spot or spot of poor vision in the macula, and 21 subjects with high risk drusen, which are large deposits of debris located between the retina and the Bruch’s membrane, that can interfere with waste products getting removed from the macula. Subjects received once daily subcutaneous injections of elamipretide for 24 weeks.
ReCLAIM-2    dry AMD    Phase 2b; planning for start in the first quarter of 2019    Double-blind, placebo controlled, multi-center clinical trial involving approximately 180 subjects with non-central geographic atrophy, receiving once daily subcutaneous injections of either elamipretide or placebo for ~48 weeks.

In preclinical models of dry AMD, published in Retina Today in May/June 2015, researchers at Duke Eye Center observed that elamipretide prevented disease progression and reversed symptoms of disease. This study utilized hydroquinone, a toxic chemical in tobacco tar, to induce dry AMD-like symptoms in mice over a two-week course of exposure. Concurrent treatment with 3 mg/kg subcutaneous elamipretide during hydroquinone exposure protected against these symptoms, as evidenced by a reduction of the drusen-like deposit formation and maintenance of normal membrane thickness, mitochondrial morphology and ultrastructure of the retinal pigment endothelium cells in treated mice.

In another preclinical model of a 24-month old Alzheimer’s disease mouse (roughly equivalent to a human octogenarian) which, when fed a high fat diet, accumulated drusen-like deposits, one month of subcutaneous administration of elamipretide eliminated the drusen-like deposits and restored normal mitochondrial morphology and the ultrastructure of the retinal pigment endothelium cells. In addition, the animals treated with elamipretide were observed to have normalization of b-wave amplitudes on electroretinograms, which suggests an improvement in photoreceptor function reflecting improved visual acuity.

We conducted our ReCLAIM Phase 1 open-label clinical trial at Duke Eye Center to evaluate the safety, tolerability and efficacy of daily subcutaneous injections of 40 mg elamipretide given over 24 weeks to 40 individuals with intermediate characteristics of dry AMD. We enrolled 21 subjects who have high-risk drusen, the most common early signs of dry AMD, and 19 subjects who have non-central geographic atrophy, or areas of dysfunctional macula. Individuals with high-risk drusen typically have difficulty seeing in low light conditions and mild to moderate deficits in visual acuity under normal light condition, while those with non-central geographic atrophy have more advanced symptoms but are not yet blind. The primary endpoint was safety and tolerability, evaluated based on review of adverse events, or AEs, and compliance of self-administration of subcutaneous elamipretide, measured at 24 weeks compared to baseline. Secondary endpoints for both high-risk drusen subjects and subjects with non-central geographic atrophy included change from baseline in visual acuity in low light conditions, or low luminance visual acuity, or LLVA, a five-letter deficit in which was required for inclusion in the trial, visual acuity in standard light conditions, BCVA, reading speed and acuity in low light conditions and standard light conditions, drusen volume and patient reported outcome assessments. Assessments for most secondary endpoints occurred at baseline, week four, week eight, week 12 and week 16.

We analyzed the data for subjects in each cohort who completed 24 weeks of therapy, which included 19 subjects with high-risk drusen and 15 subjects with non-central geographic atrophy. We observed improvements in functional assessments across both cohorts, as summarized below. As noted above, a five-letter deficit in LLVA, which is among the first clinical symptoms of the disease, was a required inclusion criterion for the trial, and improvements in this

 

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endpoint were statistically significant across both the drusen (p=0.0055) and geographic atrophy (p=0.0186) cohorts.

