As filed with the U.S. Securities and Exchange Commission on July 20, 2017

Registration no. 333-219066

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

AMENDMENT NO. 1
TO

F
ORM F-1
REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

CLEMENTIA PHARMACEUTICALS INC.
(Exact name of Registrant as specified in its charter)

 

 

 

 

 

Canada
(State or other jurisdiction of
incorporation or organization)

 

2834
(Primary Standard Industrial
Classification Code Number)

 

98-1128564
(I.R.S. Employer
Identification Number)

Clementia Pharmaceuticals Inc.
4150 St Catherine Street West, Suite 550
Montreal, Quebec, Canada H3Z 2Y5
(514) 940-3600

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

 

The Corporation Trust Company
Corporation Trust Center
1209 Orange Street
Wilmington, DE 19801
Telephone: (302) 658-7581

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

 

Copies to:

 

 

 

Kevin T. Collins
Martin C. Glass
Jenner & Block LLP
919 Third Avenue
New York, NY 10022
(212) 891-1600

 

Patrick O’Brien
Ropes & Gray LLP
800 Boylston Street
Boston, MA 02199
(617) 951-7050

 

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

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

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

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

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company R

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

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

 

CALCULATION OF REGISTRATION FEE

 

 

 

 

 

 

 

 

 

 

Title of each class of
securities to be registered

 

Amount to be
Registered
(1)

 

Proposed
Maximum Offering
Price Per Share
(2)

 

Proposed
Maximum Aggregate
Offering Price
(2)

 

Amount of
Registration
Fee
(3)

 

Common stock, $0.01 par value

 

8,222,500

 

$15.00

 

$123,337,500

 

$14,294.82

 

 

(1)

 

Includes 1,072,500 shares which the underwriters have the option to purchase.

 

(2)

 

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act.

 

(3)

 

Of this amount, $13,328.50 was previously paid in connection with the initial filing of this Registration Statement on June 30, 2017.

 

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

 

 


 

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

 

 

 

PROSPECTUS (Subject to Completion)
Dated July 20, 2017

 

 

7,150,000 Shares

Common Shares

 

Clementia Pharmaceuticals Inc. is offering 7,150,000 of its common shares. This is our initial public offering and no public market exists for our shares. We anticipate that the initial public offering price per share will be between $13.00 and $15.00.

 

We have applied to list our common shares on The Nasdaq Global Market under the symbol “CMTA.”

 

We are an “emerging growth company” as defined under the federal securities laws. Investing in our common shares involves risks. See “Risk Factors” beginning on page 10 of this prospectus.

 

PRICE $  PER SHARE

 

 

 

 

 

 

 

 

 

 

Price to Public

 

Underwriting
Discounts and
Commissions
(1)

 

Proceeds to
Company

Per share

 

 

$

 

 

   

$

 

 

   

$

 

 

 

Total

 

 

$

 

 

   

$

 

 

   

$

 

 

 

(1) See “Underwriters” for a description of the compensation payable to the underwriters.

Neither the United States Securities and Exchange Commission nor any state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

We have granted the underwriters an option to purchase up to an additional 1,072,500 common shares to cover over-allotments. The underwriters can exercise this option at any time within 30 days after the date of this prospectus.

Certain of our existing principal shareholders, directors and their affiliated entities, including OrbiMed, New Enterprise Associates 15, L.P., BDC, Fonds de solidarité des travailleurs du Québec (F.T.Q.) and RA Capital Management have indicated an interest in purchasing up to an aggregate of $30.0 million in common shares in this offering at the initial public offering price per share. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, less or no shares in this offering to any of these entities, or any of these entities may determine to purchase more, less or no shares in this offering. The underwriters will receive the same underwriting discount on any shares purchased by these entities as they will on any other shares sold to the public in this offering.

The underwriters expect to deliver the common shares on or about  , 2017.

 

 

 

 

MORGAN STANLEY

 

LEERINK PARTNERS

WEDBUSH PACGROW

 

BTIG

The date of this prospectus is  , 2017.


 

TABLE OF CONTENTS

 

 

 

PROSPECTUS SUMMARY

 

 

 

1

 

RISK FACTORS

 

 

 

10

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

 

 

48

 

EXCHANGE RATE DATA

 

 

 

50

 

USE OF PROCEEDS

 

 

 

51

 

DIVIDEND POLICY

 

 

 

52

 

CAPITALIZATION

 

 

 

53

 

DILUTION

 

 

 

55

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

 

 

57

 

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

 

 

 

59

 

BUSINESS

 

 

 

83

 

MANAGEMENT

 

 

 

125

 

EXECUTIVE AND DIRECTOR COMPENSATION

 

 

 

131

 

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

 

 

146

 

PRINCIPAL SHAREHOLDERS

 

 

 

148

 

DESCRIPTION OF SHARE CAPITAL

 

 

 

151

 

SHARES ELIGIBLE FOR FUTURE SALE

 

 

 

157

 

MATERIAL DIFFERENCES BETWEEN THE CANADA BUSINESS CORPORATIONS ACT AND THE DELAWARE GENERAL CORPORATION LAW

 

 

 

159

 

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

 

 

 

166

 

MATERIAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

 

 

 

173

 

UNDERWRITERS

 

 

 

176

 

EXPENSES RELATED TO THIS OFFERING

 

 

 

181

 

ENFORCEABILITY OF CIVIL LIABILITIES

 

 

 

181

 

EXPERTS

 

 

 

181

 

CHANGE IN ACCOUNTANTS

 

 

 

181

 

LEGAL MATTERS

 

 

 

182

 

WHERE YOU CAN FIND MORE INFORMATION

 

 

 

182

 

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

F-1

 

 

Neither we nor the underwriters have authorized anyone to provide information different from that contained in this prospectus, any amendment or supplement to this prospectus or in any free writing prospectus prepared by us or on our behalf. Neither we nor the underwriters take any responsibility for, and can provide no assurance as to the reliability of, any information other than the information in this prospectus, any amendment or supplement to this prospectus, and any free writing prospectus prepared by us or on our behalf. Neither the delivery of this prospectus nor the sale of our common shares means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy our common shares in any circumstances under which such offer or solicitation is unlawful.

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. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

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ABOUT THIS PROSPECTUS

All references in this prospectus to “the Company,” “Clementia,” “we,” “us,” or “our” refer to Clementia Pharmaceuticals Inc. and the subsidiaries through which it conducts its business unless otherwise indicated.

This prospectus includes statistical data, market data and other industry data and forecasts, which we obtained from various sources, including internal surveys, market research, publicly available information and independent industry publications and reports. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Similarly, internal surveys, industry forecasts and market research, which we believe to be reliable based upon our management’s knowledge of the industry, have not been independently verified. The future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in these publications and reports.

“Clementia” and our other registered or common law trademarks, service marks or trade names appearing in this prospectus are the property of Clementia Pharmaceuticals, Inc. Other trademarks and trade names referred to in this prospectus are the property of their respective owners.

Unless otherwise indicated, all references to “dollars” or the use of the symbol “$” are to U.S. dollars, the Company’s functional currency, and all references to “Canadian dollars” or “C$” are to Canadian dollars. Unless otherwise specified, all financial information has been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

ii


 

PROSPECTUS SUMMARY

This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in our common shares and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and our consolidated financial statements and the related notes, before deciding to buy our common shares.

OUR COMPANY

We are a clinical stage biopharmaceutical company that is developing disease-modifying treatments for patients suffering from debilitating bone and other diseases with high unmet medical need. Our lead product candidate, palovarotene, is an oral small molecule that binds and activates retinoic acid receptor gamma (an RARg agonist), and has shown potent activity in preventing abnormal new bone formation as well as scar tissue formation (or fibrosis) in a variety of tissues in animal models. We are developing palovarotene for the treatment of Fibrodysplasia Ossificans Progressiva (FOP) and Multiple Osteochondroma (MO) and have one Phase 3 trial and one Phase 2/3 trial, for two separate indications, planned to commence in 2017 with data read-outs planned in 2019 and 2020. We believe that if approved in FOP or MO, palovarotene could become the standard of care in either or both of these indications.

FOP is an ultra-rare, chronic and severely disabling disease of abnormal bone formation, known as heterotopic ossification (HO). FOP is characterized by painful, recurrent episodes of soft tissue swelling (flare-ups) that result in bone formation in areas of the body where bone is not normally present, such as muscles, tendons and ligaments. Flare-ups begin early in life and may occur spontaneously or after certain events, including soft tissue trauma, vaccinations or influenza infections. Recurrent flare-ups and new bone formation progressively restrict movement by locking joints, leading to cumulative loss of function, disability and early death due to reduced respiratory function. FOP is caused by a mutation of the bone morphogenetic protein (BMP) Type I receptor or ACVR1 (also known as ALK2) that leads to excess BMP signaling and new bone formation. Virtually all known patients have the same point mutation and have congenital malformations of the big toes at birth. We estimate that the prevalence of FOP is approximately 1.3 individuals per million lives, or approximately 9,000 globally. As of October 2016, there were known to be 800 diagnosed FOP patients worldwide. There are currently no approved medical treatment options to prevent the formation of heterotopic bone in FOP.

A 2011 Nature Medicine paper showed that palovarotene potently inhibited HO in animal models. Palovarotene had been previously tested by Roche Pharmaceuticals in 825 subjects, including healthy volunteers and patients with chronic obstructive pulmonary disease, where it was well-tolerated. Upon evaluation of the RARg agonist landscape, we determined that palovarotene had the most immediate potential in this class. As a result, we exclusively in-licensed palovarotene from Roche to form the basis of Clementia. In July 2014, the FDA granted Orphan Drug Designation for palovarotene as a treatment for FOP and in November 2014, we were granted orphan drug status in the EU. Orphan Drug Designation by the FDA allows for seven years of market exclusivity in the U.S. upon approval of the drug for the indication for which it was designated except in certain limited circumstances. In Europe, marketing authorization for an orphan drug generally leads to a ten-year period of market exclusivity. In November 2014 we received Fast Track Designation from the FDA, which allows for more frequent interactions with the FDA during the drug development and review process. Also, in July 2017 the FDA granted Breakthrough Therapy Designation to palovarotene for the prevention of HO in patients with FOP, which allows for intensive guidance on efficient drug development, organizational commitment involving senior management, and rolling review of our application. We have also secured IP related to palovarotene and in-licensed additional next generation RARg agonists.

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Our Programs

Our programs currently focus on diseases involving tissue transformation via retinoic acid receptors (RARs). RARs are expressed in a variety of tissues and are involved in the growth, shape and maintenance of tissues (morphogenesis). In particular, the RARg receptor sub-type is expressed in cells that produce cartilage and plays a role in biological pathways responsible for endochondral bone formation (the process of new bone formation which occurs via cartilage formation). RARg is also present in multiple other cells and tissues where it mediates the growth and differentiation of specific cell types, including those involved in fibrosis.

We believe that RARg agonists, such as palovarotene, have the potential for therapeutic use in a broad range of conditions, including diseases like FOP and MO that involve pathological bone formation as well as other indications characterized by excessive fibrosis or scarring such as dry eye disease.

The following table summarizes our development programs:

 

*

 

Phase 1 trials for palovarotene in FOP provide basis for proceeding directly to Phase 2/3 trials in MO

 

**

 

To our knowledge, no animal models for surgical release in FOP currently exist

Palovarotene for FOP

In advance of the commencement of our pivotal palovarotene trial program, we completed the first, randomized, placebo-controlled, adaptive design Phase 2 study in FOP, which enrolled 40 patients. The results of the Phase 2 study along with our open label extension, which reported a total of 67 flare-ups, saw positive trends on certain of our secondary endpoints. Importantly, while our clinical trials have not demonstrated statistically significant results, the data suggest that palovarotene reduced the incidence of new HO by approximately 50% as determined by CT scan at 12 weeks. In those subjects who formed new HO, the mean volumes of new HO were reduced by approximately 70% as compared to the placebo-treated subjects. Palovarotene was well-tolerated in this study and no patient discontinued drug or dose de-escalated.

Our Phase 2 trial and open label extensions as well as additional insights have led us to design our registration trial (considered to be a clinical trial expected to form the basis for regulatory approval) for palovarotene in FOP. Our Phase 3 trial, MOVE, for the treatment of FOP in adults and children, will enroll up to 80 patients who will be treated chronically with palovarotene and with increased doses during flare-ups. Based on clinical data generated from our Phase 2 study, open label extensions and our natural history study, the FDA has indicated that new HO is a clinically meaningful outcome

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provided we pre-specify the magnitude of treatment effect and support the HO findings with secondary endpoints, and is sufficient as a primary endpoint for a registration trial supporting approval. Furthermore, we will use the natural history study as the external control in the MOVE study. We expect to initiate our Phase 3 trial in 2017 and report data in 2020 with an interim read-out in 2019.

We are also planning for a trial which aims to determine if palovarotene can inhibit new HO formation after surgical excision of HO. Patients will be treated prophylactically and after surgery at specific previously locked joints, in an effort to prevent the re-growth of abnormal bone typically observed in FOP patients and to attempt to increase range of motion at such joints. We intend to discuss the details and timing of this trial with FDA in the future.

In parallel with our Phase 2 trials, we have also completed enrollment in a first of its kind natural history study with 114 patients worldwide to characterize the progression of FOP across numerous outcomes. This study is tracking new HO formation across the body using whole body CT scans (WBCTs) as well as measuring range of motion across all joints. Cross-sectional data indicates a strong correlation between losses in physical function with age. Also, the total body volume of HO in individual patients as well as the number of joints with heterotopic ossification shows strong correlations with these functional outcomes. The findings of this study have been instrumental in establishing that HO is a clinically meaningful endpoint in FOP. Further, given that patients in this study have not received palovarotene, they could be eligible to enroll in our planned registration trial for FOP and we anticipate that many of them will choose to do so.

Palovarotene for MO

Like FOP, MO, also called multiple hereditary exostoses, is an ultra-rare genetic disease of new bone formation in children, which is mediated by excess BMP signaling. Patients with MO develop multiple benign bone tumors, also known as osteochondromas (OCs) or exostoses, on bones. MO affects approximately 20 individuals per million lives, or approximately 150,000 globally, which is approximately 15 times greater than FOP. Patients suffer from substantial morbidities that worsen over time until they reach skeletal maturity. Since it is believed that the mutations which cause MO also result in excess BMP signaling, we believe palovarotene can also inhibit this pathway in MO.

We have generated pre-clinical data demonstrating that palovarotene inhibits the number of OCs by approximately 80% in an animal model of MO as compared to vehicle-treated animals. Based on our knowledge of the safety and tolerability profile of palovarotene and our pre-clinical animal model data, we are planning to submit an IND and initiate a placebo-controlled Phase 2/3 study of palovarotene in MO this year. We expect to report Phase 2/3 clinical data for this trial in 2020 with a potential interim read-out in 2019.

Palovarotene for Dry Eye Disease

We also believe that RARg agonists have great potential as inhibitors of BMP signaling in other indications. Palovarotene has been shown to exert multiple effects in various tissues including in ocular tissues, where RARg agonists generally demonstrate anti-fibrotic properties. As a result, we have conducted pre-clinical proof-of-concept studies in dry eye disease that show that an eye drop formulation of palovarotene can potently increase tear production and decrease corneal damage. Following the completion of these studies, we plan to initiate toxicity studies of an ophthalmologic formulation in order to satisfy the requirements for an investigational new drug (IND) submission, which is required to begin Phase 1 and 2 clinical trials in dry eye disease in 2018.

Other RARg Agonists

We are also focused on developing our RARg agonist platform beyond palovarotene for larger, related disease markets, such as in ankylosing spondylitis or trauma-induced HO. Ankylosing spondylitis is a type of arthritis associated with excess BMP signaling, which the National Institute of Health estimates affects greater than 500,000 people in the United States and represents a high unmet medical need. Other indications, such as those characterized by excessive fibrosis or scarring, are also potential target indications for RARg agonists. On the basis of our scientific know-how and other

3


 

clinical and commercial insights, a number of indications have been prioritized for animal model proof-of-concept studies in 2017 and 2018. Should these studies be successful, we plan to initiate the pre-IND activities necessary to initiate clinical trials in these new indications.

Our Strategy

We strive to become a leading fully-integrated biopharmaceutical company that provides disease modifying treatments to patients suffering from debilitating bone and other diseases with high unmet medical need. We are rapidly developing our lead product candidate, palovarotene, to treat FOP and MO. To achieve our goals, we are executing the following strategy:

Complete development and obtain regulatory approval for our lead product candidate, palovarotene, in FOP and MO. Following the completion of our Phase 2 double-blind, placebo-controlled clinical trial of palovarotene in FOP, we are planning to commence a global multi-site Phase 3 clinical trial for palovarotene in FOP in 2017. In addition, we are planning a study of palovarotene in subjects with FOP who will undergo surgical excision of HO. Following the completion of our pre-clinical proof-of-concept studies showing that palovarotene potently suppresses the number of OCs expressed in animal models of MO, and based on the safety and tolerability profile of palovarotene observed to date, we are planning to initiate a placebo-controlled Phase 2/3 study of palovarotene in MO in 2017. We believe that success in any one of our planned clinical trials can form the basis of FDA approval of palovarotene for the targeted indication. We expect to file for worldwide regulatory approvals of palovarotene in FOP and MO including in the United States, Europe and Japan after generating the relevant Phase 3 and Phase 2/3 clinical data, which we expect to read out in 2019 and 2020.

Independently commercialize palovarotene and improve patient care in FOP and MO. We intend to establish our own commercial organization and have begun to develop a global commercial plan under the leadership of our chief commercial officer. Our plan includes establishing the sales, marketing and reimbursement functions required to commercialize palovarotene in global markets. We actively collaborate with patient groups through a number of initiatives including participation in local meetings and educational initiatives such that we better understand the burdens and unmet needs that patients face, and so that we can better facilitate their access to palovarotene, should it be approved.

Develop palovarotene for other indications including dry eye disease. Palovarotene as a RARg agonist is an inhibitor of BMP signaling and has been shown to exert multiple effects in various tissues including bone, muscle and ocular tissues where it generally demonstrates anti-fibrotic properties. Following the completion of our pre-clinical proof-of-concept studies showing that an eye drop formulation of palovarotene can potently increase tear production and decrease corneal damage, we are initiating IND-enabling toxicity studies of an ophthalmologic formulation in order to begin Phase 1 and 2 clinical trials in dry eye disease in 2018.

Expand our RARg agonists platform. We believe that RARg agonists beyond palovarotene have great potential as inhibitors of BMP signaling in other indications and in particular in inhibiting HO in larger disease markets, such as ankylosing spondylitis or trauma-induced HO. As a result, we intend to further develop our RARg agonist platform beyond palovarotene. We are currently in the process of characterizing second generation RARg agonists recently licensed from Galderma.

Evaluate opportunities to expand our leadership in our areas of expertise. We may also selectively form collaborative alliances to expand our capabilities and product offerings into new therapeutic areas and potentially accelerate commercialization in select geographic markets. Additionally, we may pursue acquisition or in-licensing of product candidates, particularly in our core focus area of rare bone diseases.