 

 

 

ENDPOINT

   DRUSEN COHORT
(N=19)
  GEOGRAPHIC
ATROPHY COHORT
(N=15)

Best corrected visual acuity (regular light) mean letters gained/p value

   3.58   4.60
   (p=0.0253)   (p=0.0034)

Low luminance visual acuity mean letters gained/p value

   5.63   5.40
   (p=0.0055)   (p=0.0186)

Reading speed (regular light) mean reduction in time/p value

   -0.11   -0.02
   (p=0.0054)   (p=0.5501)

Low luminance reading speed mean reduction in time/p value

   -0.28   -0.52
   (p<0.0001)   p=0.0172

Visual function questionnaire composite score

   9.25   6.59
   (p=0.0004)   (p=0.0125)

Low luminance questionnaire general dim light vision score

   20.75   10.32
   (p=0.0003)   (p=0.027)

 

 

Since we did not have a placebo, or control group, in this study, we evaluated natural history data and prior placebo-controlled trials of subjects with similar disease burden to understand the likelihood that we would observe a learning or placebo effect in this study. In a number of other reported interventional studies conducted by others, including Chroma, Spectri and Filly (combined n>700), as well as in several natural history studies conducted by others, including Proxima, Holz and Ladd (combined n>250), BCVA was observed to decline in similar patient groups by four to six letters over an up to one-year period, and LLVA was observed to decline in similar patient groups by approximately two letters over a six-month to one-year period. This supports our belief that the improvements observed in the ReCLAIM trial are unlikely to be due to the natural variability of the disease.

While each subject in ReCLAIM had one eye designated as a study eye, which met the inclusion criteria for the trial, the other eye was not required to meet inclusion criteria. Fourteen subjects in the trial had neovascular age-related macular degeneration, or wet AMD, that was at the quiescent stage, meaning that it was stable on standard-of-care anti-vascular endothelial growth factor, or anti-vegF, therapy. While there is an improvement in visual acuity when some subjects are first dosed with anti-vegF therapy, improvement typically plateaus and even declines slightly when the disease reaches the quiescent state. We observed that subjects with wet AMD experienced similar improvements in vision as was observed in the study eyes, with a 5.6 letter mean gain from baseline in BCVA, which was statistically significant at p=0.0027, and a 6.1 letter mean gain from baseline in LLVA, which was statistically significant at p=0.0012.

We also assessed the rate of progression of geographic atrophy in the non-central geographic atrophy cohort relative to what has been observed in other studies. The typical rate of geographic atrophy progression in dry AMD is well-understood from prior studies and the natural history, and we believe slowing of geographic atrophy progression could be a meaningful endpoint as we pursue approval by the FDA. This analysis was conducted using several types of imaging technologies including fundus auto- fluorescence, or FAF, an advanced imaging technique for observing the fundus, which is the interior surface of the eye opposite the lens including the retina, optic disk, macula, fovea and posterior pole, FAF squared, or FAF SQRT, a calculation performed to eliminate dependence of growth rates on lesion measurements, and optical coherence tomography, or OCT, a non-invasive imaging test which uses light waves to take cross-sectional pictures of the retina, also squared, or OCT SQRT, to eliminate dependence of growth rates on lesion measurements. Each of these imaging technologies showed that six months’ treatment with elamipretide was associated with slower progression of geographic atrophy than was observed in prior published studies conducted by others (assuming, for prior studies which were completed over a longer time period, a linear progression of geographic atrophy enabling calculation at the 6-month time point). FAF demonstrated mean growth of 0.50 mm2, versus 0.91 mm2 mean observation from ten prior studies over a similar time period (assuming linear progression), FAF SQRT demonstrated mean growth of 0.14 mm, versus 0.19 mm mean observation from five prior studies over a

 

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similar time period (assuming linear progression), and OCT SQRT demonstrated mean growth of 0.11 mm, versus 0.18 mm mean observation from five prior published studies over a similar time period (assuming linear progression).

We plan to initiate ReCLAIM 2, a Phase 2b placebo-controlled clinical trial with once daily subcutaneous dosing in subjects with non-central geographic atrophy during the first quarter of 2019. ReCLAIM 2 is designed to enroll up to 180 subjects, of whom 120 will be treated with an elamipretide 40 mg once daily subcutaneous injection, and the remainder will receive placebo for a 48-week period. Eligible subjects are required to have a geographic atrophy area greater than or equal to 0.05mm2 and less than 10.16 mm2, BCVA greater than or equal to 55 letters and greater than 5 letters low luminance deficit. Efficacy endpoints in ReCLAIM 2 include BCVA, FAF, OCT, low-luminance best-corrected visual acuity, low-luminance reading acuity, National Eye Institute Visual Function Questionnaire-39 score, visual function by the Low-luminance Questionnaire and conversion to choroidal neovascularization.

Although we believe that individuals experiencing a progressive decline in visual activity will be compliant with daily subcutaneous injections, we may consider a second Phase 2b placebo-controlled clinical trial using the drop formulation because it may be commercially advantageous to utilize a topical drop formulation. We observed signs of clinical benefit with elamipretide topical ophthalmic drops in our ReVEAL Phase 1/2 clinical trial enrolling subjects with Fuchs’ corneal endothelial dystrophy, or Fuchs, as well as in our ReSIGHT trial, and we are continuing to assess open-label efficacy data from our ReSIGHT study to inform the decision whether to pursue further development of the drop formulation.

Fuchs’ corneal endothelial dystrophy

Fuchs’ affects the endothelium, the thin layer of cells that line the back part of the cornea in the front of the eye. Endothelial cells are key to pumping excess water from the cornea, where it otherwise accumulates and results in corneal damage and cell death. When endothelial cells die, they cannot be regenerated. As more cells are lost, fluid builds up in the cornea and the tissue gradually thickens, resulting in a swollen and cloudy cornea. Fuchs’ is thought to be caused by oxidative stress in the endothelial cells, which in turn causes mtDNA damage and leads to morphological changes in the cells of the corneal epithelium. There are no non-surgical therapies approved for Fuchs’. In 2016, there were an estimated 28,000 corneal transplants in the United States for treatment of Fuchs’.

Our ReVEAL Phase 1/2 clinical trial was a randomized, double-masked, vehicle-controlled, two-part trial, with two separate 12-week treatment periods measuring two doses of elamipretide, intended to enroll 27 subjects at two sites in the United States. We completed the first part of ReVEAL, in which 16 individuals diagnosed with Fuchs’ and experiencing mild to moderate corneal edema received elamipretide 1.0% ophthalmic solution twice daily for up to 12 weeks in a randomly selected eye and a single drop of placebo twice daily to the control eye. We were unable to identify sufficient subjects to meet the enrollment criteria for the second part, in which an intended eight subjects were to receive elamipretide 3.0% ophthalmic solution twice daily in both eyes for up to 12 weeks, and three patients were to receive a single drop of placebo twice daily to each eye. We terminated the study early due to these enrollment challenges, enrolling only four of the intended 11 subjects in the second part.

In the fully enrolled, completed first part of the ReVEAL study, we observed significant differences in the primary efficacy endpoint of interest, which was central corneal thickness, in elamipretide-treated subjects relative to placebo-treated subjects (p=0.0293). This suggests that elamipretide may have reduced the degree of edema, or swelling, which contributes to corneal damage and endothelial cell death in this disease. We will evaluate this data in the context of our ongoing development of elamipretide for age-related diseases, but we do not currently plan to continue development of elamipretide for Fuchs based on our evaluation of the market potential in this indication.

Elamipretide Safety Data

We have a significant amount of clinical trial data indicating that elamipretide is generally well tolerated. As of September 30, 2018, 22 clinical trials had been completed with single and multiple intravenous and subcutaneous administrations of elamipretide at dose levels ranging from approximately 0.7 mg/day to 300 mg/day. These included 14 clinical pharmacology studies enrolling approximately 276 healthy subjects in which the primary objective was to assess safety rather than to treat a disease state, and 10 clinical trials enrolling approximately 498 subjects across multiple patient populations, including subjects with primary mitochondrial myopathy, skeletal muscle mitochondrial dysfunction, stable chronic heart failure, acute coronary syndrome and acute kidney injury. Additionally, data from two open-label clinical trials with the subcutaneous formulation in 49 subjects with primary mitochondrial myopathy and 40 subjects with dry AMD are available.