Our Team

We have assembled a team of highly skilled and experienced employees, directors and consultants with broad capabilities in drug discovery, development, regulation and commercialization and particular expertise in orphan diseases. Seventy percent of our employees possess advanced scientific degrees. Our management team has substantial industry experience in the orphan disease space and has an average

4


 

of 24 years of industry experience, with a successful track record of developing and commercializing drug candidates such as Aldurazyme®, Cerezyme®, Fabrazyme® , Myozyme®, Soliris® and Vyndaqel®. Our board members include the former CEOs of companies that developed Synagis®, FluMist®, Gattex®, Natpara® and Strensiq®, the latter two drugs being for the treatment of rare bone diseases. We continue to leverage this specialized expertise and experience to rapidly pursue the development and commercialization of palovarotene in multiple indications. We are backed by a group of leading institutional life science investors, including OrbiMed, New Enterprise Associates, RA Capital Management, a fund managed by Janus Capital Management LLC, Rock Springs Capital, EcoR1 Capital, UCB Biopharma SPRL, BDC and Fonds de solidarité des travailleurs du Québec (F.T.Q).

Summary Risk Factors

Investing in our common shares involves a high degree of risk. You should carefully consider the risks described in “Risk Factors” before making a decision to invest in our common shares. If any of these risks actually occur, our business, financial condition and results of operations would likely be materially adversely affected. In such case, the trading price of our common shares would likely decline and you may lose part or all of your investment. Below is a summary of some of the principal risks we face:

 

 

our ability to generate revenue and become profitable;

 

 

the ability to obtain, on satisfactory terms or at all, the financing required to support operations, development, clinical trials, and commercialization of products;

 

 

the risks related to our heavy reliance on palovarotene, our only current product candidate;

 

 

the risks associated with the development of palovarotene and any future product candidate, including the demonstration of efficacy and safety;

 

 

the risks related to clinical trials including the risk of negative results, potential delays, cost overruns and potential adverse events or unacceptable side effects;

 

 

the risks of reliance on third-parties for the planning, conduct and monitoring of clinical trials and for the manufacture of clinical drug supplies and drug product;

 

 

potential changes in regulatory requirements, and delays or negative outcomes from the regulatory approval process;

 

 

our ability to successfully compete in our targeted markets, including the risk that competing therapies could emerge;

 

 

the risks related to healthcare reimbursement policies and potential healthcare reform;

 

 

our heavy dependence on licensed intellectual property, including our ability to source and maintain licenses from third-party owners;

 

 

the risk of patent or other intellectual property related litigation; and

 

 

the risks of adverse tax consequences for our U.S. shareholders if we are characterized as a passive foreign investment company (PFIC). We expect to qualify as a PFIC for our taxable year ending December 31, 2017 and, very possibly, for subsequent years.

Implications of Being an Emerging Growth Company and a Foreign Private Issuer

As a company with less than $1.07 billion in revenue during our most recently completed fiscal year as of the initial filing date of the registration statement of which this prospectus is a part, we qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended (the Securities Act) as modified by the Jumpstart our Business Startups Act of 2012 (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 that are not emerging growth companies. These provisions include an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.

We may take advantage of these exemptions for up to five years or such time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have $1.07 billion or more in annual revenues as of the end of our fiscal year, more than $700 million in

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market value of our stock held by non-affiliates as of the end of our second fiscal quarter, or we issue more than $1.0 billion of non-convertible debt securities over a three-year period. We may choose to take advantage of some but not all of these reduced disclosure obligations. If we do, the information that we provide shareholders may be different than you might get from other public companies in which you hold stock.

The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. We prepare our financial statements in accordance with IFRS as issued by the IASB, which make no distinction between public and private companies for purposes of compliance with new or revised accounting standards. As a result, the requirements for our compliance as a private company and as a public company are the same.

Upon consummation of this offering, we will report under the Securities Exchange Act of 1934, as amended (the Exchange Act) as a non-U.S. company with foreign private issuer status. As a foreign private issuer, we may take advantage of certain provisions in the Nasdaq Listing Rules that allow us to follow Canadian law for certain corporate governance matters. Even after we no longer qualify as an emerging growth company, as long as we qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:

 

 

the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;

 

 

the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time;

 

 

the rules under the Exchange Act requiring the filing with the U.S. Securities and Exchange Commission of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events;

 

 

the sections of the Exchange Act requiring U.S. GAAP financial statements (rather than financial statements pursuant to IFRS as issued by the IASB used by the Company); and

 

 

Regulation Fair Disclosure, or Regulation FD, which regulates selective disclosures of material information by issuers.

Both foreign private issuers and emerging growth companies are also exempt from certain more stringent executive compensation disclosure rules. Thus, even if we no longer qualify as an emerging growth company, but remain a foreign private issuer, we will continue to be exempt from the more stringent compensation disclosures required of companies that are neither an emerging growth company nor a foreign private issuer.

Corporate Information

Clementia Pharmaceuticals Inc. was incorporated under the Canada Business Corporations Act on November 5, 2010. The principal executive offices of Clementia Pharmaceuticals Inc. are currently located at 4150 Sainte-Catherine Street West, Suite 550, Montreal, Quebec, Canada H3Z 2Y5. Our telephone number is (514) 940-3600.

Clementia Pharmaceuticals Inc. has a wholly-owned subsidiary, Clementia Pharmaceuticals USA Inc., which was incorporated in the state of Delaware, with a registered office located at 275 Grove Street, Suite 2-400, Newton, Massachusetts, USA.

6


 

THE OFFERING

 

 

 

Common shares offered by us

 

7,150,000 shares (or 8,222,500 shares if the underwriters exercise their option to purchase additional shares in full)

Common shares to be outstanding immediately after this offering

 


29,676,584 shares (or 30,749,084 shares if the underwriters exercise their option to purchase additional shares in full)

Use of proceeds

 

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses payable by us, will be approximately $90.6 million, or approximately $104.6 million if the underwriters exercise their option to purchase additional shares in full, based on an assumed initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

 

 

We anticipate that we will use the net proceeds of this offering, together with our existing cash on hand, to fund an estimated $65.0 million in expenses primarily incurred in conducting a Phase 3 and additional clinical trials of palovarotene for the treatment of FOP, to fund an estimated $25.0 million in expenses incurred in conducting a Phase 2/3 trial of palovarotene for the treatment of MO, to fund an estimated $10.0 million in expenses incurred in conducting Phase 1 and Phase 2 clinical trials of palovarotene for the treatment of dry eye disease, and for working capital and other general corporate purposes. See “Use of Proceeds” for more information.

Proposed Nasdaq Global Market
symbol

 

“CMTA”

Risk factors

 

See “Risk Factors” beginning on page 10 of this prospectus for a discussion of factors you should consider before deciding to invest in our common shares.

The number of common shares to be outstanding after this offering is based on 22,526,584 of our common shares outstanding as of July 15, 2017 after giving effect to the automatic conversion of all outstanding shares of our Class A, Class B and Class C convertible and redeemable preferred shares, and excludes:

 

 

2,997,836 common shares issuable upon the exercise of options outstanding as of July 15, 2017 pursuant to our stock option plans, at a weighted-average exercise price of $2.48 per share; and

 

 

2,339,605 common shares available for future issuance under our stock option plans.

Except as otherwise noted or the context otherwise requires, all information in this prospectus:

 

 

assumes no issuance or exercise of options after July 15, 2017;

 

 

reflects the automatic conversion of all outstanding shares of our Class A, Class B and Class C convertible preferred shares into 20,076,224 shares of common shares;

 

 

reflects a 11.99-for-1 stock split, which was effected on July 19, 2017 and all issued and outstanding common and preferred share numbers contained in this prospectus have been adjusted to reflect the stock split;

 

 

assumes the amendment of our articles of incorporation and the amendment and restatement of our by-laws in connection with the consummation of this offering; and

 

 

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

7


 

SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables present our historical summary consolidated financial data for the periods, and as of the dates, indicated. Our consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB.

We derived the consolidated statements of net loss and comprehensive loss data for the years ended December 31, 2016, 2015 and 2014 from our audited consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus. We derived the consolidated statements of net loss and comprehensive loss data for the three-month periods ended March 31, 2017 and 2016 and the consolidated statement of financial position data as of March 31, 2017 from our unaudited interim condensed consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the financial statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and the results for the three-month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the full year or any other period.

You should read this summary consolidated financial data together with our consolidated financial statements and related notes and the information under the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Net Loss and Comprehensive Loss Data

 

Three-months Ended
March 31,

 

Year Ended
December 31,

 

2017

 

2016

 

2016

 

2015

 

2014

 

 

(in thousands, except share and per share data)

Expenses

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

$

 

3,408

 

 

 

$

 

3,669

 

 

 

$

 

16,852

 

 

 

$

 

14,396

 

 

 

$

 

7,797

 

Investment tax credits

 

 

 

(50

)

 

 

 

 

(47

)

 

 

 

 

(139

)

 

 

 

 

(165

)

 

 

 

 

(214

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,358

 

 

 

 

3,622

 

 

 

 

16,713

 

 

 

 

14,231

 

 

 

 

7,583

 

General and administrative

 

 

 

1,668

 

 

 

 

1,080

 

 

 

 

3,406

 

 

 

 

5,479

 

 

 

 

2,266

 

Interest income

 

 

 

(81

)

 

 

 

 

(103

)

 

 

 

 

(399

)

 

 

 

 

(109

)

 

 

 

 

(19

)

 

Financial expenses

 

 

 

36,347

 

 

 

 

1,432

 

 

 

 

37,646

 

 

 

 

56,140

 

 

 

 

2,364

 

Income tax expense

 

 

 

45

   

 

 

33

 

 

 

 

146

 

 

 

 

156

 

 

 

 

95

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and comprehensive loss

 

 

$

 

(41,337

)

 

 

 

$

 

(6,064

)

 

 

 

$

 

(57,512

)

 

 

 

$

 

(75,897

)

 

 

 

$

 

(12,289

)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share applicable to common shareholders—basic and diluted

 

 

$

 

(17.48

)

 

 

 

$

 

(2.58

)

 

 

 

$

 

(24.46

)

 

 

 

$

 

(33.07

)

 

 

 

$

 

(5.70

)

 

Weighted average number of common shares used in net loss per share applicable to common shareholders—basic and diluted

 

 

 

2,364,200

   

 

 

2,351,347

   

 

 

2,351,347

   

 

 

2,295,402

   

 

 

2,156,689

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

$

 

(0.23

)

 

 

 

 

 

$

 

(0.92

)

 

 

 

 

 

Pro forma weighted average number of common shares used in net loss per share applicable to common shareholders—basic and diluted (unaudited)(1)

 

 

 

21,731,287

   

 

 

 

 

21,586,161

   

 

 

 

 

 

(1)

 

See the section titled “Selected Consolidated Financial Data” for a discussion of the pro forma weighted-average common shares and pro forma net loss used to compute pro forma net loss per share

8


 

The following table sets forth summary statement of financial position data as of March 31, 2017:

 

 

on an actual basis, which retrospectively reflects a 11.99-for-1 stock split of our common shares;

 

 

on a pro forma basis to give effect to the conversion of all outstanding Class A, Class B and Class C preferred shares into 20,076,224 common shares and the resulting re-measurement of the embedded derivative liability, the reclassifications of the original stated capital of the preferred shares into capital stock, the reclassification of the excess of the total carrying value of the preferred shares over the stated capital of the preferred shares and embedded derivative into contributed surplus, and the elimination of the contributed surplus thus created against deficit, as further described in the section titled “Capitalization”; and

 

 

on a pro forma basis as adjusted to give further effect to our issuance and sale of 7,150,000 common shares in this offering at an assumed initial public offering price of $14.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting underwriting discounts and estimated offering expenses payable by us.

 

 

 

 

 

 

 

Consolidated Balance Sheet Data

 

As at
March 31,
2017

 

March 31,
2017
Pro Forma
(unaudited)

 

March 31,
2017
Pro Forma
As Adjusted
(unaudited)

 

 

(in thousands)

Cash and short-term investments

 

 

$

 

43,722

   

 

$

 

43,722

   

 

$

 

134,315

 

Preferred share and embedded derivative liabilities

 

 

 

231,916

   

 

   

 

 

Total equity

 

 

 

(189,899

)

 

 

 

 

42,017

   

 

 

132,610

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share would increase (decrease) the amount of cash and short-term investments, working capital, total assets and total equity by approximately $6.6 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1,000,000 shares in the number of common shares offered by us would increase (decrease) the amount of cash and short-term investments, working capital, total assets and total equity by approximately $13.0 million, assuming that the assumed initial public offering price remains the same and after deducting underwriting discounts and estimated offering expenses payable by us. The pro forma and pro forma as adjusted information discussed above is illustrative only and will change based on the actual initial public offering price and other terms in this offering determined at pricing.

9


 

RISK FACTORS

Investing in our common shares involves a high degree of risk. You should carefully consider the following risks and uncertainties, together with all other information in this prospectus, including our financial statements and related notes thereto, before investing in our common shares. Any of the risk factors we describe below could adversely affect our business, financial condition or results of operations. The market price of our common shares could decline if one or more of these risks or uncertainties occur, causing you to lose all or part of the money you paid to buy our common shares. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business. Certain statements below are forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements” in this prospectus.

Risks Related To Our Financial Position and Need For Capital

We are a clinical stage biopharmaceutical company with a limited operating history and have not generated any revenue from product sales. We have incurred significant operating losses and negative operating cash flows since our inception and anticipate that we will incur continued losses for the foreseeable future.

We are a clinical stage company with a limited operating history on which to base your investment decision. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We were incorporated in November 2010. Our operations to date have been limited primarily to organizing and staffing our Company, raising capital and conducting research and development activities for palovarotene and any other product candidate. We have never generated any revenue from product sales. We have not obtained regulatory approvals for palovarotene or any other product candidate.

We have funded our operations to date primarily through proceeds from issuances of redeemable convertible preferred stock. From our inception through March 31, 2017, we received gross proceeds of $102.2 million from the sale of our convertible and redeemable preferred shares. As of March 31, 2017 our cash and short-term investments were $43.7 million. We have incurred net losses in each year since our inception. Our net losses were $41.3 million for the three-month period ended March 31, 2017 and $57.5, $75.9 and $12.3 million for the years ended December 31, 2016, 2015 and 2014, respectively, and our negative operating cash flows were $5.9 million for the three-month period ended March 31, 2017 and $18.8, $17.6 and $9.7 million for the years ended December 31, 2016, 2015 and 2014, respectively. Substantially all of our operating losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to incur increasing levels of operating losses over the next several years and for the foreseeable future. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ deficit and working capital. In addition, if we obtain marketing approval for palovarotene or any other product candidate, we will incur significant sales, marketing and outsourced-manufacturing expenses. Once we are a public company, we will incur additional costs associated with operating as a public company. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or when we will become profitable, if at all. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.

Our ability to become profitable depends upon our ability to generate revenue. To date, we have not generated any revenue from palovarotene or any other product candidate and we do not know when, or if, we will generate any revenue. We do not expect to generate significant revenue unless and until we obtain marketing approval of, and begin to sell, palovarotene. Our ability to generate revenue depends on a number of factors, including, but not limited to, our ability to:

 

 

initiate and successfully complete clinical trials that meet their clinical endpoints;

 

 

initiate and successfully complete all safety studies required to obtain U.S. and foreign marketing approval for palovarotene or any other product candidates;

10


 

 

 

commercialize palovarotene or any other product candidates, if approved, by developing a sales force or entering into collaborations with third parties; and

 

 

achieve market acceptance of palovarotene or any other product candidates in the medical community and with third-party payors.

Absent our entering into a collaboration or partnership agreement, we expect to incur significant sales and marketing costs as we prepare to commercialize palovarotene or any other product candidates. Even if we initiate and successfully complete pivotal clinical trials of palovarotene or any other product candidates, and any such product candidate is approved for commercial sale, and despite expending these costs, our product candidate may not be a commercially successful drug. We may not achieve profitability soon after generating product sales, if ever. If we are unable to generate product revenue, we will not become profitable and may be unable to continue operations without continued funding.

Even if this offering is successful, we expect to need to raise additional funding, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations.

We are currently advancing palovarotene through clinical development. Developing our product candidates is expensive, and we expect our research and development and commercialization expenses to increase substantially in connection with our ongoing activities, particularly as we advance palovarotene in clinical trials. Depending on the status of regulatory approval or, if approved, commercialization of palovarotene or any other product candidates, as well as the progress we make in selling palovarotene or any other product candidates, we will require additional capital to fund operating needs thereafter. We may also need to raise additional funds sooner if we choose to pursue additional indications and/or geographies for palovarotene or any other product candidates or otherwise expand more rapidly than we presently anticipate.

As of March 31, 2017, our cash and short-term investments were $43.7 million. We expect that our existing cash and short-term investments will be sufficient to fund our operating expenses for at least the twelve months following March 31, 2017. We estimate that the net proceeds from this offering will be approximately $90.6 million, based on the assumed initial public offering price of $14.00 per share which is the mid-point of our estimated price range, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. In any event, we will require additional capital to obtain regulatory approval for, and to commercialize, palovarotene or any other product candidate. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations.

Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize palovarotene or any other product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all.

If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or the commercialization of any product candidates, or be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations.

11


 

Risks Related To Product Development, Regulatory Approval and Commercialization

We depend heavily on the success of our only current product candidate, palovarotene, for which as of the date of this prospectus, we have completed a Phase 2 clinical trial and we are planning to initiate one registration trial and one Phase 2/3 clinical trial in 2017. We cannot be certain that we will be able to develop, obtain regulatory approval of, or successfully commercialize palovarotene for FOP, MO or any other indication.

We currently have no drug products for sale and may never be able to successfully develop drug products. We have invested the vast majority of our efforts and resources into the development of our only current product candidate, palovarotene, for the treatment of FOP and MO. Our business thus depends heavily on the successful non-clinical and clinical development, regulatory approval and commercialization of palovarotene, for which we are planning two clinical trials for the treatment of FOP and a clinical trial for the treatment of MO.

Palovarotene will require substantial additional clinical development, testing and regulatory approval before we may be permitted to commence its commercialization. The clinical trials of our product candidate are, and the manufacturing and marketing of our product candidate will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United States and in other countries where we intend to test and, if approved, market this or any other product candidate. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through clinical trials that the applicable product candidate is safe and effective for use for the target indication. Drug development is a long, expensive and uncertain process, and delay or failure can occur at any stage of any of our clinical trials. This process can take many years and may include post-marketing studies and surveillance, which may require the expenditure of substantial resources beyond the proceeds we raise in this offering. Of the large number of drugs in development in the United States at any time, only a small percentage will successfully complete the U.S. Food and Drug Administration (FDA) regulatory approval process and will be commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development and clinical trials, we cannot assure you that our product candidate will be successfully developed or commercialized.

We are not permitted to market our product candidate in the United States until we receive approval of a new drug application (NDA) from the FDA, or market in any foreign countries until we receive the requisite approval from such countries. We are currently planning to initiate a Phase 3 clinical trial to study safety, tolerability and efficacy of palovarotene in patients with FOP. We expect that the FDA will require us to complete one Phase 3 trial in order to submit an NDA for palovarotene as a treatment for FOP patients. We are also currently planning a Phase 2/3 trial using palovarotene for the treatment of MO. While the FDA has recommended that we conduct a Phase 2 trial to inform the optimal dose and the appropriate choice of endpoints in MO followed by a Phase 3 trial, we believe that this Phase 2/3 study may if it provides statistically strong evidence of an important clinical benefit, be sufficient for us to file an NDA for palovarotene for MO. However there is no guarantee that we will not be required to perform an additional pivotal trial of palovarotene in MO in order to gain approval. Moreover, the FDA has stated their preference for a Phase 2 trial followed by a Phase 3 trial. We also intend to discuss the details and timing of a clinical trial in surgical excision of HO using palovarotene with the FDA. The FDA has indicated that we need additional positive data from our trials in FOP prior to commencing the trial in surgical excision. We cannot be certain that the FDA will not require that we conduct additional pivotal trials before we can submit an NDA for palovarotene for any indication. We have only sought general feedback to date from the FDA on what would be required in a Phase 3 clinical trial of palovarotene for the treatment of FOP and a Phase 2/3 clinical trial in MO. We intend to discuss our protocols for our proposed clinical trials of palovarotene for FOP and MO prior to initiating the trials. We cannot be certain that the FDA will agree on all aspects of the design of our clinical trials. For example, we plan to have the FOP natural history study serve as the control group in our Phase 3 clinical trial of palovarotene for the treatment of FOP; however, the FDA has indicated that it would prefer we use a placebo control in the study and that the acceptability of the natural history study as the control would be considered during the review of a marketing application.