 

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The following table summarizes, by dosing duration, the meaningful differences in systemic treatment-emergent adverse events reported in elamipretide-treated subjects versus placebo-treated subjects. For this purpose, we considered a difference of at least 2% to be meaningful. In addition, injection site reactions were reported in the majority of subjects receiving elamipretide by subcutaneous injection; most commonly these entailed mild redness, swelling and itchiness which usually resolved within four hours of dosing.

 

 

 

SUMMARY OF SYSTEMIC TREATMENT EMERGENT ADVERSE EVENTS (TEAEs) REPORTED IN GREATER FREQUENCY

(³ 2% DIFFERENCE) IN ELAMIPRETIDE-TREATED SUBJECTS COMPARED TO PLACEBO-TREATED SUBJECTS

     ELAMIPRETIDE     PLACEBO    

DISCUSSION

Single Dose

     n=356       n=220    

Headache

     4.5     2.3  

Repeat dose £ 8 days

     n=186       n=46    

Dizziness

     2.2     0.0  

Repeat dose > 8 days (TEAEs ³ 5%)

     n=70       n=30    

Increased eosinophils/eosinophilia

     48.6     0.0   Mild to moderate increase in eosinophils, a variety of white blood cells that combat parasites and infections and control mechanisms associated with allergy and asthma, were observed in longer-term dosing regimens, with no associated clinical signs and symptoms. These appear to decrease to within normal limits with longer duration of elamipretide administration and return to pre-treatment levels after the end of elamipretide treatment.

Upper respiratory tract infection

     15.7         All 10 events of upper respiratory tract infection occurred in one open-label trial in an elderly population where there was no placebo-control group.

Increased blood immunoglobulin E

     10.0     0.0   No associated clinical signs and symptoms.

Dizziness

     8.6     1.4  

Headache

     8.6     2.9  

Urinary tract infection

     7.1     0.0  

Viral gastroenteritis

     5.7     0.0  

 

 

We have completed three clinical trials with topical ophthalmic elamipretide: ReSIGHT for the treatment of LHON, ReVEAL for the treatment of Fuchs’, and ReVIEW for the treatment of either diabetic macular edema, or DME, or dry AMD. In the ReSIGHT clinical trial, 12 subjects were treated with 1.0% ophthalmic solution twice daily for 52 weeks. There were no discontinuations in the ReSIGHT clinical trial. Ocular related TEAEs were reported in 56.3% of the elamipretide-treated and half of the placebo-treated eyes. In our ReVEAL clinical trial, 22 subjects were enrolled in one of two dosing cohorts, 1.0% ophthalmic solution or 3.0% ophthalmic solution, administered in the eye twice daily for 12 weeks. In this trial, there were two discontinuations, one of which was due to failure to meet inclusion criteria and one of which was due to a reported allergic reaction. Two unrelated systemic TEAEs were reported. In the 3.0% dose arm, two subjects reported ocular TEAEs of itching, foggy vision, redness and/or allergic conjunctivitis that led to discontinuation, each of which was deemed likely related to study drug. In the REVIEW clinical trial, 20 subjects were enrolled in one of two dosing cohorts, 0.3% ophthalmic solution or 1.0% ophthalmic solution, administered to one eye twice daily for 28 days. A total of four TEAEs were reported in the ReVIEW clinical trial and none were considered related to elamipretide by the investigator. There were no local tolerability issues reported, and there were no significant findings on physical examinations, ophthalmic examinations, vital signs or laboratory measurements.

 

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Earlier Clinical Trials of Elamipretide

We have studied elamipretide in clinical trials in several diseases associated with aging, including studies enrolling subjects with reduced skeletal muscle mitochondrial function, subjects with heart failure with reduced ejection fraction, or HFrEF, subjects with heart failure with preserved ejection fraction, or HFpEF, subjects undergoing percutaneous transluminal renal angioplasty and subjects with acute coronary syndrome. These trials were designed as small proof-of-concept studies to inform our decision whether to progress later stage development in these indications, and as such were generally not well-powered to achieve statistical significance. Although we have decided not to independently progress development of elamipretide for these common disease indications, we saw signs of clinical benefit from treatment with elamipretide in several of these indications, which may help inform our future development of pipeline compounds for age-related diseases.

In April 2010, we submitted an investigational new drug application, or IND, to the FDA for purposes of conducting clinical trials of elamipretide for the prevention and treatment of ischemia reperfusion injury. In October 2014, we submitted an IND to the FDA for the purpose of conducting clinical trials of elamipretide for the treatment of primary mitochondrial myopathy. Although this IND was also intended to cover our Barth clinical trial, when the FDA granted Fast-Track Status to this program they recommended we file a new IND covering Barth, which we have done. Additionally, in October 2014, we submitted an IND for purposes of conducting clinical trials of elamipretide for the treatment of diabetic macular edema and dry AMD; this IND also covers our clinical trials of Fuchs’ and LHON. The initial study under this IND was a Phase 1/2 safety study in 15 patients with diabetic macular edema and 5 patients with dry AMD, in which elamipretide topical ophthalmic drops at concentrations of 0.3% and 1% were well-tolerated over four weeks of dosing. We were the sponsor for each of those INDs.

MOTION—reduced skeletal muscle mitochondrial function. Our Phase 2 MOTION clinical trial was a double-blind, placebo-controlled trial involving 38 elderly subjects with reduced mitochondrial function in the thenar muscle group, between the thumb and pointer finger, as measured by nuclear magnetic resonance technology, or P31 NMR, a magnet that can measure phosphorous peaks as it associates and de-associates with adenosine, a purine nucleoside found in every human cell, during the oxidative phosphorylation process. Subjects were randomized one-to-one to a single two-hour IV of 0.25 mg/kg elamipretide or placebo. We measured the maximum capacity of the mitochondria to produce ATP in vivo using P31 NMR on the infusion day and seven days post- infusion. A sustained hand fatigue test determined the effect of increasing ATPmax on exercise tolerance.

Although our pre-specified analysis did not show a statistically significant benefit in this population, our investigator conducted a post-hoc sensitivity analysis excluding one subject in the placebo group whose ATPmax value was believe to be an erroneous measurement that did not meet the quality control criteria. The post-hoc analysis excluding this subject showed that two hours after the start of a single IV, elamipretide-treated subjects experienced a 30% improvement in ATPmax compared to a 12.5% improvement in the placebo-treated subjects (p=0.0555). This improvement was reduced to near baseline levels seven days following treatment. The increase in ATPmax was statistically significantly correlated with functional improvement measured by force time integral (p=0.0041), a test of muscle endurance, two hours after the start of the infusion, with mean increases approximately two to four times greater in subjects treated with elamipretide compared to placebo. This post hoc finding suggests that increasing skeletal muscle mitochondrial capacity may increase skeletal muscle function.