12


 

The FDA may require that we conduct additional toxicity studies and may also require us to conduct additional non-clinical studies before submitting an NDA for palovarotene.

Obtaining approval of an NDA is a complex, lengthy, expensive and uncertain process, and the FDA may delay, limit or deny approval of our product candidate for many reasons, including, among others:

 

 

we may not be able to demonstrate that palovarotene or any other product candidate is safe and effective in treating FOP to the satisfaction of the FDA;

 

 

the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA for marketing approval; for example, FDA may not agree that the magnitude of change in HO volume is clinically meaningful without the support of secondary endpoints;

 

 

the FDA may disagree with the number, design, size, conduct or implementation of our clinical trials;

 

 

the FDA may require that we conduct non-clinical studies and additional clinical trials;

 

 

the FDA may not approve the formulation, labeling or specifications of palovarotene or any other product candidate;

 

 

the contract research organizations (CROs) that we retain to conduct our non-clinical studies and clinical trials may take actions outside of our control that adversely impact such studies or trials;

 

 

the FDA may find the data from non-clinical studies and clinical trials insufficient to demonstrate that palovarotene or any other product candidate’s clinical and other benefits outweigh its safety risks;

 

 

the FDA may disagree with our interpretation of data from our non-clinical studies or clinical trials;

 

 

the FDA may not accept some or all of the data generated at our non-clinical studies and clinical trial sites;

 

 

if our NDA, if and when submitted, is reviewed by an advisory committee, the FDA may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, non-clinical studies or additional clinical trials, limitations on approved labeling or distribution and use restrictions;

 

 

the FDA may determine that the manufacturing processes or facilities of third-party manufacturers with which we contract do not conform to applicable requirements, including current Good Manufacturing Practices (cGMPs); or

 

 

the FDA may change its approval policies or adopt new regulations.

Any of these factors and others, many of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully market palovarotene or any other product candidate. Any such setback in our pursuit of regulatory approval would have a material adverse effect on our business and prospects.

The number of patients suffering from FOP and MO is small and has not been established with precision. If the actual number of patients with FOP or MO is smaller than we anticipate, we may encounter difficulties in enrolling patients in our clinical trials, thereby delaying or preventing development of palovarotene or any other product candidate, and if palovarotene or any other product candidate is approved, our revenue and ability to achieve profitability may be materially adversely affected.

There is no precise method of establishing the actual number of patients with FOP or MO in any geography over any time period. We estimate that the number of individuals affected by FOP is approximately 1.3 individuals per million lives globally and the number of individuals affected by MO is approximately 20 individuals per million lives worldwide. If we are not able to identify and recruit a sufficient number of patients, we will have difficulty completing our clinical trials. Moreover, other

13


 

companies are trying to recruit patients for their trials which may negatively impact our ability to recruit patients for our trials. Because the estimated number of patients is so small, and particularly if the actual number of patients with FOP or MO is lower than we believe, we may experience difficulty in enrolling patients in our clinical trials, thereby delaying development of palovarotene.

Further, if palovarotene or any other product candidate is approved, the markets for FOP or MO could be smaller than we anticipate, which could limit our ability to achieve profitability.

If serious adverse events or unacceptable side effects are identified during the development of palovarotene or at any other time, we may need to delay, limit or terminate our clinical development activities, and such adverse events or unacceptable side effects may negatively impact the regulatory approval and commercial profile of palovarotene, and have other significant negative consequences.

Clinical trials by their nature utilize a sample of the potential patient population. Accordingly, any rare and severe side effects of palovarotene may be uncovered only in later stages of our product development activities or only in subsequent trials that we may conduct. Many product candidates that initially showed promise in early stage testing have later been found to cause side effects that prevented their further development. We have observed an increase in specific mucocutaneous side effects when higher doses of palovarotene are administered. These included pruritus (or itchiness), generalized pruritus, excoriation (or skin abrasion), rash and alopecia (or hair loss), none of which were considered severe. These mucocutaneous side-effects required dose de-escalations in approximately 20% of subjects due primarily to dry skin, alopecia and pruritus. We are planning to evaluate in our registration trial chronic dosing for a duration that will support lifetime chronic dosing of palovarotene and as a result the severity of side effects observed to date may increase and new side effects may emerge. Since palovarotene is a retinoid and therefore a teratogen, women who are or expect to become pregnant will not be able to take palovarotene and major fetal abnormalities may occur if it is taken, as any fetus that is exposed can be affected. Moreover, the development of palovarotene or any other product candidate may cause certain undesirable side effects in certain patient populations or have characteristics that are unexpected, and we may need to abandon development or limit development to more narrow 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, any of which could adversely affect our business, prospects, financial condition and results of operations.

Further, it is possible that rare and severe side effects of palovarotene or any other product candidate may only be uncovered after palovarotene or any other product candidate receives marketing approval. This would result in a number of potentially significant negative consequences, including:

 

 

regulatory authorities may withdraw or limit their approval of such product candidate;

 

 

regulatory authorities may require the addition of labeling statements, such as a “boxed” warning or a contraindication; for example, palovarotene, like all retinoids, is a teratogen and its labeling will communicate that it must not be taken by pregnant women or women who may become pregnant;

 

 

we may be required to change the way such product candidate is distributed or administered, conduct additional clinical trials or change the labeling of the product candidate;

 

 

we may be subject to regulatory investigations and government enforcement actions;

 

 

we may decide to remove such product candidate from the marketplace;

 

 

we could be sued and held liable for injury caused to individuals exposed to or taking our product candidate; or

 

 

our reputation may suffer.

We believe that any of such events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercializing palovarotene or any other product candidate and significantly impact our ability to successfully commercialize palovarotene or any other product candidate and generate revenues.

14


 

Results from early clinical trials of palovarotene or any other product candidate are not necessarily predictive of the results of later non-clinical studies and clinical trials of palovarotene or any other product candidate. If later clinical trials are not successful, we will not be able to successfully develop, obtain regulatory approval for and commercialize palovarotene or any other product candidate.

Any trends we observe and results we obtain from our early clinical trials of palovarotene or any other product candidate may not necessarily be predictive of the results from later clinical trials. For example, as is common with Phase 2 trials, particularly with the first clinical trials to be conducted in a patient population, we explored numerous endpoints and analyzed the data from our Phase 2 clinical trials of palovarotene in a number of ways. Product candidates such as palovarotene in Phase 3 clinical trials may fail to demonstrate sufficient efficacy despite having progressed through initial clinical trials, even if certain analyses of primary or secondary endpoints or cross-study comparisons of pooled results in those early trials showed trends toward efficacy. Much of the data we present on the use of palovarotene for the treatment of FOP is drawn from the results of multiple clinical trials which have been pooled and then analyzed. While we believe this data is useful in informing the design of future clinical trials in palovarotene, cross-study comparisons of pooled results involve the inherent bias of post-hoc manipulation of data and choice of analytical methods, as well as methodological issues surrounding heterogeneity among studies contributing to the analyses; therefore, it is important to view such results in light of the totality of all available information, such as individual study results on pre-specified analyses of endpoints. Prior to obtaining approval for palovarotene, the results of our registration trials will have to demonstrate statistically significant improvement in the pre-specified primary endpoint in the applicable registration trial. To date, our clinical trials of palovarotene have not demonstrated statistically significant results. Further, different results may be achieved depending upon whether the Per Protocol (PP) population is used to report results or the Full Analysis Set or an Intent-to-Treat (ITT) population is used. While we believe the PP analysis may be more applicable for our Phase 2 studies because their primary purpose is in determining the biological effect of palovarotene such as by eliminating data relating to study participants that did not adhere to the trial protocol, we expect that the primary analysis for any registration trial would need to show efficacy on the full analysis set population or an ITT population. Also, our later-stage clinical trials could differ in significant ways from our Phase 2 clinical trials of palovarotene, which may cause the outcome of these later-stage trials to differ from our earlier stage clinical trials. These differences may include changes to inclusion and exclusion criteria, efficacy endpoints and statistical design. For example, we expect our Phase 3 clinical trial in FOP to implement a chronic dosing regimen with increased dosing in the case of flare-ups and a primary endpoint of new HO volume as measured by whole body CT scans. This dosing regimen and primary endpoint of annualized change in new HO volume is different from those of our ‘201 study and Part A of our ‘202 study, and different from the data we present herein on the use of palovarotene for the treatment of FOP; this Phase 3 primary endpoint is a continuous variable rather than a discrete, responder analysis, as was performed in our ‘201 study and Part A of our ‘202 study. These differences may have an effect on the ability of our Phase 2 clinical trials to predict the outcome of our Phase 3 clinical trial. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in early-stage development, and we cannot be certain that we will not face similar setbacks. These setbacks have been caused by, among other things, non-clinical findings made while clinical trials were underway or safety or efficacy observations made in non-clinical studies and clinical trials, including previously unreported adverse events. Moreover, non-clinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in non-clinical studies and clinical trials nonetheless failed to obtain FDA approval. If we fail to produce positive results in our clinical trials of palovarotene or any other product candidate, the development timeline and regulatory approval and commercialization prospects for palovarotene or any other product candidate, and, correspondingly, our business and financial prospects, would be materially adversely affected.

Failures or delays in the commencement or completion of our planned clinical trials of palovarotene or any other product candidate could result in increased costs to us and could delay, prevent or limit our ability to generate revenue and continue our business.

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We believe we will need to complete at least one additional trial prior to the submission of an NDA for palovarotene. Successful completion of our clinical trials is a prerequisite to submitting an NDA to the FDA and, consequently, the ultimate approval and commercial marketing of palovarotene. We are currently planning to initiate one registration trial and one Phase 2/3 clinical trial in 2017; however, we do not know if these trials or any future clinical trials will begin or be completed on schedule, if at all, as the commencement and completion of clinical trials can be delayed or prevented for a number of reasons, including, among others:

 

 

the FDA may deny permission to proceed with our planned clinical trials or any other clinical trials we may initiate, or may place a clinical trial on hold;

 

 

delays in filing or obtaining permission to proceed under additional investigational new drug applications (INDs) that may be required including the IND we plan to file for palovarotene for the treatment of MO;

 

 

delays in reaching or failing to reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

 

inadequate quantity or quality of palovarotene or any other product candidate or other materials necessary to conduct clinical trials, for example delays in the manufacturing of sufficient supply of finished drug product;

 

 

difficulties obtaining Institutional Review Board (IRB) approval to conduct a clinical trial at a prospective site or sites;

 

 

challenges in recruiting and enrolling patients to participate in clinical trials, including the small size of the patient population, acute nature of the flare-ups in and chronic nature of the disease FOP, the proximity of patients to trial sites, eligibility criteria for the clinical trial, the nature of the clinical trial protocol and competition from other clinical trial programs for similar indications;

 

 

severe or unexpected drug-related side effects experienced by patients in a clinical trial;

 

 

delays in validating any endpoints utilized in a clinical trial that we may choose to use, particularly any clinical outcome measures, such as the FOP-Physical Function Questionnaire that we have developed;

 

 

the FDA may disagree with our clinical trial design and our interpretation of data from clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials;

 

 

reports from non-clinical or clinical testing of other FOP and MO treatments that raise safety or efficacy concerns; and

 

 

difficulties retaining patients who have enrolled in a clinical trial but may be prone to withdraw due to rigors of the clinical trials, lack of efficacy, side effects, personal issues or loss of interest.

Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, the FDA, the IRBs at the sites where the IRBs are overseeing a clinical trial, a data and safety monitoring board, overseeing the clinical trial at issue or other regulatory authorities due to a number of factors, including, among others:

 

 

failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

 

 

inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities that reveals deficiencies or violations that require us to undertake corrective action, including the imposition of a clinical hold;

 

 

unforeseen safety issues, adverse side effects or lack of effectiveness;

 

 

changes in government regulations or administrative actions;

 

 

problems with clinical supply materials; and

 

 

lack of adequate funding to continue clinical trials.

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Product development costs for palovarotene for FOP, MO or for any other future indications we may pursue or for any other product candidates we may develop in the future will increase if we have delays in testing, or if we need to perform more or larger clinical studies than planned. If we experience delays in completion of any of our clinical trials, or if we, the FDA, other regulatory authorities, IRBs or other reviewing entities, or any of our clinical trial sites suspend or terminate any of our clinical trials of palovarotene for any indication, its commercial prospects may be harmed and our ability to generate product revenues will be delayed, if we are able to generate product revenue at all. Any delays in completing our clinical trials will increase our costs, slow down our development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, termination or suspension of, or a delay in the commencement or completion of, clinical trials may also ultimately lead to the denial or even withdrawal of regulatory approval of palovarotene for any indication. In addition, if one or more clinical trials are delayed, our competitors may be able to bring products to market before we do, and the commercial viability of palovarotene could be significantly reduced.

We have never completed a Phase 3 clinical trial or registration trial, or submitted an NDA before and may be unable to do so for palovarotene.

The conduct of Phase 3 clinical trials and registration trials, and the submission of a successful NDA is a complicated process. We have never conducted a Phase 3 clinical trial or registration trial before, have limited experience in preparing and submitting regulatory filings, and have not submitted an NDA before. Consequently, we may be unable to successfully and efficiently execute and complete these planned clinical trials in a way that leads to NDA submission and approval of palovarotene. We may require more time and incur greater costs than our competitors and may not succeed in obtaining regulatory approvals of drug candidates that we develop. Failure to commence or complete, or delays in, our planned clinical trials would prevent or delay commercialization of palovarotene.

Potential changes in regulatory requirements, FDA guidance or unanticipated events during clinical trials of palovarotene or any other product candidate may result in changes to clinical trial protocols or additional non-clinical studies and clinical trial requirements, which could result in increased costs to us and could delay our development timeline.

Changes in regulatory requirements, FDA guidance or unanticipated events during our clinical trials may force us to amend clinical trial protocols or cause the FDA to impose new or additional clinical trial requirements. For example, the endpoints in our clinical trials may change. Based on our discussions with the FDA to date, the FDA has indicated that new HO volume is a clinically meaningful outcome for our Phase 3 clinical trial for palovarotene in FOP provided we pre-specify the magnitude of treatment effect and support the HO findings with secondary endpoints. However, there can be no assurance that the FDA may not later determine that mean new HO volume does not qualify as a clinically meaningful endpoint for our Phase 3 clinical trial for palovarotene. Further, we have had preliminary discussions with the FDA regarding endpoints related to our Phase 2/3 clinical trial in MO and we cannot be certain that the proposed study design will be acceptable to the FDA or that additional clinical studies will not be required. We have not yet discussed with the FDA our clinical trial for surgical release in FOP.

Amendments or changes to our clinical trial protocols would require resubmission to the FDA and IRBs for review and approval, which may adversely impact the cost, timing or successful completion of clinical trials. If we experience delays completing, or if we terminate, any of our clinical trials, or if we are required to conduct non-clinical studies or additional clinical trials, the commercial prospects for palovarotene and any other product candidate may be harmed and our ability to generate product revenue will be delayed, if we are able to generate product revenue at all.

We rely, and expect that we will continue to rely, on third parties to conduct clinical trials for palovarotene and any other product candidate. If these third parties do not successfully carry out their contractual duties or fail to meet expected deadlines, we may not be able to obtain regulatory approval

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for or commercialize palovarotene and any other product candidate and our business could be substantially harmed.

We do not have the ability to independently conduct clinical trials. We rely on universities, contract laboratories and other third parties, such as CROs, to conduct clinical trials on palovarotene and any other product candidate. We enter into agreements with third-party CROs to provide monitors for and to manage data for our ongoing clinical trials. We rely heavily on these parties for execution of clinical trials for palovarotene and any other product candidate and control only certain aspects of their activities. As a result, we have less direct control over the conduct, timing and completion of these clinical trials and the management of data developed through clinical trials than would be the case if we were relying entirely upon our own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside parties may, among other things:

 

 

have staffing difficulties;

 

 

fail to comply with contractual obligations;

 

 

experience regulatory compliance issues;

 

 

undergo changes in priorities or become financially distressed; or

 

 

form relationships with other entities, some of which may be our competitors.

These factors may materially adversely affect the willingness or ability of third parties to conduct our clinical trials and may subject us to unexpected cost increases that are beyond our control. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific requirements and standards, and our reliance on CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with regulations and guidelines, including current Good Clinical Practices (cGCPs) for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the trial patients are adequately informed of the potential risks of participating in clinical trials. These regulations and standards are enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA enforces cGCP regulations and standards through periodic inspections of clinical trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. In addition, our clinical trials must be conducted with product candidates produced under cGMPs regulations and will require a large number of test patients. Our failure or the failure of our CROs to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement action up to and including civil and criminal penalties.

Although we design our clinical trials for palovarotene and will do so for any future product candidate, CROs conduct all of the clinical trials. As a result, many important aspects of our drug development programs are outside of our direct control. In addition, the CROs may not perform all of their obligations under arrangements with us or in compliance with regulatory requirements, but we remain responsible and are subject to enforcement action that may include civil penalties up to and including criminal prosecution for any violations of FDA laws and regulations during the conduct of our clinical trials. If the CROs do not perform clinical trials in a satisfactory manner, breach their obligations to us or fail to comply with regulatory requirements, the development and commercialization of palovarotene and any other product candidates may be delayed or our development program materially and irreversibly harmed. We cannot control the amount and timing of resources these CROs devote to our program or our clinical products. If we are unable to rely on clinical data collected by our CROs, we could be required to repeat, extend the duration of, or increase the size of our clinical trials and this could significantly delay commercialization and require significantly greater expenditures.

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If any of our relationships with these third-party CROs terminates, we may not be able to enter into arrangements with alternative CROs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, any clinical trials such CROs are associated with may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize palovarotene and any other product candidate. As a result, we believe that our financial results and the commercial prospects for palovarotene and any other product candidate in the subject indication would be harmed, our costs could increase and our ability to generate revenue could be delayed.

Sales of counterfeit palovarotene or unauthorized sales of palovarotene may have a material adverse effect on our revenues, business, results of operations and damage our brand and reputation.

Palovarotene may become subject to competition from counterfeit pharmaceutical products, which are pharmaceutical products sold under the same or very similar brand names and/or having a similar appearance to genuine products, but which are sold without proper licenses or approvals. Such products divert sales from genuine products, often are of lower cost, often are of lower quality (having different ingredients or formulations, for example), and have the potential to damage the reputation for quality and effectiveness of the genuine product.

Obtaining regulatory approval for palovarotene is a complex and lengthy process. If during the period while the regulatory approval is pending illegal sales of counterfeit palovarotene begin, consumers may buy such counterfeit palovarotene, which could have an adverse impact on our revenues, business and results of operations. In addition, if illegal sales of counterfeit palovarotene result in adverse side effects to consumers, we may be associated with any negative publicity resulting from such incidents.

Although pharmaceutical regulation control and enforcement systems throughout the world have been increasingly active in policing counterfeit pharmaceuticals, we may not be able to prevent third parties from manufacturing, selling or purporting to sell counterfeit products competing with our product candidate.

Further, we are aware that third parties are manufacturing unauthorized palovarotene for research use, and it is possible that unauthorized sales of palovarotene may be made through such channels without our knowledge.

The existence and any increase in production or sales of counterfeit palovarotene or unauthorized palovarotene could negatively impact our revenues, brand reputation, business and results of operations.

We rely completely on one third-party supplier to manufacture the active pharmaceutical ingredient (API) for palovarotene and another third party supplier to manufacture final drug product, and we intend to rely on third parties to produce non-clinical, clinical and commercial supplies of any future product candidates.

We do not currently have, nor do we plan to acquire, the infrastructure or capability to internally manufacture our clinical drug supply of palovarotene, or any future product candidates, for use in the conduct of our non-clinical studies and clinical trials, and we lack the internal resources and the capability to manufacture any product candidates on a clinical or commercial scale. We currently have the API for palovarotene manufactured by one supplier and final drug product supplied by another supplier. At this time, we have not identified secondary sources of clinical supplies of palovarotene, and identifying an additional manufacturer would require significant delay and likely significant additional cost.

The facilities used by contract manufacturers to manufacture the active pharmaceutical ingredient and final drug product will generally be required to complete a pre-approval inspection by the FDA and other comparable foreign regulatory agencies to assess compliance with applicable requirements, including cGMPs, after we submit our NDA or relevant foreign regulatory submission to the applicable regulatory agency.

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We do not control the manufacturing process of, and are completely dependent on, our contract supplier to comply with cGMPs for manufacture of the active pharmaceutical ingredient for our clinical trials, and upon another supplier for manufacture of final drug product. These manufacturers must successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or applicable foreign regulatory agencies. In addition, although we have no direct control over these manufacturers’ ability to maintain adequate quality control, quality assurance and qualified personnel, we are responsible for ensuring that our materials and product candidates are manufactured in accordance with cGMPs. Furthermore, these manufacturers are engaged with other companies to supply and/or manufacture materials or products for such companies, which exposes our manufacturers to regulatory risks for the production of such materials and products. As a result, failure to satisfy the regulatory requirements for the production of those materials and products may affect the status of their facilities generally. If the FDA or an applicable foreign regulatory agency determines now or in the future that these facilities for the manufacture of our product candidate are noncompliant, any pending NDAs or other applications for marketing authorization may not be approved until the facilities have a compliance status that is acceptable to FDA or an applicable foreign regulatory agency. In such case, we may need to find alternative manufacturing facilities, which would adversely impact our ability to develop, obtain regulatory approval for or market palovarotene and any future product candidate. Our reliance on these manufacturers also exposes us to the possibility that they, or third parties with access to their facilities, will have access to and may appropriate our trade secrets or other proprietary information.

We do not have long-term supply agreements in place with any party, and each batch of palovarotene is individually contracted under a quality and supply agreement. If we engage new contractors, such contractors must complete an inspection by the FDA and other applicable foreign regulatory agencies. We plan to continue to rely upon the same manufacturers and, potentially, collaboration partners to manufacture commercial quantities of palovarotene, if approved.

If we are unable to obtain the supplies we need at a reasonable price or on a timely basis, it could have a material adverse effect on our ability to complete the development of palovarotene or, if we obtain regulatory approval for palovarotene, to properly commercialize it.

Even though we have obtained orphan drug designation for palovarotene as a treatment for FOP, there may be limits to the regulatory exclusivity afforded by such designation.

Even though we obtained orphan drug designation in July 2014 for palovarotene for treatment of FOP by the FDA and the EMA, there are limitations to exclusivity afforded by such designation. In the United States, the company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition receives orphan drug marketing exclusivity for that drug for a period of seven years. This orphan drug exclusivity prevents the FDA from approving another application, including a full NDA to market the same drug for the same orphan indication, except in very limited circumstances, including when the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. For purposes of small molecule drugs such as palovarotene, the FDA defines “same drug” as a drug that contains the same active moiety and is intended for the same use as the drug in question. To obtain orphan drug exclusivity for a drug that shares the same active moiety as an already approved drug, it must be demonstrated to the FDA that the drug is safer or more effective than the approved orphan designated drug, or that it makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition or if another drug with the same active moiety is determined to be safer, more effective, or represents a major contribution to patient care.

In Europe, orphan drugs may be able to obtain ten years of marketing exclusivity and up to an additional two years on the basis of qualifying pediatric studies. However, orphan exclusivity may be reduced to six years if the drug no longer satisfies the original designation criteria. Additionally, a marketing authorization holder may lose its orphan exclusivity if it consents to a second orphan drug

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application or cannot supply enough drug. Orphan drug exclusivity also can be lost when a second applicant demonstrates its drug is “clinically superior” to the original orphan drug.

Even though we have obtained Fast Track Designation from the FDA for palovarotene for the treatment of FOP, it may not lead to a faster development or regulatory review or approval process, and does not increase the likelihood that palovarotene will receive marketing approval.

If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may apply to the FDA for Fast Track Designation. Even though we have obtained Fast Track Designation for palovarotene for treatment of FOP, we may not experience a faster development process, review or approval compared to conventional FDA procedures. The FDA may withdraw Fast Track Designation if it believes that the designation is no longer supported by data from our clinical development program. Many drugs that have received Fast Track Designation have failed to obtain approval.

Even if we receive marketing approval for palovarotene in the United States, we may never receive regulatory approval to market palovarotene outside of the United States.

We have selected markets outside of the United States, including but not limited to parts of Europe, Asia, South America and Canada, where we intend to seek regulatory approval to market palovarotene. In order to market any product outside of the United States, however, we must establish and comply with the numerous and varying safety, efficacy and other regulatory requirements of any such other country. Approval procedures vary among countries and can involve additional product candidate testing and additional administrative review periods. The time required to obtain approvals in other countries might differ from that required to obtain FDA approval. The marketing approval processes in other countries may implicate all of the risks detailed above regarding FDA approval in the United States as well as other risks. In particular, in many countries outside of the United States, products must receive pricing and reimbursement approval before the product can be commercialized. Obtaining this approval can result in substantial delays in bringing products to market in such countries. Marketing approval in one country does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one country may have a negative effect on the regulatory process in others. Failure to obtain marketing approval in other countries or any delay or other setback in obtaining such approval would impair our ability to market palovarotene in such foreign markets. Any such impairment would reduce the size of our potential market, which could have a material adverse impact on our business, results of operations and prospects.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell palovarotene or any other product candidate, we may not be able to generate any revenue.

We do not currently have an infrastructure for the sales, marketing and distribution of pharmaceutical products. In order to market palovarotene or any other product candidate, if approved by the FDA or any other regulatory body, we must build our sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, or if we are unable to do so on commercially reasonable terms, our business, results of operations, financial condition and prospects will be materially adversely affected.

Even if we receive marketing approval for palovarotene or any other product candidate, our product candidate may not achieve broad market acceptance, which would limit the revenue that we generate from its sales.

The commercial success of palovarotene or any other product candidate, if approved by the FDA or other applicable regulatory authorities, will depend upon the awareness and acceptance of palovarotene or any other product candidate among the medical community, including physicians, patients and healthcare payors. Market acceptance of palovarotene or any other product candidate, if approved, will depend on a number of factors, including, among others:

 

 

the efficacy of palovarotene or any other product candidate as demonstrated in clinical trials;

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limitations or warnings contained in the labeling approved for palovarotene or any other product candidate by the FDA or other applicable regulatory authorities, including that palovarotene, like all retinoids, is a teratogen and must not be taken by pregnant women or women who may become pregnant;

 

 

the clinical indications for which palovarotene or any other product candidate is approved;

 

 

availability of alternative treatments already approved or expected to be commercially launched in the near future;

 

 

the potential and perceived advantages of palovarotene or any other product candidate over current treatment options or alternative treatments, including future alternative treatments;

 

 

the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

 

the strength of marketing and distribution support and timing of market introduction of competitive products;

 

 

publicity concerning our product or any competing products and treatments;

 

 

pricing and cost effectiveness;

 

 

the effectiveness of our sales and marketing strategies;

 

 

our ability to increase awareness of palovarotene or any other product candidate through marketing efforts;

 

 

our ability to obtain sufficient third-party coverage or reimbursement; or

 

 

the willingness of patients to pay out-of-pocket in the absence of third-party coverage.

If palovarotene or any other product candidate is approved but does not achieve an adequate level of acceptance by patients, physicians and payors, we may not generate sufficient revenue from palovarotene or any other product candidate to become or remain profitable. Before granting reimbursement approval, healthcare payors may require us to demonstrate that palovarotene or any other product candidate, in addition to treating its intended target indication, also provides incremental health benefits to patients. Our efforts to educate the medical community and third-party payors about the benefits of palovarotene and any other product candidate may require significant resources and may have limited or no success.

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

If palovarotene or any other product candidate is approved for commercialization, we may enter into agreements with third parties to market it outside of the United States. We expect that we will be subject to additional risks related to entering into international business relationships, including:

 

 

different regulatory requirements for drug approvals in foreign countries;

 

 

reduced protection for intellectual property rights;

 

 

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

 

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

 

 

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

 

 

foreign taxes, including withholding of payroll taxes;

 

 

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

 

 

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

 

 

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

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

Even if we receive marketing approval for palovarotene or any other product candidate, we may still face future development and regulatory difficulties.

Even if we receive marketing approval for palovarotene or any other product candidate, regulatory authorities may still impose significant restrictions on palovarotene or any other product candidate, indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies. Palovarotene and any other product candidate will also be subject to ongoing FDA requirements governing the labeling, packaging, storage and promotion of the product as well as record keeping, submission of safety and other post-market information, and prohibitions regarding the promotion of off-label uses.

The FDA has significant post-marketing authority, including, for example, the authority to require labeling changes based on new safety information and to require post-marketing studies or clinical trials to evaluate serious safety risks related to the use of a drug. The FDA also has the authority to require, as part of an NDA or post-approval, the submission of a Risk Evaluation and Mitigation Strategy. Any Risk Evaluation and Mitigation Strategy required by the FDA may lead to increased costs to assure compliance with new post-approval regulatory requirements and potential requirements or restrictions on the sale of approved products, all of which could lead to lower sales volume and revenue. Further, the FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products, and we could be subject to significant liability if, for example, physicians prescribe palovarotene to their patients in a manner that is inconsistent with the approved label and we are found to have promoted such off-label uses.

Manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMPs and other regulations. If we or a regulatory agency discover problems with palovarotene or any other product candidate, such as adverse events of unanticipated severity or frequency, or problems with the facility where our product candidate is manufactured, a regulatory agency may impose restrictions or penalties on our product candidate, the manufacturer or us, including requiring withdrawal of our product candidate from the market or suspension of manufacturing.

The occurrence of any regulatory penalty may inhibit or preclude our ability to commercialize palovarotene and any other future product candidates we may develop which in turn would inhibit or preclude our ability to generate revenue.

Competing therapies could emerge, adversely affecting our opportunity to generate revenue from the sale of our product candidate.

The biopharmaceuticals industry is highly competitive. There are many public and private biopharmaceutical companies, universities, governmental agencies and other research organizations actively engaged in the research and development of products that may be similar to palovarotene or any other product candidate or address similar markets. We believe it is probable that the number of companies seeking to develop products and therapies similar to our product will increase. Gene therapy, cell therapy and other approaches may also emerge for the treatment of any of the disease areas in which we focus.

Currently, there are no therapies that have been specifically approved for treatment of FOP. However, products approved for other indications, for example, cortisteroids and non-steroidal anti-inflammatory drugs, are used off-label to manage FOP symptoms during flare-ups, though none of these medications has been shown to prevent HO. Further, we are aware that Regeneron Pharmaceuticals Inc., Blueprint Medicines and La Jolla Pharmaceutical Company are each in early stages of development of therapies for the treatment of FOP. See “Business—Competition” for a more detailed discussion.

Many of our potential competitors, alone or with their strategic partners, could have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of

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treatments and the commercialization of those treatments. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated among a smaller number of our competitors. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market.

We may not be able to establish collaborations, and, if we are able to establish collaborations we may not be able to establish them on commercially reasonable terms, which could result in alterations or delays of our development and commercialization plans.

Our drug development program and the potential commercialization of palovarotene and any other product candidate will require substantial additional cash to fund expenses. We may decide to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of palovarotene and any other product candidate. We are restricted under existing collaboration agreements, such as pursuant to certain rights granted to Roche under our agreement with it from entering into future agreements on certain terms with potential collaborators.

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, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the product candidate, the costs and complexities of manufacturing and delivering the product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate. The terms of any collaborations or other arrangements that we may establish may not be favorable to us.

Collaborations are complex and time-consuming to negotiate and document. In addition, 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, reduce or delay its development program, 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 candidate or bring it to market and generate product revenue.

In addition, any future collaborations that we enter into may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations. Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters can lead to delays in the development process or commercializing the applicable product candidate and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision-making authority. Collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party. Any such termination or expiration would adversely affect us financially and could harm our business reputation.

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

The success of our business depends primarily upon our ability to identify, develop and commercialize products. Although palovarotene is in clinical development, our research programs may fail to identify other potential product candidates for clinical development for a number of reasons. Our research methodology may be unsuccessful in identifying potential product candidates or our potential product candidates may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval.

Because we have limited financial and management resources, we are currently focused on our FOP and MO programs. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial drugs 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 drugs. 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 future collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.

If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business and could potentially cause us to cease operations.

We are subject to healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Although we do not currently have any products on the market, once we begin commercializing our product, we may be subject to additional healthcare statutory and regulatory requirements and enforcement by the federal government and the states and foreign governments in which we conduct our business. Healthcare providers, physicians and others will play a primary role in the recommendation and prescription of our product candidate, if approved. Our future arrangements with third-party payors will expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our product candidate, if we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:

 

 

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

 

 

The federal False Claims Act imposes criminal and civil penalties, including those from civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government.

 

 

The federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information.

 

 

The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services.

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The federal transparency requirements, sometimes referred to as the "Sunshine Act," under the Patient Protection and Affordable Care Act, require manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program to report on an annual basis to the Department of Health and Human Services information related to transfers of value to physicians and teaching hospitals and physician ownership and investment interests.

 

 

Analogous state laws and regulations, such as state anti-kickback and false claims laws and transparency laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and 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 in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures and drug pricing.

Ensuring that our future business arrangements with third parties comply with applicable healthcare laws and regulations could be costly. It is possible that governmental authorities will conclude that our business practices do 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, including anticipated activities to be conducted by our sales team, were 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 and exclusion from government funded healthcare programs, such as Medicare and Medicaid, any of which could substantially disrupt our operations. If any of the physicians or other providers or entities with whom we expect to do business is found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

Healthcare legislative reform measures may have a material adverse effect on our business and results of operations.

In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively referred to as the Affordable Care Act, was enacted, which substantially changes the way health care is financed by both governmental and private insurers, and significantly impacts the U.S. pharmaceutical industry. The Affordable Care Act, among other things, imposed reporting requirements on manufacturers related to drug samples and financial relationships with physicians and teaching hospitals, increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extended the rebate program to individuals enrolled in Medicaid managed care organizations, established annual fees on manufacturers of certain branded prescription drugs, and established a Medicare Part D coverage gap discount program. The healthcare regulatory environment in the U.S. is still in flux, and judicial challenges and legislative initiatives to modify, limit, or repeal the Affordable Care Act continue, and may increase in light of the change in administration following the 2016 U.S. presidential election. For example, a recent Executive Order signed by the U.S. President directed executive departments and federal agencies to waive, defer, grant exemptions from, or delay the implementation of provisions of the Affordable Care Act that would impose a fiscal or regulatory burden on individuals and certain entities to the maximum extent permitted by law. In addition, the future implementation of the Affordable Care Act is not assured. By way of example, in January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal portions of the Affordable Care Act. The Budget Resolution is not a law; however, it is widely viewed as the first step toward the passage of legislation that would repeal certain aspects of the Affordable Care Act. Congress has also proposed and may in the future propose legislation to replace elements of the Affordable Care Act that are repealed. We cannot predict the impact on our business of changes to current laws and regulations. However, any changes that lower reimbursements for products for which we may obtain regulatory approval, or that impose administrative and financial burdens on us, could adversely affect our business.

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In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. These changes include, among others, aggregate reductions of Medicare payments to providers of up to 2% per fiscal year, starting in 2013. We expect that additional state and federal healthcare reform measures will be adopted in the future, which may alter or completely replace the existing healthcare financing structure. Any of these reform measures could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for any such product candidate that we may have developed or additional pricing pressures on our business.

Similar initiatives and legislations may come into force in other jurisdictions as well, such as in the different countries of the European Union, where price ceilings and rebate systems are essential parts of the reimbursement of medicinal products. Some of these systems are being adapted on a regular or irregular basis to further reduce drug prices.

Even if approved, reimbursement policies could limit our ability to sell palovarotene and any other product candidate.

Market acceptance and sales of palovarotene and any other product candidate will depend on reimbursement policies and may be affected by healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels for those medications. Cost containment is a primary concern in the U.S. healthcare industry and elsewhere. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure what the level of reimbursement will be for palovarotene and any future product candidate and, if any reimbursement is available, the level of such reimbursement. Reimbursement may impact the demand for, or the price of, palovarotene and any other product candidate. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize palovarotene and any other product candidate. In some foreign countries, particularly in Canada and European countries, the pricing of prescription pharmaceuticals is subject to strict governmental control. In these countries, pricing negotiations with governmental authorities can take six to twelve months or longer after the receipt of regulatory approval and product launch. To obtain favorable reimbursement for the indications sought or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate with other available therapies. If reimbursement for our product candidate is unavailable in any country in which we seek reimbursement, limited in scope or amount, conditioned upon our completion of additional clinical trials, or set at unsatisfactory levels, our operating results could be materially adversely affected.

Risks Related To Our Intellectual Property Rights

We are heavily dependent on licensed intellectual property. If we were to lose our rights to licensed intellectual property, we would not be able to continue developing or commercializing palovarotene or any other product candidate, if approved. If we breach any of the agreements under which we license the use, development and commercialization rights to palovarotene or any other product candidate or technology from third parties or if certain insolvency events were to occur, we could lose license rights that are important to our business.

We are a party to a number of license agreements under which we are granted rights to intellectual property that are important to our business and we may need to enter into additional license agreements in the future. Our existing license agreements impose, and we expect that any future license agreements will impose on us, various development, regulatory and/or commercial diligence obligations, payment of milestones and/or royalties and other obligations. If we fail to comply with our obligations under these agreements, or we are subject to a bankruptcy, the licensor may have the right to terminate the license, in which event we would not be able to market products covered by the license. Our business could suffer, for example, if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms. See “Business—

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License Agreements” for a description of our existing license agreements, which includes a description of the termination provisions of each such agreement.

As we have done previously, we may need to obtain licenses from third parties to advance our research or allow commercialization of palovarotene or any other product candidates, and we cannot provide any assurances that third-party patents do not exist that might be enforced against palovarotene or any other product candidates or future products in the absence of such a license. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In that event, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or commercialize the affected product candidates, which could materially harm our business and the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation.