PREVIEW-HF—heart failure. PREVIEW-HF was a Phase 1/2 randomized, double-blind, placebo-controlled, single ascending dose trial of elamipretide in 36 subjects aged 45 to 80 years with stable Class 2/3 chronic heart failure, or mild to moderate symptoms of heart failure, who were receiving concomitant standard of care pharmacologic therapy. The trial evaluated the safety, tolerability, pharmacokinetics, pharmacodynamics and the effect on heart function assessed by serial two dimensional echocardiograms of a single four-hour IV of elamipretide (0.005 mg/kg/hour, or low dose (n=8), 0.05 mg/kg/hr, or mid-dose (n=8), 0.25 mg/kg/hour, or high-dose (n=8)) or placebo (n=12). We observed that the highest dose of elamipretide significantly reduced mean left ventricular end-systolic volume (absolute change from baseline -11 mL versus 2.8 mL for placebo; mean difference = -13.7 mL; p=0.005) and mean left ventricular end-diastolic volume (absolute change from baseline -15 mL versus 2.9 mL for placebo; mean difference = -17.9 mL; p=0.009) at the end of a four- hour infusion. Volume measurements such as end-systolic volume and end-diastolic volume are viewed as the best predictor of an improvement in morbidity and mortality in heart failure subjects.

 

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We also observed that, as compared to subjects in the placebo cohort, subjects in the high-dose arm had reduced left atrial volume at all time points, as well as an increase in right ventricular fractional area change at all time points. Finally, right-ventricular systolic pressure appeared to be reduced at most time points in both the medium and high-dose elamipretide-treated subjects, as compared to placebo. We also observed reductions in urinary 8-OH-2-deoxyguanosine and urinary 8-isoprostane, production of both of which is well-documented to increase in direct proportion to oxidative stress, six hours after the start of a four-hour infusion of elamipretide.

PROGRESS-HF—heart failure with reduced ejection fraction. PROGRESS-HF was a Phase 2 randomized, double-blind, placebo-controlled trial, involving 71 subjects with Stage C heart failure with reduced ejection fraction, or HFrEF, randomized to receive 28-days of once daily subcutaneous injections of 4mg elamipretide (low dose) (n=23) or 40mg elamipretide (high dose) (n=24) or placebo (n=24) injections. The trial evaluated the safety, tolerability, pharmacokinetics, pharmacodynamics and the effect on heart function of elamipretide assessed by cardiac magnetic resonance imaging, or MRI. The trial did not meet its primary efficacy endpoints of change from baseline in left ventricular ejection fraction and change from baseline in left ventricular end systolic volume, both assessed by cardiac MRI. NT-proBNP levels appeared to be consistently reduced in the elamipretide-treated subjects that received 40mg versus the placebo-treated group, an effect that appeared to be more pronounced in the subgroup where the NT-proBNP levels were highest at baseline. Although these values did not reach statistical significance, it may be suggestive of preferential benefit for more impaired subjects.

IDDEA-HF—acute heart failure with reduced ejection fraction. IDDEA-HF was a Phase 2 randomized, double-blind, placebo-controlled trial, involving 308 subjects with acute decompensated heart failure, which affects patients with advanced heart failure with HFrEF and is associated with severe congestion of multiple organs by fluid that is inadequately circulated by the failing heart. Subjects were randomized to receive 20 mg elamipretide in normal saline or placebo, dosed once daily over seven days by intravenous administration.

The trial evaluated the safety, tolerability, pharmacokinetics, pharmacodynamics and the effect on heart function of elamipretide assessed by NT-pro-BNP, a marker in the blood for brain natriuretic peptide, or BNP, which is a biomarker of cardiac function. Although NT-pro-BNP levels were significantly reduced from baseline in the elamipretide treated group (p<0.0001), when adjusted for reductions from baseline in the placebo treated group the change was not significant and so the trial did not meet its primary efficacy endpoint. We observed trends toward improvement in biomarkers of kidney function in patients who received elamipretide relative to placebo, and we also observed that fewer patients who received elamipretide relative to placebo died or were readmitted to the hospital during the 40-day follow-up period.

ReSTORE-HF—heart failure with preserved ejection fraction. ReSTORE-HF was a Phase 2 randomized, double-blind, placebo-controlled trial, involving 47 subjects ranging between 45 and 80 years of age presenting with symptomatic heart failure with preserved ejection fraction, or HFpEF, randomized to receive 28 days of once daily subcutaneous injections of 40 mg elamipretide or placebo.

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