Licensing of intellectual property is of critical importance to our business and involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding intellectual property subject to a license agreement, including:

 

 

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

 

 

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

 

 

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

 

 

our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our product candidates, and what activities satisfy those diligence obligations; and

 

 

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

If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates.

We may enter into additional licenses to third-party intellectual property that are necessary or useful to our business. Our current licenses and any future licenses that we may enter into impose various royalty payments, milestones, diligence and other obligations on us. If we fail to comply with any of our obligations under a current or future license agreement, such licensor may allege that we have breached our license agreement and may accordingly seek to terminate our license with them. In addition, future licensors may decide to terminate any such license at will. Termination of any of our current or future licenses could result in our loss of the right to use the licensed intellectual property, which could materially adversely affect our ability to develop and commercialize palovarotene or any other product candidate, if approved, as well as harm our competitive business position and our business prospects. Moreover, our current or future licenses may provide for a reversion to the licensor of our rights in regulatory filings or other intellectual property or data that we regard as our own in the event the license terminates under certain circumstances, such as due to breach.

In addition, if our current or future licensors fail to abide by the terms of the applicable license, if the licensors fail to prevent infringement by third parties, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms, if at all, our business could suffer.

Moreover, our licensors under current licenses retain and our licensors under future licenses may retain certain rights and obligations. For example, the licensor may retain control over patent prosecution and maintenance under a license agreement, in which case we may not be able to adequately influence patent prosecution or prevent inadvertent lapses of coverage due to failure to pay maintenance fees. Similarly, the licensor may retain the sole right or a first right to enforce the licensed

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patents against infringement, in which case we may not be able to adequately influence or may be delayed in enforcing certain licensed patents.

Some intellectual property that we have licensed may have been discovered through government funded programs and thus may be subject to federal regulations such as “march-in” rights, certain reporting requirements, and a preference for U.S. 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 non-U.S. manufacturers.

Some of the intellectual property rights we have licensed may have been generated through the use of U.S. government funding and may therefore 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 (Bayh-Dole Act). Moreover, intellectual property that we may own or license in the future may be subject to the applicable provisions of the Bayh-Dole Act. These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). The U.S. government also has the right to take title to these inventions if we fail, or the applicable licensor fails, to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. In addition, the U.S. government may acquire title to these inventions in any country in which a patent application is not filed within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us, or the applicable licensor, to expend substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturers may limit our ability to contract with non-U.S. product manufacturers for products covered by such intellectual property.

We currently do not plan to apply for U.S. government funding, but if we do, and we discover compounds or drug candidates as a result of such funding, intellectual property rights to such discoveries may be subject to the applicable provisions of the Bayh-Dole Act.

If we are unable to adequately protect our proprietary technologies, or obtain and maintain issued in-licensed patents that are sufficient to protect palovarotene or any future product candidates, others could compete against us more directly, which would have a material adverse impact on our business, results of operations, financial condition and prospects.

Our commercial success will depend in part on our success in obtaining and maintaining issued owned and in-licensed patents and other intellectual property rights in the United States and elsewhere and protecting our proprietary technologies. We will seek to protect our proprietary position by filing patent applications in the United States and abroad related to our business plans. We also rely on trade secrets that protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection. If we do not adequately protect our intellectual property and proprietary technologies, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability.

We cannot provide any assurances that any of our in-licensed patents have, or that any of our pending owned or in-licensed patent applications will mature into issued patents that include claims with a scope sufficient to protect palovarotene or any other product candidate, any additional features we develop for palovarotene or any other product candidate, or any new products or otherwise provide

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any competitive advantage. Other parties may have developed technologies that may be related or competitive to our approach, and may have filed or may file patent applications and may have received or may receive patents that may overlap or conflict with our owned or in-licensed patent applications, either by claiming the same methods or formulations or by claiming subject matter that could dominate our patent position. Such third-party patent positions may limit or even eliminate our ability to obtain patent protection for certain inventions.

The patent positions of biotechnology and pharmaceutical companies, including our patent position, involve complex legal and factual questions, and, therefore, the issuance, scope, validity and enforceability of any patent claims that we have or may obtain cannot be predicted with certainty. Patents may be challenged, deemed unenforceable, invalidated, or circumvented. U.S. patents and patent applications may also be subject to interference proceedings, ex parte reexamination, or inter partes review proceedings, supplemental examination and challenges in district court. Patents may be subjected to opposition, post-grant review, or comparable proceedings lodged in various foreign, both national and regional, patent offices. These proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents that we may own or exclusively license may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent right sought by us, which in turn could affect our ability to develop, market or otherwise commercialize palovarotene or any other product candidate.

Furthermore, though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may be interpreted in a manner adverse to our interests, or not provide us with adequate proprietary protection or competitive advantages against competitors with similar products. Even if an issued patent is held to be valid and enforceable, it may be interpreted in a manner adverse to our interests, or competitors may be able to design around any patents that we may own or in-license, such as through the use of pre-existing or newly developed technology. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. Moreover, the life of a patent and the term of any protection it may provide is limited. Given the period of time it takes to bring a drug to market, it is possible that some of our patent rights will expire or be near the end of their term before we obtain approval to sell palovarotene or any other product candidate, if such approval is obtained. For example, a U.S. patent licensed from Roche claiming palovarotene as a composition of matter has a statutory expiration date in 2021, without extensions or adjustments.

We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, vendors, former employees and current employees. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries, such as China. If these developments were to occur, they could have a material adverse effect on our sales.

Our ability to enforce our patent rights depends on our ability to detect infringement. It is difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. Any litigation to enforce or defend our in-licensed patent rights, even if we were to prevail, could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful.

In addition, proceedings to enforce or defend our owned or in-licensed patents, if and when issued, could put our patents at risk of being invalidated, held unenforceable, or interpreted narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or more of our patents are invalid or otherwise unenforceable. If any of our owned or in-licensed patents, if and when issued, that cover or which we believe cover palovarotene or any other product candidate (including any method of use) are invalidated or found unenforceable or interpreted in a manner adverse to our interests, such as to not cover the relevant product candidate, our financial

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position and results of operations would be materially and adversely impacted. In addition, if a court found that valid, enforceable patents held by third parties covered palovarotene or any other product candidate, our financial position and results of operations would also be materially and adversely impacted.

The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

 

 

any of our in-licensed patents or pending owned or in-licensed patent applications, if issued, will include claims having a scope sufficient to protect palovarotene or any other product candidates;

 

 

any of our pending owned or in-licensed patent applications will issue as patents at all;

 

 

we will be able to successfully commercialize palovarotene or any other product candidate, if approved, before our relevant in-licensed patents expire;

 

 

our licensors were the first to make the inventions covered by each of our in-licensed patents, and we or our licensors were the first to make the inventions covered by each of our pending owned or in-licensed patent applications;

 

 

we or our licensors were the first to file patent applications for these inventions;

 

 

others will not develop similar or alternative technologies that do not infringe our in-licensed patents, or our owned or in-licensed patent applications, if issued;

 

 

others will not use pre-existing technology to effectively compete against us;

 

 

any of our in-licensed patents, if issued, will be found to ultimately be valid and enforceable;

 

 

any patents issued to us or our licensors will provide a basis for an exclusive market for our commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;

 

 

we will develop additional proprietary technologies or product candidates that are separately patentable; or

 

 

that our commercial activities or products will not infringe upon the patents or proprietary rights of others.

We rely upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. It is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees and consultants who are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.

We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing palovarotene or any other product candidates, if approved.

Our success will depend in part on our ability to operate without infringing the intellectual property and proprietary rights of third parties. We cannot assure you that our business, products and methods do not or will not infringe the patents or other intellectual property rights of third parties.

The pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may allege that palovarotene or any other product candidate or the use of our technologies infringes patent claims or other intellectual property rights held by them or that we are employing their proprietary technology without authorization. As we continue to develop and, if approved, commercialize palovarotene or any future product candidates, competitors may claim that our technology infringes their intellectual property rights as part of business strategies designed to impede our successful commercialization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of palovarotene or any other product candidate. Because patent applications can take many years to issue, third parties may have currently pending patent applications which may later result

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in issued patents that palovarotene or any other product candidate may infringe, or which such third parties claim are infringed by our technologies. Moreover, we may fail to identify relevant third party patents or patent applications, or we may incorrectly conclude that the claims of an issued patent were not relevant to our activities.

The outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our product candidate, products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid, and we may not be able to do this. 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 have a material adverse effect on us. In addition, we may not have sufficient resources to bring these actions to a successful conclusion.

Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome is uncertain. Any claim relating to intellectual property infringement that is successfully asserted against us may require us to pay substantial damages, including treble damages and attorney’s fees if we are found to be willfully infringing another party’s patents, for past use of the asserted intellectual property and royalties and other consideration going forward if we are forced to take a license. In addition, if any such claim were successfully asserted against us and we could not obtain such a license, we may be forced to stop or delay developing, manufacturing, selling or otherwise commercializing palovarotene or any other product candidate.

Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required or may choose to seek a license, defend an infringement action or challenge the validity of the patents in court, or redesign our product. Patent litigation is costly and time-consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, intellectual property litigation or claims could force us to do one or more of the following:

 

 

cease developing, selling or otherwise commercializing palovarotene or any other product candidate;

 

 

pay substantial damages for past use of the asserted intellectual property;

 

 

obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; and

 

 

in the case of trademark claims, redesign or rename palovarotene or any other product candidate to avoid infringing the intellectual property rights of third parties, which may not be possible and, even if possible, could be costly and time-consuming.

Any of these risks coming to fruition could have a material adverse effect on our business, results of operations, financial condition and prospects.

We may be subject to claims challenging the inventorship or ownership of our owned or in-licensed patents and other intellectual property.

We generally enter into confidentiality and intellectual property assignment agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. For example, inventorship disputes may arise from conflicting obligations of consultants or others who are involved in developing palovarotene or any other product candidates.

Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. The owners of intellectual property in-licensed to us could also face such claims. If we or our licensors fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we or our

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licensors are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

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

The U.S. Patent and Trademark Office (U.S. PTO), and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.

If we or our licensors fail to maintain the patents and patent applications covering or otherwise protecting our product candidates, it could materially harm our business. In addition, to the extent that we have responsibility for taking any action related to the prosecution or maintenance of patents or patent applications in-licensed from a third party, any failure on our part to maintain the in-licensed intellectual property could jeopardize our rights under the relevant license and may expose us to liability.

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

Even if the patent applications we own or license are issued, competitors may infringe these patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid, is unenforceable and/or is not infringed, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put our patents or our licensors’ patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference proceedings provoked by third parties or brought by us may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

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

Issued patents covering palovarotene or any other product candidate could be found invalid or unenforceable if challenged in court.

If we or one of our licensing partners initiated legal proceedings against a third party to enforce a patent covering palovarotene or any other product candidate, the defendant could counterclaim that the patent covering palovarotene or any other product candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include alleged failures to meet any of several statutory

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requirements, including lack of novelty, obviousness or non-enablement. Grounds for unenforceability assertions include allegations that someone connected with prosecution of the patent withheld relevant information from the U.S. PTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review and equivalent proceedings in foreign jurisdictions, e.g. opposition proceedings. Such proceedings could result in revocation or amendment of our patents or our licensors’ patents in such a way that they no longer cover palovarotene or any other product candidate or competitive products. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on palovarotene or any other product candidate. Such a loss of patent protection would have a material adverse impact on our business.

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

Filing, prosecuting and defending patents on product candidates in all countries and jurisdictions throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States could be less extensive than those offered in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions.

Competitors may use our technologies in jurisdictions where we do not have, or where we do not pursue and obtain, patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our product and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from so competing.

Further, the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to biotechnology. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.

Moreover, proceedings to enforce our patent rights, or those of our licensors or partners, in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our in-licensed patents, or any patents that we may own in the future, at risk of being invalidated or interpreted narrowly, could put our owned or in-licensed patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

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If we do not obtain additional protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent term and obtaining data exclusivity for our product candidates, our business may be materially harmed.

Depending upon the timing, duration and specifics of FDA marketing approval of palovarotene or any other product candidate, one or more of the U.S. patents we may own or license may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a restoration of patent term for one patent of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, we may not be granted an extension because of, for example, 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 restoration 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 ability to generate revenues could be materially adversely affected.

Changes in either U.S. or foreign patent law or interpretation of such laws could diminish the value of patents in general, thereby impairing our ability to protect our products.

As is the case with other biotechnology companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biotechnology industry involve both technological and legal complexity, and it therefore is costly, time-consuming and inherently uncertain. In addition, on September 16, 2011, the Leahy-Smith America Invents Act (AIA), was signed into law. The AIA includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation.

An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the U.S. PTO after that date but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party. This will require us to be cognizant going forward of the time from invention to filing of a patent application.

Among some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and providing opportunities for third parties to challenge any issued patent in the U.S. PTO. This applies to all of our U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard necessary to invalidate a patent claim in U.S. PTO proceedings compared to the evidentiary standard in United States federal court, a third party could potentially provide evidence in a U.S. PTO proceeding sufficient for the U.S. PTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the U.S. PTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action.

Depending on decisions by the United States Congress, the federal courts, the U.S. PTO, or similar authorities in foreign jurisdictions, 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 in-licensed patents and patents that we might obtain in the future.

We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

Some of our employees have been previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We also engage advisors and consultants who are concurrently employed at universities or who perform services for other entities.

Although we are not aware of any claims currently pending against us, we may be subject to claims that we or our employees, advisors or consultants have inadvertently or otherwise used or disclosed

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intellectual property, including trade secrets or other proprietary information, of a former employer or other third party. We may be subject to claims that an employee, advisor or consultant performed work for us that conflicts with that person’s obligations to a third party, such as an employer, and thus, that the third party has an ownership interest in the intellectual property arising out of work performed for us. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our current and future product candidates, which would materially adversely affect our commercial development efforts.

General Company-Related Risks

We will need to develop and expand the size and scope of our Company, and we may encounter difficulties in managing this development and expansion, which could disrupt our operations.

As of March 31, 2017, we had 24 full-time employees and in connection with becoming a public company and advancing our growth plans, we expect to increase our number of employees and the scope of our operations. To manage our anticipated development and expansion, 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. Also, our management may need to divert a disproportionate amount of its attention away from its day-to-day activities and devote a substantial amount of time to managing these development activities. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. This 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. The physical expansion of our operations may lead to significant costs and may divert financial resources from other projects, such as the development of palovarotene and any other product candidates. If our management is unable to effectively manage our expected development and expansion, our expenses may increase more than expected, our ability to generate or increase our revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize our product candidates, if approved, and compete effectively will depend, in part, on our ability to effectively manage the future development and expansion of our Company.

We have limited experience operating internationally, are subject to a number of risks associated with our international activities and operations, and may not be successful in our efforts to expand internationally.

We have collaboration, clinical trial and other relationships outside the United States, but we currently have very limited operations outside of the United States and Canada. In order to meet our long-term goals, we would need to grow our international operations significantly. Consequently, we are and will continue to be subject to additional risks related to operating in foreign countries, including:

 

 

the fact that we have limited experience operating our business internationally;

 

 

local, economic and political conditions, including inflation, geopolitical events, such as war and terrorism, foreign currency fluctuations and exchange risks, which could result in increased or unpredictable operating expenses and reduced revenues and other obligations incident to doing business in, or with a company located in, another country;

 

 

our customers’ ability to obtain reimbursement for palovarotene or any other product candidate in foreign markets, and unexpected changes in reimbursement and pricing requirements, tariffs, trade barriers and regulatory requirements;

 

 

different medical practices and customs in foreign countries affecting acceptance in the marketplace;

 

 

longer lead times for shipping and longer accounts receivable collection times;

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the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute;

 

 

reduced protection of intellectual property rights in some foreign countries or the existence of additional potentially relevant third party intellectual property rights; and

 

 

compliance with foreign or U.S. laws, rules and regulations, including data privacy requirements, labor relations laws, tax laws, accounting requirements, anti-competition regulations, import, export and trade restrictions, anti-bribery/anti-corruption laws, regulations or rules, which could lead to actions by us or our licensees, distributors, manufacturers, other third parties who act on our behalf or with whom we do business in foreign countries or our employees who are working abroad that could subject us to investigation or prosecution under such foreign or U.S. laws.

We face potential product liability exposure, and, if claims are brought against us, we may incur substantial liability.

The use of our product candidates in clinical trials and the sale of our product candidates, if approved, exposes us to the risk of product liability claims. Product liability claims might be brought against us by patients, healthcare providers or others selling or otherwise coming into contact with our product candidates. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, including as a result of interactions with alcohol or other drugs, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we become subject to product liability claims and cannot successfully defend ourselves against them, we could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in, among other things:

 

 

withdrawal of patients from our clinical trials;

 

 

substantial monetary awards to patients or other claimants;

 

 

decreased demand for our product candidates or any future product candidates following marketing approval, if obtained;

 

 

damage to our reputation and exposure to adverse publicity;

 

 

increased FDA warnings on product labels;

 

 

litigation costs;

 

 

distraction of management’s attention from our primary business;

 

 

loss of revenue; and

 

 

the inability to successfully commercialize our product candidates or any future product candidates, if approved.

We maintain product liability and clinical trial insurance coverage in the U.S., United Kingdom (UK), France, Italy, Argentina, Spain and Australia for our clinical trials with annual aggregate coverage limits varying from $2.7 million to $15.0 million. Nevertheless, our insurance coverage may be insufficient to reimburse us for any expenses or losses we may suffer. Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses, including if insurance coverage becomes increasingly expensive. If and when we obtain marketing approval for our product candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we may not be able to obtain this product liability insurance on commercially reasonable terms. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. The cost of any product liability litigation or other proceedings, even if resolved in our favor, could be substantial, particularly in light of the size of our business and financial resources. A product liability claim or series of claims brought against us could cause our stock price to decline and, if we are unsuccessful in defending such a claim or claims and the resulting judgments exceed our insurance coverage, our financial condition, business and prospects could be materially adversely affected.

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Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel, including qualified accounting and financial personnel with appropriate public company experience.

We are highly dependent on the principal members of our executive team listed under “Management” located elsewhere in this prospectus, the loss of whose services may adversely impact the achievement of our objectives. Any of our executive officers could leave our employment at any time, as all of our employees are “at will” employees. Recruiting and retaining other qualified employees for our business, including scientific and technical personnel, will also be critical to our success. There is currently a shortage of skilled executives in our industry, which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical companies for individuals with similar skill sets. In addition, failure to succeed in clinical trials may make it more challenging to recruit and retain qualified personnel. The inability to recruit key executives or the loss of the services of any executive or key employee might impede the progress of our development and commercialization objectives.

Further, as a newly public company, we may need to hire additional accounting and financial personnel with appropriate public company experience and technical accounting knowledge, and it may be difficult to recruit and maintain such personnel. Even if we are able to hire appropriate personnel, our existing operating expenses and operations will be impacted by the direct costs of their employment and the indirect consequences related to the diversion of management resources from product development efforts.

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

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. In addition, the Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the U.S. Securities and Exchange Commission (SEC) and The Nasdaq Global Market have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

After we are no longer an emerging growth company, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404), we will be required to furnish a report by our management on our internal control over financial reporting, including, after we are no longer an emerging growth company, an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting pursuant to the Committee of Sponsoring Organizations of the Treadway Commission 2013, 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.

Changes in our effective income tax rate could adversely affect our results of operations.

We are subject to income taxes in the Unites States and Canada and may be subject to income taxes in various foreign jurisdictions in the future, and our domestic and foreign tax liabilities are largely dependent upon the distribution of pre-tax earnings among these different jurisdictions. Various factors may have favorable or unfavorable effects on our effective income tax rate. These factors include, but are not limited to, interpretations of existing tax laws, changes in tax laws and rates, the

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accounting for stock options and other share-based compensation, changes in accounting standards, future levels of research and development spending, changes in the mix and level of pre-tax earnings by taxing jurisdiction, the outcome of examinations by the U.S. Internal Revenue Service, Canadian Revenue Agency and related provincial tax authorities, and other jurisdictions, the accuracy of our estimates for unrecognized tax benefits, the realization of deferred tax assets, or by changes to our ownership or capital structure. The impact on our income tax provision resulting from the above-mentioned factors and others may be significant and could adversely affect our results of operations.

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

In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended (the Code) a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating loss carryforwards (NOLs) to offset future taxable income. Similarly, where control of a corporation has been acquired by a person or group of persons, subsection 111(5) of the Canadian Income Tax Act (Canadian Tax Act), and equivalent provincial income tax legislation restrict the corporation’s ability to carry forward non-capital losses from preceding taxation years. We have not performed a detailed analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code or an acquisition of control for the purposes of subsection 111(5) of the Canadian Tax Act has occurred after each of our previous issuances of common shares, preferred shares and convertible debt. In addition, if we undergo an ownership change or acquisition of control after this public offering, our ability to utilize NOLs and non-capital losses could be limited by Section 382 of the Internal Revenue Code and subsection 111(5) of the Canadian Tax Act. As of December 31, 2016, we had Canadian federal and provincial net operating loss carry forwards of $49.2 million and $48.3 million, respectively, and unused federal tax credits of $0.7 million, all of which are set to expire over time to 2036. We also had Canadian federal and provincial research and development expenditure pools of $4.1 million and $4.9 million, respectively, without time limitations. Future changes in our share ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code or an acquisition of control for the purposes of subsection 111(5) of the Canadian Tax Act. Furthermore, our ability to utilize NOLs and non-capital losses of companies that we may acquire in the future may be subject to limitations.

We may become a “controlled foreign corporation,” which may have adverse U.S. federal income tax consequences for a U.S. investor that owns substantial amounts of our common shares.

Although we believe we qualified as a controlled foreign corporation (CFC) in prior years, based on our current ownership structure, we do not believe we are currently a CFC for U.S. federal income tax purposes for the taxable year ending December 31, 2017. Given our ownership concentration, however, it is possible we could become a CFC if U.S. persons, each of whom own, directly or indirectly, including through non-U.S. persons (or is considered to own under applicable constructive ownership rules of the Code), 10% or more of the total combined voting power of all our classes of stock entitled to vote (U.S. Shareholders), together own more than 50% of the total vote or value of our stock. In such case, U.S. Shareholders may be subject to current U.S. federal income tax on certain types of income (generally passive income) regardless of whether corresponding cash distributions are made by us. In addition, gains recognized by U.S. Shareholders on the sale of our common shares may be reclassified, in whole or in part, as a dividend. The CFC rules are complex, and investors are urged to consult their own tax advisors regarding the possible application of the CFC rules in their particular circumstances. See “Material U.S. Federal Income Tax Considerations—Controlled Foreign Corporation Considerations.”

Transfer pricing rules may adversely affect our income tax expense.

Many of the jurisdictions in which we will conduct business have detailed transfer pricing rules which require that all transactions with non-resident related parties be priced using arm’s length pricing principles. Contemporaneous documentation must exist to support this pricing. The taxation authorities in these jurisdictions could challenge our arm’s length related party transfer pricing policies. International transfer pricing is an area of taxation that depends heavily on the underlying facts and circumstances and generally involves a significant degree of judgment. If any of these taxation

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authorities are successful in challenging our transfer pricing policies, our income tax expense may be adversely affected and we could also be subjected to interest and penalty charges. Any increase in our income tax expense and related interest and penalties could have a significant impact on our future earnings and future cash flows.

Our deductions and credits in respect of scientific research and experimental development expenditures may be challenged by the Canadian tax authorities.

The Canadian taxation authorities may not necessarily agree with our determinations of the expenses and tax credits claimed by us, including research and development expenses and related tax credits. If the Canadian taxation authorities successfully challenge such expenses or the correctness of such income tax credits claimed, our operating results could be materially adversely affected. Furthermore, if the Canadian taxation authorities reduce the tax credit either by reducing the rate of the credit or the eligibility of some research and development expenses in the future, our operating results will be materially adversely affected.

We are likely a “passive foreign investment company,” which may have adverse U.S. federal income tax consequences for U.S. investors.

U.S. investors should be aware that we believe that we qualified as a passive foreign investment company (PFIC) for our taxable year ended December 31, 2016 and that we expect to qualify as a PFIC for our taxable year ending December 31, 2017 and very possibly, for subsequent years. If we are a PFIC for any taxable year during a U.S. investor’s holding period of our common shares, a U.S. investor generally will be required to treat any gain realized upon a disposition of our common shares, or any so-called “excess distribution” received on our common shares, as ordinary income (not capital gain) earned over the U.S. investor’s holding period of our common shares, and to pay applicable taxes on such ordinary income as well as an interest charge on the gain or distribution as if the resulting taxes had been earned (and resulting tax due) ratably over the holding period. A U.S. investor may make certain elections (such as a “mark-to-market” election or a “qualified electing fund” election) to mitigate certain of the adverse U.S. federal income tax consequences of owning PFIC stock, but such elections have their own set of consequences and may not be available in certain circumstances. The PFIC rules are complex and they and any available elections may have a significant effect on U.S. investors. U.S. investors are urged to consult their own tax advisors regarding all aspects of the PFIC rules that may be applicable. See “Material U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Considerations.”

We may acquire businesses or products, or form strategic alliances, in the future, and we may not realize the benefits of such acquisitions.

We may acquire additional businesses or products, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing business. If we acquire businesses with promising products or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to successfully integrate them with our existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing and marketing any new products resulting from a strategic alliance or acquisition that delay or prevent us from realizing their expected benefits or enhancing our business. We cannot assure you that, following any such acquisition, we will achieve the expected synergies to justify the transaction.

Risks Related To Our Common Shares and This Offering

Market volatility may affect our stock price and the value of your investment.

Following this offering, the market price for our common shares is likely to be volatile, in part because our common shares have not been previously traded publicly. In addition, the market price of

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our common shares may fluctuate significantly in response to a number of factors, most of which we cannot control, including, among others:

 

 

plans for, progress of or results from non-clinical studies and clinical trials of palovarotene and any other product candidates;

 

 

the FDA’s approval of or failure to approve palovarotene or any other product candidate;

 

 

announcements of new products, technologies, commercial relationships, acquisitions or other events by us or our competitors;

 

 

the success or failure of other FOP or MO therapies;

 

 

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

 

 

failure of palovarotene or any other product candidates, if approved, to achieve commercial success;

 

 

fluctuations in stock market prices and trading volumes of similar companies;

 

 

general market conditions and overall fluctuations in U.S. equity markets;

 

 

variations in our operating results;

 

 

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

 

 

changes in accounting principles;

 

 

our ability to raise additional capital and the terms on which we can raise it;

 

 

sales of large blocks of our common shares, including sales by our executive officers, directors and significant stockholders;

 

 

additions or departures of key personnel;

 

 

discussion of us or our stock price by the press and by online investor communities; and

 

 

other risks and uncertainties described in these risk factors.

An active trading market for our common shares may not develop, and you may not be able to resell your shares at or above the initial public offering price.

Prior to this offering, there has been no public market for our common shares. Although we have applied to list our common shares on The Nasdaq Global Market, an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price of our common shares will be determined through negotiations between us and the underwriters. The initial public offering price may not be indicative of the market price of our common shares after this offering. In the absence of an active trading market for our common shares, investors may not be able to sell their common shares at or above the initial public offering price or at the time that they would like to sell.

We are an “emerging growth company,” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common shares may be less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may choose to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. If we choose not to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, our auditors will not be required to attest to the effectiveness of our internal control over financial reporting. As a result, investors may become less comfortable with the effectiveness of our internal controls and the risk that material weaknesses or other deficiencies in our internal controls go undetected may increase. If we choose to provide reduced disclosures in our periodic reports and proxy statements while we are an

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emerging growth company, investors would have access to less information and analysis about our executive compensation, which may make it difficult for investors to evaluate our executive compensation practices. We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our stock price may be more volatile.

As a foreign private issuer, we are not subject to certain U.S. securities law disclosure requirements that apply to domestic U.S. issuers, which may limit the information publicly available to our shareholders, and we may lose such status in the future.

As a foreign private issuer, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Securities and Exchange Act of 1934 (Exchange Act) and therefore there may be less publicly available information about us than if we were a U.S. domestic issuer. For example, we are not subject to the proxy rules in the United States and disclosure with respect to our annual meetings will be governed by Canadian requirements. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules thereunder. Therefore, our shareholders may not know on a timely basis when our officers, directors and principal shareholders purchase or sell our shares. Furthermore, as a foreign private issuer, we may take advantage of certain provisions in the Nasdaq listing rules that allow us to follow Canadian law for certain governance matters.

We may also lose our status as a foreign private issuer. 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, and, accordingly, the next determination will be made with respect to us on June 30, 2018. We would lose our foreign private issuer status if, for example, more than 50% of our common shares are directly or indirectly held by residents of the United States on June 30, 2018 and we fail to meet additional requirements necessary to maintain our foreign private issuer status. More than 50% of our common shares are currently held by U.S. shareholders. We nonetheless meet the definition of a foreign private issuer as we have determined that a majority of our executive officers and directors are not, for purposes of this test, U.S. citizens or U.S. residents, a majority of our assets are not located in the U.S. and our business is administered principally in Canada. 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 beginning on January 1, 2019, 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 listing rules of The Nasdaq Global Market. 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 expenses will relate to, among other things, the obligation to prepare our financial information in accordance with U.S. generally accepted accounting principles in the future.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common shares.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition and when required, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retrospective changes to our consolidated financial statements or identify other

42


 

areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common shares.

The two material weaknesses in internal controls over financial reporting identified as of December 31, 2016 were: (i) the valuation of the embedded derivative and related preferred shares liability accounting, and (ii) lack of segregation of duties due to super-user access and insufficient journal entry review throughout the entire fiscal year. The preferred shares will be converted to common shares at the time of the closing of this initial public offering. Management introduced a new control in the fourth quarter of 2016 related to journal entry review, and in April 2017 management implemented another new control related to super-user access. We expect that these new controls combined will remediate the material weakness related to segregation of duties. Despite our efforts to remediate existing material weaknesses or due to the existence of other material weaknesses, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

Our charter documents and certain Canadian legislation could delay or deter a change of control, limit attempts by our shareholders to replace or remove our current management and limit the market price of our common shares.

Our authorized preferred shares are available for issuance from time to time at the discretion of our board of directors, without shareholder approval. Our articles grant our board of directors the authority, subject to the CBCA, to determine the special rights and restrictions granted to or imposed on any unissued series of preferred shares, and those rights may be superior to those of our common shares.

Any of the foregoing could prevent or delay a change of control and may deprive or limit strategic opportunities to our shareholders to sell their shares.

In addition, provisions in the CBCA and in our articles of incorporation and by-laws, as amended and/or restated in connection with this offering, may have the effect of delaying or preventing changes in our management, including provisions that:

 

 

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

 

 

establish an advance notice procedure for shareholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;

 

 

prohibit cumulative voting in the election of directors; and

 

 

require the approval of our board of directors and of our shareholders to amend our by-laws and the approval of our board of directors or the holders of a supermajority of our outstanding share capital to amend the provisions of our articles of incorporation.

These provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our board of directors, which is responsible for appointing the members of our management.

Our executive officers, directors, principal stockholders and their affiliates will continue to exercise significant control over our Company after this offering, which will limit your ability to influence corporate matters and could delay or prevent a change in corporate control.

Immediately following the completion of this offering, and disregarding any common shares that they purchase in this offering, the existing holdings of our executive officers, directors, principal stockholders and their affiliates, including OrbiMed, BDC, and New Enterprise Associates, Inc. and its affiliates will represent beneficial ownership, in the aggregate, of approximately 64% of our outstanding common shares, assuming no exercise of the underwriters’ option to acquire additional common shares in this offering and assuming we issue the number of common shares as set forth on the cover page of this prospectus. As a result, these stockholders, if they act together, will have significant influence over

43


 

our management and affairs and control the outcome of matters submitted to our stockholders for approval, including the election of directors and any sale, merger, consolidation, or sale of all or substantially all of our assets. These stockholders acquired their common shares for substantially less than the price of the common shares being acquired in this offering, and these stockholders may have interests, with respect to their common shares, that are different from those of investors in this offering and the concentration of voting power among these stockholders may have an adverse effect on the price of our common shares. In addition, this concentration of ownership might adversely affect the market price of our common shares by:

 

 

delaying, deferring or preventing a change of control of us;

 

 

impeding a merger, consolidation, takeover or other business combination involving us; or

 

 

discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

See “Principal Shareholders” in this prospectus for more information regarding the ownership of our outstanding common shares by our executive officers, directors, principal stockholders and their affiliates.

Limitations on the ability to acquire and hold our common shares may be imposed under the Hart-Scott Rodino Act, the Competition Act (Canada) and other applicable antitrust legislation.

Limitations on the ability to acquire and hold our common shares may be imposed under the Hart-Scott Rodino Act, the Competition Act (Canada) and other applicable antitrust legislation. Such legislation generally permits the relevant governmental authority to review any acquisition of control over or of a significant interest in us, and grants the authority to challenge or prevent an acquisition on the basis that it would, or would be likely to, result in a substantial prevention or lessening of competition. In addition, the Investment Canada Act subjects an “acquisition of control” of a “Canadian business” (as those terms are defined therein) by a non-Canadian to governmental review if the book value of the Canadian business’ assets as calculated pursuant to the legislation exceeds a threshold amount. A reviewable acquisition may not proceed unless the relevant minister is satisfied that the investment is likely to be of net benefit to Canada. Any of the foregoing could prevent or delay a change of control and may deprive our shareholders of the opportunity to sell their common shares at a control premium.

Sales of a substantial number of our common shares in the public market could cause our stock price to fall.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common shares in the public market after the lock-up and other legal restrictions on resale discussed in this prospectus lapse, the market price of our common shares could decline. Based upon the number of common shares, on an as-converted basis, outstanding as of July 15, 2017, upon the completion of this offering, we will have outstanding a total of 29,676,584 common shares, assuming no exercise of the underwriters’ option to purchase additional shares. Of these shares, as of the date of this prospectus, approximately 7,150,000 of our common shares, plus any shares sold upon exercise of the underwriters’ option to purchase additional shares, will be freely tradable, without restriction, in the public market immediately following this offering, assuming that current stockholders do not purchase shares in this offering. The representatives of the underwriters, however, may, in their sole discretion, permit our officers, directors and other stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

The lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus. After the lock-up agreements expire, based upon the number of common shares, on an as-converted basis, outstanding as of July 15, 2017, up to an additional 22,526,584 common shares will be eligible for sale in the public market, 84% of which shares are held by directors, executive officers and other affiliates and will therefore be subject to certain limitations of Rule 144 under the Securities Act of 1933, as amended (the Securities Act).

44


 

Upon completion of this offering, 5,337,441 common shares that are either subject to outstanding options or reserved for future issuance under our equity incentive plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. If these additional common shares are sold, or if it is perceived that they will be sold, in the public market, the market price of our common shares could decline.

After this offering, the holders of 20,076,224 shares of our common share will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to the lock-up agreements described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates. Any sales of securities by these stockholders could have a material adverse effect on the market our common shares.

If you purchase common shares in this offering, you will incur immediate and substantial dilution in the book value of your shares.

You will suffer immediate and substantial dilution in the net tangible book value of the common shares you purchase in this offering. Based on the assumed initial public offering price of $14.00 per share which is the mid-point of our estimated price range, purchasers of common shares in this offering will experience immediate dilution of $9.58 per share in net tangible book value of the common shares. In addition, investors purchasing common shares in this offering will contribute 49.3% of the total amount invested by stockholders since inception but will only own 24.1% of our common shares outstanding. In the past, we issued options to acquire common shares at prices significantly below the initial public offering price. To the extent these outstanding securities are ultimately exercised, investors purchasing common shares in this offering will sustain further dilution. See “Dilution” for a more detailed description of the dilution to new investors in the offering.

Future sales and issuances of our common shares or rights to purchase common shares, including pursuant to additional financings or our equity incentive plans could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common shares, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common shares, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. These sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing stockholders.

The terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The incurrence of indebtedness would result in increased fixed payment obligations and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborative partners or at an earlier stage than otherwise would be desirable and we may be required to relinquish rights to some of our technologies or palovarotene or any other product candidate or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects.

Moreover, pursuant to the stock option plan, our board of directors are authorized to grant stock options and other equity-based awards to our employees, directors and consultants. The number of shares available for future grant under the 2017 Omnibus Plan will automatically increase by an annual amount to be added the first day of each fiscal year, subject to the ability of our board of directors to take action to reduce the size of the increase in any given year. Currently, we plan to register the increased number of shares available for issuance under the stock option plan each year. If our board of

45


 

directors elects to increase the number of shares available for future grant by the maximum amount each year, our stockholders may experience additional dilution, which could cause our stock price to fall.

After the completion of this offering, we may be at an increased risk of securities class action litigation.

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

We have broad discretion in how we use the proceeds of this offering and may not use these proceeds effectively, which could affect our results of operations and cause our stock price to decline.

Our management will have considerable discretion in the application of the net proceeds of this offering, including for any purpose described in the section of this prospectus entitled “Use of Proceeds.” However, our needs may change as our business and industry evolve and, as a result, the proceeds we receive from this offering may be used in a manner substantially different from our current expectations. We may use the net proceeds for purposes that do not yield a significant return or any return at all for our stockholders. In addition, pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. You will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately and, as a result, you will be relying on our management’s judgment.

We are governed by the corporate laws of Canada which in some cases have a different effect on shareholders than the corporate laws of Delaware.

We are governed by the CBCA, and other relevant laws, which may affect the rights of shareholders differently than those of a company governed by the laws of a U.S. jurisdiction, and may, together with our charter documents, have the effect of delaying, deferring or discouraging another party from acquiring control of our Company by means of a tender offer, a proxy contest or otherwise, or may affect the price an acquiring party would be willing to offer in such an instance. The material differences between the CBCA and Delaware General Corporation Law (DGCL), that may have the greatest such effect include but are not limited to the following: (i) for material corporate transactions (such as mergers and amalgamations, other extraordinary corporate transactions or amendments to our articles) the CBCA generally requires a two-thirds majority vote by shareholders, whereas DGCL generally only requires a majority vote; and (ii) under the CBCA a holder of 5% or more of our common shares can requisition a special meeting of shareholders, whereas such right does not exist under the DGCL. Refer to the heading titled “Material Differences between the Canada Business Corporations Act and Delaware General Corporation Law” for more information.

U.S. civil liabilities may not be enforceable against us, our directors, our officers or certain experts named in this prospectus.

We are governed by the CBCA and our principal place of business is in Canada. Many of our directors and officers, as well as certain experts named herein, reside outside of the U.S., and all or a substantial portion of their assets as well as all or a substantial portion of our assets are located outside the U.S. As a result, it may be difficult for investors to effect service of process within the U.S. upon us and such directors, officers and experts or to enforce judgments obtained against us or such persons, in U.S. courts, in any action, including actions predicated upon the civil liability provisions of U.S. federal securities laws or any other laws of the U.S. Additionally, rights predicated solely upon civil liability provisions of U.S. federal securities laws or any other laws of the U.S. may not be enforceable in original actions, or actions to enforce judgments obtained in U.S. courts, brought in Canadian courts, including courts in the Province of Quebec.

46


 

We do not intend to pay dividends on our common shares and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common shares.

We have never declared or paid any cash dividend on our common shares and do not currently intend to do so in the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. Therefore, the success of an investment in our common shares will depend upon any future appreciation in their value. There is no guarantee that our common shares will appreciate in value or even maintain the price at which you purchased them.

If securities or industry analysts do not publish or cease publishing research or reports or publish misleading, inaccurate or unfavorable research about us, our business or our market, our stock price and trading volume could decline.

The trading market for our common share will be influenced by the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. We do not currently have and may never obtain research coverage by securities and industry analysts. If no or few securities or industry analysts cover our Company, the trading price and volume of our stock would likely be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, or provides more favorable relative recommendations about our competitors, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

47


 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of applicable securities laws. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “expect,” “estimate,” “may,” “will,” “could,” “leading,” “intend,” “contemplate,” “shall” and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements in this prospectus include, but are not limited to, statements with respect to:

 

 

our ability to achieve profitability in the future;

 

 

our projected financial position and estimated cash burn rate;

 

 

our expectations about the timing of achieving milestones and the cost of our development programs;

 

 

our observations and expectations regarding the efficacy of palovarotene and the potential benefits to patients;

 

 

our requirements for, and the ability to obtain, future funding on favorable terms or at all;

 

 

our projections regarding the timely and successful completion of studies and trials and availability of results from such studies and trials;

 

 

our expectations about palovarotene’s safety and efficacy;

 

 

our expectations regarding our ability to arrange for the manufacturing of our products and technologies;

 

 

our expectations regarding the progress, and the successful and timely completion, of the various stages of the regulatory approval process;

 

 

our plans to market, sell and distribute our products and technologies;

 

 

our expectations regarding the acceptance of our products and technologies by the market;

 

 

our ability to retain and access appropriate staff, management, and expert advisers;

 

 

our expectations with respect to existing and future corporate alliances and licensing transactions with third parties, and the receipt and timing of any payments to be made by us or to us in respect of such arrangements; and

 

 

our strategy with respect to the protection of our intellectual property.

All forward-looking statements reflect our beliefs and assumptions based on information available at the time the assumption was made. These forward-looking statements are not based on historical facts but rather on management’s expectations regarding future activities, results of operations, performance, future capital and other expenditures (including the amount, nature and sources of funding thereof), competitive advantages, business prospects and opportunities. By its nature, forward-looking information involves numerous assumptions, inherent risks and uncertainties, both general and specific, known and unknown, that contribute to the possibility that the predictions, forecasts, projections or other forward-looking statements will not occur. Factors which could cause future outcomes to differ materially from those set forth in the forward-looking statements include, but are not limited to:

 

 

our ability to generate revenue and become profitable;

 

 

the ability to obtain, on satisfactory terms or at all, the financing required to support operations, development, clinical trials, and commercialization of products;

 

 

the risks related to our heavy reliance on palovarotene, our only current product candidate;

 

 

the risks of delays and inability to complete clinical trials due to difficulties enrolling patients;

 

 

the risks associated with the development of palovarotene and any future product candidate, including the demonstration of efficacy and safety;

 

 

the risks related to clinical trials including the risk of negative results, potential delays, cost overruns and potential adverse events or unacceptable side effects;

48


 

 

 

the risks of reliance on third-parties for the planning, conduct and monitoring of clinical trials and for the manufacture of clinical drug supplies and drug product;

 

 

potential changes in regulatory requirements, and delays or negative outcomes from the regulatory approval process;

 

 

our ability to successfully compete in our targeted markets, including the risk that competing therapies could emerge;

 

 

the risks related to healthcare reimbursement policies and potential healthcare reform;

 

 

our heavy dependence on licensed intellectual property, including our ability to source and maintain licenses from third-party owners;

 

 

our ability to adequately protect proprietary information, trade secrets, and technology from competitors;

 

 

the risk of patent or other intellectual property related litigation;

 

 

risks related to changes in patent laws and their interpretations;

 

 

risks relating to our ability to manage the expansion of the size and scope of our Company, including risks associated with international operations;

 

 

the potential for product liability claims; and

 

 

our ability to attract, retain and motivate key personnel.

The above are further and more fully described under the section of this prospectus entitled “Risk Factors.”

Although the forward-looking statements contained in this prospectus are based upon what our management believes to be reasonable assumptions, we cannot assure readers that actual results will be consistent with these forward-looking statements.

Any forward-looking statements represent our estimates only as of the date of this prospectus and should not be relied upon as representing our estimates as of any subsequent date. We undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as may be required by applicable securities legislation.

49


 

EXCHANGE RATE DATA

The following table sets forth, for the periods indicated, the high, low, average and end of period noon rates of exchange for one U.S. dollar, expressed in Canadian dollars, published by the Bank of Canada during the respective periods.

 

 

 

 

 

 

 

 

 

 

 

Three-Month
Period Ended
March 31,

 

Year Ended December 31,

 

2017

 

2016

 

2015

 

2014

Highest noon rate during the period

 

 

 

1.3513

 

 

 

 

1.4589

 

 

 

 

1.3990

 

 

 

 

1.1643

 

Lowest noon rate during the period

 

 

 

1.3016

 

 

 

 

1.2544

 

 

 

 

1.1728

 

 

 

 

1.0614

 

Average noon spot rate for the period

 

 

 

1.3238

 

 

 

 

1.3248

 

 

 

 

1.2787

 

 

 

 

1.1045

 

Noon rate at the end of the period

 

 

 

1.3310

 

 

 

 

1.3427

 

 

 

 

1.3840

 

 

 

 

1.1601

 

On July 20, 2017, the Bank of Canada indicative rate of exchange was $1.00 = C$1.2585.

50


 

USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $90.6 million based upon an assumed initial public offering price of $14.00 per common share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ over-allotment option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be approximately $104.6 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $6.6 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of common shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $13.0 million, assuming the assumed initial public offering price remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The principal reasons for this offering are to increase our capitalization and financial flexibility, create a public market for our common shares, and facilitate our access to the public equity markets. We anticipate that we will use the net proceeds of this offering, together with our existing cash on hand, as follows:

 

 

Approximately $65.0 million to fund expenses incurred in pursuing the registration of palovarotene in FOP, including conducting the Phase 3 MOVE clinical trial and additional clinical trials of palovarotene for the treatment of FOP;

 

 

Approximately $25.0 million to fund expenses incurred in conducting the Phase 2/3 clinical trial of palovarotene for the treatment of MO;

 

 

Approximately $10.0 million to fund expenses incurred in conducting the Phase 1 and Phase 2 clinical trials of palovarotene for the treatment of dry eye disease; and

 

 

The remainder for working capital, general and administrative expenses, pre-commercial activities, research and development expenses, and other general corporate purposes.

Our expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering or the amounts that we will actually spend on the uses set forth above. We may also use a portion of the net proceeds to in-license, acquire or invest in complementary technologies, products or assets. The amounts and timing of our actual use of net proceeds will vary depending on numerous factors, including the status of and results from clinical trials, the timing of regulatory submissions, and the progress of our development and commercialization efforts. As a result, our management will have broad discretion over the use of the net proceeds from this offering.

Pending its use, we intend to invest the net proceeds to us from the offering in accordance with the terms of our investment policy, as approved by our board of directors, or hold them as cash.

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DIVIDEND POLICY

We have never declared or paid cash dividends on our common shares. We currently intend to retain any future earnings to fund the development and growth of our business and we do not currently anticipate paying dividends on our common shares. Any determination to pay dividends to holders of our common shares in the future will be at the discretion of our board of directors and will depend on many factors, including our financial condition, earnings, legal requirements and other factors as our board of directors deems relevant.

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CAPITALIZATION

The following table sets forth our cash and short-term investments and capitalization as of March 31, 2017:

 

(1)

 

on an actual basis, which retrospectively reflects a 11.99-for-1 stock split of our common shares;

 

(2)

 

on a pro forma basis to give effect to (1) the automatic conversion of all of our outstanding preferred shares into 20,076,224 common shares upon the closing of this offering; (2) the recording of a non-recurring, non-cash charge of approximately $49.2 million to the consolidated statement of net loss and comprehensive loss (reflected as a pro forma increase in preferred share embedded derivative liability and deficit in connection with the mark-to-market of the preferred shares and embedded derivative liabilities to the fair value of our common shares prior to conversion of our preferred shares into common shares), assuming an initial public offering price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus (see footnote (1) to the table set forth in the section titled “Selected Consolidated Financial Data” for more information); (3) the inclusion in share capital of the original stated capital of the preferred shares (in accordance with subsection 39(4) of the CBCA); (4) the inclusion in contributed surplus of the excess of the total carrying value of the preferred shares, including the preferred shares and embedded derivative liabilities, over the stated capital of the preferred shares, and a corresponding increase in deficit (as resolved by the Company’s board of directors); and (5) the elimination of the contributed surplus created by the conversion of the preferred shares into common shares, and a corresponding reduction in deficit (as resolved by the Company’s board of directors); and

 

(3)

 

on a pro forma as adjusted basis to give effect to the sale by us of 7,150,000 common shares in this offering at an assumed initial public offering price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and estimated offering expenses payable by us.

You should read the information in this table together with our financial statements and accompanying notes thereto, “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

 

 

 

 

 

 

 

 

As of March 31, 2017

 

Actual

 

Pro Forma

 

Pro Forma
As Adjusted
(4)

 

 

(in thousands)

Cash and short-term investments

 

 

$

 

43,722

   

 

$

 

43,722

   

 

$

 

134,315

 

 

 

 

 

 

 

 

Preferred shares liability(1)

 

 

$

 

76,059

   

 

$

 

   

 

$

 

 

Preferred shares embedded derivative

 

 

$

 

155,857

   

 

$

 

   

 

$

 

 

 

 

 

 

 

 

 

Total long-term liabilities

 

 

$

 

231,916

   

 

$

 

   

 

$

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Common shares(2)

 

 

$

 

314

   

 

$

 

103,021

   

 

$

 

195,512

 

Contributed surplus(3)

 

 

$

 

566

   

 

$

 

566

   

 

$

 

566

 

Deficit

 

 

$

 

(190,779

)

 

 

 

$

 

(61,570

)

 

 

 

$

 

(63,468

)

 

 

 

 

 

 

 

 

Total equity

 

 

$

 

(189,899

)

 

 

 

$

 

42,017

   

 

$

 

132,610

 

 

 

 

 

 

 

 

Consolidated capitalization

 

 

$

 

42,017

   

 

$

 

42,017

   

 

$

 

132,610

 

 

 

(1)

 

Actual: no par value, unlimited shares authorized, 13,409,796 Class A, 5,825,018 Class B and 841,410 Class C convertible and redeemable preferred shares issued and outstanding. Pro forma and pro forma as adjusted: no shares authorized, issued and outstanding.

 

(2)

 

Actual: no par value, unlimited shares authorized, 2,430,289 shares issued and outstanding. Pro forma: unlimited shares authorized; 22,506,513 shares issued and outstanding. Pro forma as adjusted: unlimited shares authorized, 29,656,513 shares issued and outstanding.

 

(3)

 

At March 31, 2017, there were 2,549,098 stock options outstanding at a weighted average exercise price of $1.07 per share. Share-based compensation expense recognized as stock options vest is

53


 

 

 

 

recorded in contributed surplus. 468,809 stock options were granted subsequent to March 31, 2017 with a weighted average exercise price of $10.04 per share. The grants subsequent to March 31, 2017 are not reflected in the above table as they will only be recorded as vesting occurs.

 

(4)

 

A $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) pro forma as adjusted cash, short-term investments and total equity by $6.6 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of common shares offered by us would increase (decrease) pro forma as adjusted cash, short-term investments and total equity by approximately $13.0 million, assuming the assumed initial public offering price remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

54


 

DILUTION

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

Our historical net tangible book value as of March 31, 2017 was negative $191.9 million or negative $78.94 per share. The historical net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of common shares outstanding as of March 31, 2017. The negative amount is attributable to our preferred shares being classified as a liability and the related embedded derivative liability, which have been included in this calculation based on the amounts in the consolidated financial statements as of March 31, 2017.

Our pro forma net tangible book value as of March 31, 2017 was $40.1 million, or $1.78 per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of common shares as of March 31, 2017 after giving effect to the automatic conversion of our preferred shares into common shares and the 11.99-for-1 stock split of our common shares.

After giving further effect to the sale by us of common shares in this offering at an assumed initial public offering price of $14.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2017 would have been $131.1 million, or $4.42 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $2.64 per share to our existing shareholders and an immediate dilution in pro forma as adjusted net tangible book value of $9.58 per share to new investors in this offering. The following table illustrates this dilution on a per share basis:

 

 

 

 

 

Assumed initial public offering price per share

 

 

 

 

   

 

$

 

14.00

 

Historical net tangible book value per share as of March 31, 2017

 

 

$

 

(78.94

)

 

 

 

Increase in pro forma net tangible book value per share attributed to automatic conversion of preferred shares into common shares

 

 

$

 

80.72

   

 

 

 

 

Pro forma net tangible book value per share as of March 31, 2017

 

 

$

 

1.78

   

 

Increase in pro forma as adjusted net tangible book value per share attributed to new investors purchasing shares in this offering

 

 

$

 

2.64

   

 

 

 

 

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

 

 

 

 

$

 

4.42

 

 

 

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering

 

 

 

 

$

 

9.58

 

 

 

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share would increase (decrease) the pro forma as adjusted net tangible book value by $0.22 per share and the dilution to new investors by $0.78 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1,000,000 shares in the number of common shares offered by us would increase (decrease) the pro forma as adjusted net tangible book value by approximately $0.29 per share and the dilution to new investors by approximately $0.29 per share, assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and estimated offering expenses payable by us.

If the underwriters’ option to purchase additional common shares from us is exercised in full, the pro forma as adjusted net tangible book value per share of our common shares immediately after the completion of this offering would be approximately $4.72 per share, and the dilution in pro forma net tangible book value per share to investors purchasing shares of our common shares in this offering would be approximately $9.28 per share, assuming no change in the assumed initial public offering price and after deducting underwriting discounts and estimated offering expenses payable by us.

The above discussion and table are based on 22,506,513 of our common shares outstanding as of March 31, 2017 after giving effect to a 11.99-for-1 stock split of our common shares and the automatic conversion of all of our outstanding preferred shares into 20,076,224 common shares and exclude

55


 

common shares issuable upon the exercise of options outstanding pursuant to our Existing Stock Option Plan and 2017 Omnibus Plan and common shares available for future issuance under our 2017 Omnibus Plan.

The table below summarizes as of July 15, 2017 on a pro forma as adjusted basis described above, the number of our common shares, the total consideration and the average price per share (i) paid to us by our existing shareholders and (ii) to be paid by new investors purchasing our common shares in this offering at an assumed initial public offering price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting underwriting discounts and estimated offering expenses payable by us.

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Purchased

 

Total Consideration

 

Average
Price Per
Share

 

Number

 

Percent

 

Amount

 

Percent

 

 

(In thousands)

Existing shareholders

 

 

 

22,526,584

   

 

 

75.9

%

 

 

 

$

 

102,861

   

 

 

50.7

%

 

 

 

 

4.57

 

New investors

 

 

 

7,150,000

   

 

 

24.1

   

 

$

 

100,100

   

 

 

49.3

   

 

 

14.00

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

29,676,584

   

 

 

100.0

%

 

 

 

$

 

202,961

   

 

 

100.0

%

 

 

 

$

 

6.84

 

 

 

 

 

 

 

 

 

 

 

 

The above table is based on 22,526,584 of our common shares outstanding as of July 15, 2017 after giving effect to a 11.99-for-1 stock split of our common shares and the automatic conversion of all of our outstanding preferred shares into 20,076,224 common shares, and excludes:

 

 

2,997,836 common shares issuable upon the exercise of options outstanding as of July 15, 2017 pursuant to our Second Amended and Restated Stock Option Plan (Existing Stock Option Plan) and 2017 Omnibus Plan, at a weighted-average exercise price of $2.48 per share; and

 

 

2,339,605 common shares available for future issuance under our 2017 Omnibus Plan.

To the extent that any outstanding options are exercised, new options are issued under our 2017 Omnibus Plan or we issue additional common shares in the future, there will be further dilution to investors participating in this offering. If all outstanding options under our Existing Stock Option Plan and 2017 Omnibus Plan as of July 15, 2017 were exercised, then our existing shareholders, including the holders of these options, would own 78.1%, and our new investors would own 21.9% of the total number of our common shares outstanding upon the closing of this offering. In such event, the total consideration paid by our existing shareholders, including the holders of these options, would be approximately $110.3 million, or 52.4%, the total consideration paid by our new investors would be $100.1 million, or 47.6%, the average price per share paid by our existing shareholders would be $4.32 and the average price per share paid by our new investors would be $14.00.

56


 

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth our selected consolidated financial data for the periods, and as of the dates, indicated. The information set forth below does not take into account the 11.99-for-1 stock split of our common shares or the automatic conversion of our preferred shares into common shares, which will occur prior to the consummation of this offering. The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto, which are included elsewhere in this prospectus.

We have derived the selected consolidated statements of net loss and comprehensive loss data for the years ended December 31, 2016, 2015 and 2014 and the selected consolidated statement of financial position data as of December 31, 2016, 2015 and 2014 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the consolidated statements of net loss and comprehensive loss data for the three-month periods ended March 31, 2017 and 2016 and the consolidated statement of financial position data as of March 31, 2017 from our unaudited interim condensed consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus. Our consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the financial statements. Our historical results are not necessarily indicative of the results that should be expected in any future period, and the results for the three-month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the full year or any other period.

All of our operations are continuing operations and we have not paid any dividends since inception.

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Net Loss and Comprehensive Loss Data

 

Three-months Ended
March 31,

 

Year Ended
December 31,

 

2017

 

2016

 

2016

 

2015

 

2014

 

 

(in thousands, except share and per share data)

Expenses

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

$

 

3,408

 

 

 

$

 

3,669

 

 

 

$

 

16,852

 

 

 

$

 

14,396

 

 

 

$

 

7,797

 

Investment tax credits

 

 

 

(50

)

 

 

 

 

(47

)

 

 

 

 

(139

)

 

 

 

 

(165

)

 

 

 

 

(214

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,358

 

 

 

 

3,622

 

 

 

 

16,713

 

 

 

 

14,231

 

 

 

 

7,583

 

General and administrative

 

 

 

1,668

 

 

 

 

1,080

 

 

 

 

3,406

 

 

 

 

5,479

 

 

 

 

2,266

 

Interest income

 

 

 

(81

)

 

 

 

 

(103

)

 

 

 

 

(399

)

 

 

 

 

(109

)

 

 

 

 

(19

)

 

Financial expenses

 

 

 

36,347

 

 

 

 

1,432

 

 

 

 

37,646

 

 

 

 

56,140

 

 

 

 

2,364

 

Income tax expense

 

 

 

45

   

 

 

33

 

 

 

 

146

 

 

 

 

156

 

 

 

 

95

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and comprehensive loss

 

 

$

 

(41,337

)

 

 

 

$

 

(6,064

)

 

 

 

$

 

(57,512

)

 

 

 

$

 

(75,897

)

 

 

 

$

 

(12,289

)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share applicable to common shareholders—basic and diluted

 

 

$

 

(17.48

)

 

 

 

$

 

(2.58

)

 

 

 

$

 

(24.46

)

 

 

 

$

 

(33.07

)

 

 

 

$

 

(5.70

)

 

Weighted average number of common shares used in net loss per share applicable to common shareholders—basic and diluted

 

 

 

2,364,200

   

 

 

2,351,347

   

 

 

2,351,347

   

 

 

2,295,402

   

 

 

2,156,689

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

$

 

(0.23

)

 

 

 

 

 

$

 

(0.92

)

 

 

 

 

 

Pro forma weighted average number of common shares used in net loss per share applicable to common shareholders—basic and diluted (unaudited)(1)

 

 

 

21,731,287

   

 

 

 

 

21,586,161

   

 

 

 

57


 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Financial Position Data

 

As of
March 31,

 

As of December 31,

 

2017

 

2016

 

2015

 

2014

 

 

(in thousands)

Cash and short-term investments

 

 

$

 

43,722

 

 

 

$

 

39,434

 

 

 

$

 

58,107

 

 

 

$

 

5,504

 

Working capital(2)

 

 

 

40,118

 

 

 

 

36,101

 

 

 

 

55,569

 

 

 

 

4,885

 

Total assets

 

 

 

46,670

 

 

 

 

41,557

 

 

 

 

60,657

 

 

 

 

8,000

 

Preferred share and embedded derivative liabilities

 

 

 

231,916

 

 

 

 

185,706

 

 

 

 

147,981

 

 

 

 

21,598

 

Common shares

 

 

 

314

 

 

 

 

272

 

 

 

 

272

 

 

 

 

195

 

Total equity

 

 

 

(189,899

)

 

 

 

 

(148,672

)

 

 

 

 

(91,335

)

 

 

 

 

(15,652

)

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 

Pro-forma net loss per share has been computed to give retrospective effect to the conversion of all of the outstanding preferred shares into common shares on a one-for-one basis using the if-converted method for the three-month period ended March 31, 2017 and the year-ended December 31, 2016 as if the conversion had occurred on January 1, 2016 or the original issue date of the preferred shares if later and after reflecting a 11.99-for-1 stock split of our common shares. A non-recurring, non-cash charge will be recorded in the statement of net loss at the time of the conversion of the preferred shares immediately prior to the initial public offering. This charge is not reflected in the pro forma net loss per share. In addition, the following charges are not reflected in the pro forma net loss per share: charges related to incurred or upcoming listing and related expenses, and share-based compensation expense related to 468,809 stock options granted subsequent to March 31, 2017.

 

(2)

 

Working capital equals current assets less current liabilities.

58


 

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

You should read the following discussion and analysis of our financial condition and results of operations together with the section entitled “Selected Consolidated Financial Data,” our audited annual consolidated financial statements and related notes thereto, and our unaudited interim condensed consolidated financial statements and notes thereto included elsewhere in this prospectus. This discussion and analysis and other parts of this prospectus contain forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, intentions, and projections. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this prospectus.

Overview

We are a clinical stage biopharmaceutical company that is developing disease-modifying treatments for patients suffering from debilitating bone and other diseases with high unmet medical need. Our lead product candidate, palovarotene, is an oral small molecule that has shown potent activity in preventing abnormal new bone formation as well as fibrosis in a variety of tissues. We are developing palovarotene for the treatment of Fibrodysplasia Ossificans Progressiva (FOP) and Multiple Osteochondroma (MO).

Our most advanced program is palovarotene for the treatment of FOP. In July 2014, the FDA granted Orphan Drug Designation for palovarotene as a treatment for FOP and in November 2014, we received Fast Track Designation. Also, in July 2017 we received Breakthrough Therapy Designation from the FDA for the prevention of HO in patients with FOP. We expect to initiate a registration trial of palovarotene in FOP in 2017 and we are also developing a protocol for another clinical trial in FOP. The registration trial is the Phase 3 MOVE trial for the treatment of FOP in adults and children, which will enroll up to 80 patients who will be treated chronically with palovarotene and with increased doses during flare-ups. The second is a trial which aims to determine if palovarotene can inhibit new HO formation after surgical excision of HO. We expect to report data from the MOVE trial in 2020 with an interim read-out in 2019.

We are also developing palovarotene for the treatment of MO. Following the completion of our pre-clinical proof-of-concept studies showing that palovarotene inhibits the number of osteochondromas expressed in animal models of MO, and based on our knowledge of the safety and tolerability profile of palovarotene and our pre-clinical animal model data, we are planning to initiate a placebo-controlled Phase 2/3 study of palovarotene in MO this year. We expect to report data for this trial in 2020 with a potential interim read-out in 2019.

We also believe that RARg agonists have great potential as inhibitors of bone morphogenetic protein (BMP) signaling in other indications. There are several other potential large indications for the prevention of HO, such as ankylosing spondylitis, a type of arthritis associated with BMP signaling, which represents a high unmet medical need. Other indications, such as those characterized by excessive fibrosis or scarring, are also potential target indications for RARg agonists. As a result, we have conducted pre-clinical proof-of-concept studies in dry eye disease that show an eye drop formulation of palovarotene can potently increase tear production and decrease corneal damage. Following the completion of these studies, we plan to initiate IND-enabling toxicity studies of an ophthalmologic formulation in order to begin Phase 1 and 2 clinical trials in dry eye disease in 2018. We are also focused on developing our RARg agonist platform beyond palovarotene for larger, related disease markets, such as in ankylosing spondylitis or trauma-induced HO. As part of this development process, we recently licensed a number of second generation RARg agonists from Galderma. On the basis of our scientific know-how and other clinical and commercial insights, a number of indications have been prioritized for animal model proof-of-concept studies in 2017 and 2018. Should these studies be successful, we plan to initiate the pre-IND activities necessary to initiate clinical trials in these new indications.

Since our inception in November 2010, we have devoted substantially all of our resources to organizing and staffing our Company, business planning, raising capital, developing our product candidates, preparing and conducting clinical studies of our product candidates, providing general and

59


 

administrative support for these operations and protecting our intellectual property. We have funded our operations primarily through issuances of redeemable convertible preferred shares and to a lesser extent, the issuance of convertible notes and common shares. From our inception through March 31, 2017, we have received gross proceeds of $102.8 million from such transactions, of which $102.2 million was in the form of gross proceeds from the sale of preferred shares, $0.5 million was in the form of gross proceeds from the sale of convertible notes and $0.1 million was in the form of gross proceeds from the sale of common shares. As at March 31, 2017 we had cash and short-term investments of $43.7 million.

We are a development stage company and have not generated any revenue. We have incurred net losses since our inception and as of March 31, 2017, we had an accumulated deficit of $190.8 million. Substantially all of our net losses have resulted from non-cash charges incurred in connection with the accounting of our preferred shares and embedded derivatives, as well as research and development activities and general and administrative costs associated with our operations.

We expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses will increase substantially in connection with our ongoing activities, particularly as we advance clinical development of palovarotene, our lead product candidate for the treatment of FOP, including conducting two clinical trials; advance development of palovarotene in the treatment of MO; continue research and development efforts to support clinical development of additional RARg agonist candidates; continue to engage contract manufacturing organizations (CMOs) to manufacture our clinical study materials and to develop large-scale manufacturing capabilities; seek regulatory approval for our product candidates; add personnel to support our product development and future commercialization; add operational, financial and management information systems; maintain, leverage and expand our intellectual property portfolio; and operate as a public company.

We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for palovarotene or any other product candidate, which we expect will take a number of years and is subject to significant uncertainty. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing, and distribution. As a result, we will need additional financing to support our continuing operations. Until such time that we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies or product candidates, obtain adequate patent protection for our technology, obtain necessary regulatory approval for our product candidates or achieve commercial viability for any approved product candidates. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability 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 will need to generate significant revenue to achieve profitability, and we may never do so.

Financial Operations Overview

Revenue

We have not generated any revenues from product sales since our inception and do not expect to generate any revenues from the sale of products in the near future. If our development efforts result in clinical success and regulatory approval or collaboration agreements with third parties for our product candidates, we may generate revenue from those product candidates.

Research and development expenses

Research and development expenses consist primarily of costs associated with our product research and efforts, and predominantly include:

 

 

personnel costs, including salaries, benefits, bonuses, stock-based compensation expense and related travel for employees engaged in scientific research and development functions;

60


 

 

 

expenses incurred under agreements with contract research organizations, or CROs and investigative sites that conduct our non-clinical studies and clinical trials;

 

 

expenses associated with manufacturing clinical study materials and developing external manufacturing capabilities;

 

 

costs of outside consultants, including their fees and related travel expenses;

 

 

other expenses related to our non-clinical studies and expenses related to our regulatory activities; and

 

 

payments made under our third-party licensing agreements.

Research and development costs are generally expensed as incurred unless they meet specific criteria for recognition as internally-generated intangible assets as per IFRS. We have not recognized any internally-generated intangible asset to date.

Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.

We have been focused on developing palovarotene, our product candidate for the treatment of patients with FOP and MO. Our research and development expenses consist principally of external costs, such as start-up fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical and non-clinical studies, and costs related to acquiring and manufacturing clinical study materials. We do not allocate personnel-related costs, depreciation or other indirect costs to specific programs, as they are deployed across various projects under development and, as such, are separately classified as personnel and other expenses.

The following table summarizes our research and development expenses by program:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-Months
Ended March 31,

 

Years Ended
December 31,

 

2017

 

2016

 

2016

 

2015

 

2014

 

 

(in thousands)

Palovarotene for FOP research and development expenses

 

 

$

 

2,073

 

 

 

$

 

2,666

 

 

 

$

 

13,014

 

 

 

$

 

11,318

 

 

 

$

 

5,700

 

Palovarotene for MO research and development expenses

 

 

 

35

 

 

 

 

50

 

 

 

 

369

 

 

 

 

 

 

 

 

 

Palovarotene for ocular research and development expenses

 

 

 

2

 

 

 

 

61

 

 

 

 

229

 

 

 

 

75

 

 

 

 

 

Other research and development expenses

 

 

 

176

 

 

 

 

141

 

 

 

 

149

 

 

 

 

501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total direct research and development expenses

 

 

 

2,286

 

 

 

 

2,918

 

 

 

 

13,761

 

 

 

 

11,894

 

 

 

 

5,700

 

 

 

 

 

 

 

 

 

 

 

 

Personnel-related expenses

 

 

 

781

 

 

 

 

628

 

 

 

 

2,353

 

 

 

 

1,971

 

 

 

 

1,692

 

Facility and other expenses

 

 

 

341

 

 

 

 

123

 

 

 

 

738

 

 

 

 

531

 

 

 

 

405

 

 

 

 

 

 

 

 

 

 

 

 

Total personnel, facility and other expenses

 

 

 

1,122

 

 

 

 

751

 

 

 

 

3,091

 

 

 

 

2,502

 

 

 

 

2,097

 

 

 

 

 

 

 

 

 

 

 

 

Total research and development expenses

 

 

$

 

3,408

 

 

 

$

 

3,669

 

 

 

$

 

16,852

 

 

 

$

 

14,396

 

 

 

$

 

7,797

 

 

 

 

 

 

 

 

 

 

 

 

Research and development activities are central to our business. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. From inception through March 31, 2017, we incurred $44.5 million in research and development expenses. We expect that our research and development expenses will continue to increase in the foreseeable future as we pursue later stages of clinical development of our product candidates.

We cannot determine with certainty the duration and completion costs of the current or future clinical studies of our product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration,

61


 

costs, and timing of clinical studies and development of our product candidates will depend on a variety of factors, including:

 

 

the scope, rate of progress, and expense of our ongoing as well as any additional clinical studies and other research and development activities;

 

 

future clinical study results;

 

 

uncertainties in clinical study enrollment rate or design;

 

 

significant and changing government regulation; and

 

 

the timing and receipt of any regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA, or another regulatory authority were to require us to conduct clinical studies beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any of our clinical studies, we could be required to expend significant additional financial resources and time on the completion of clinical development.

General and administrative expenses

General and administrative expenses consist primarily of personnel costs, including salaries, related benefits, bonuses, stock-based compensation and travel expenses for our executive, finance, business and corporate development and other administrative functions. General and administrative expenses also include facilities and other expenses, including rent, depreciation, maintenance of facilities, insurance and supplies; and professional fees for accounting, tax and legal services, including legal expenses to pursue patent protection of our intellectual property.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our expected growth in our continued research and development activities and the potential commercialization of our product candidates. We also anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with our exchange listing on The Nasdaq Global Market and SEC requirements, director and officer insurance premiums, and investor relations costs. Additionally, if and when we believe a regulatory approval of palovarotene or any other product candidate appears likely, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of palovarotene or any other product candidate.

Interest income and financial expenses

Interest income consists of interest earned on our cash and short-term investments. Our interest income has not been significant due to low interest rates earned on invested funds. We anticipate that our interest income will increase in the future primarily due to the anticipated net proceeds from this offering.

Financial expenses consist mainly of losses on the re-measurement of embedded derivatives at fair value at each reporting date, accretion expense and foreign exchange gains and losses. Accretion expense consists of accreted interest expense on our outstanding Class A, Class B and Class C redeemable convertible preferred stock to bring the debt components of our preferred stock back to their face value over time. The consummation of this offering will result in the conversion of all classes of our preferred stock into common shares and as such, losses on the re-measurement of embedded derivatives at fair value and accretion expense will be eliminated following this offering. Foreign exchange gains and losses consist of the realized and unrealized net gains and losses from holding cash and short-term investments in foreign currency and foreign currency-denominated other current assets and accounts payable.

62


 

Results of Operations

Comparison of the three-months ended March 31, 2017 and 2016

The following table summarizes our results of operations for the three-months ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

Three-months ended
March 31,

 

Increase
(decrease)

 

2017

 

2016

 

 

(in thousands)

Expenses:

 

 

 

 

 

 

Research and development

 

 

$

 

3,408

 

 

 

$

 

3,669

 

 

 

$

 

(261

)

 

Investment tax credits

 

 

 

(50

)

 

 

 

 

(47

)

 

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

3,358

 

 

 

 

3,622

 

 

 

 

(264

)

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

 

1,668

 

 

 

 

1,080

 

 

 

 

588

 

Interest income

 

 

 

(81

)

 

 

 

 

(103

)

 

 

 

 

22

 

Financial expenses

 

 

 

36,347

 

 

 

 

1,432

 

 

 

 

34,915

 

Income tax expense

 

 

 

45

 

 

 

 

33

 

 

 

 

12

 

 

 

 

 

 

 

 

Net loss and comprehensive loss

 

 

$

 

(41,337

)

 

 

 

$

 

(6,064

)

 

 

 

$

 

(35,273

)

 

 

 

 

 

 

 

 

Research and development expenses

Research and development expenses were $3.4 million for the three-months ended March 31, 2017, compared to $3.7 million for the three-months ended March 31, 2016. The $0.3 million decrease was primarily due to reduced activities on completion of the Phase 2 clinical trial in FOP and completing enrollment into the Phase 2 open-label extension study in 2016.

General and administrative expenses

General and administrative expenses were $1.7 million for the three-months ended March 31, 2017, compared to $1.1 million for the three-months ended March 31, 2016. The increase of $0.6 million in expenses is primarily due to a $0.4 million increase in financing costs associated with the initial public offering and a $0.2 million increase in pre-commercial marketing activities and other general and administrative support activities.

Interest income

Interest income remained stable at $0.1 million for the three-months ended March 31, 2017, compared to $0.1 million for the three-months ended March 31, 2016.

Financial expenses

Financial expenses were $36.3 million for the three-months ended March 31, 2017, compared to $1.4 million for the three-months ended March 31, 2016. The $34.9 million increase in financial expenses is primarily due to an increase in losses on the re-measurement at fair value of the embedded derivative in our preferred stock as a result of a greater step-up in value of the conversion option in the first quarter of 2017 as compared to the first quarter of 2016.

63


 

Comparison of the years ended December 31, 2016 and 2015

The following table summarizes our results of operations for the years ended December 31, 2016 and 2015:

 

 

 

 

 

 

 

 

 

Years ended
December 31,

 

Increase
(decrease)

 

2016

 

2015

 

 

(in thousands)

Expenses:

 

 

 

 

 

 

Research and development

 

 

$

 

16,852

 

 

 

$

 

14,396

 

 

 

$

 

2,456

 

Investment tax credits

 

 

 

(139

)

 

 

 

 

(165

)

 

 

 

 

26

 

 

 

 

 

 

 

 

 

 

 

 

16,713

 

 

 

 

14,231

 

 

 

 

2,482

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

 

3,406

 

 

 

 

5,479

 

 

 

 

(2,073

)

 

Interest income

 

 

 

(399

)

 

 

 

 

(109

)

 

 

 

 

(290

)

 

Financial expenses

 

 

 

37,646

 

 

 

 

56,140

 

 

 

 

(18,494

)

 

Income tax expense

 

 

 

146

 

 

 

 

156

 

 

 

 

(10

)

 

 

 

 

 

 

 

 

Net loss and comprehensive loss

 

 

$

 

(57,512

)

 

 

 

$

 

(75,897

)

 

 

 

$

 

18,385

 

 

 

 

 

 

 

 

Research and development expenses

Research and development expenses were $16.9 million for the year ended December 31, 2016, compared to $14.4 million for the year ended December 31, 2015. The $2.5 million increase was primarily due to:

 

 

$1.7 million increase in clinical studies and CRO related activities as a result of three FOP clinical studies initiated in 2014 and 2015;

 

 

$0.5 million for initiation of pre-clinical research activities for new potential product candidates in MO and ocular indications;

 

 

$0.4 million decrease in pre-clinical research activities for other potential indications;

 

 

$0.4 million increase in personnel related expenses in support of increased development activities; and

 

 

$0.2 million increase in facility and other expenses in support of increased development activities.

General and administrative expenses

General and administrative expenses were $3.4 million for the year ended December 31, 2016, compared to $5.5 million for the year ended December 31, 2015. The decrease of $2.1 million in expenses is primarily due to a $1.3 million reduction in pre-commercial marketing activities as certain projects undertaken in 2015 were completed in 2016, a $0.5 million reduction in professional fees and a $0.3 million reduction in other general and administrative supporting expenditures.

Interest income

Interest income was $0.4 million for the year ended December 31, 2016, compared to $0.1 million for the year ended December 31, 2015. The increase of $0.3 million in interest income is primarily due to higher invested capital throughout 2016 at higher rates of return.

Financial expenses

Financial expenses were $37.6 million for the year ended December 31, 2016, compared to $56.1 million for the year ended December 31, 2015. The $18.5 million decrease in financial expenses is primarily due to a reduction in losses on the re-measurement at fair value of the embedded derivative as a result of a smaller step-up in value of the conversion option in 2016 than in 2015.

64


 

Comparison of the years ended December 31, 2015 and 2014

The following table summarizes our results of operations for the years ended December 31, 2015 and 2014:

 

 

 

 

 

 

 

 

 

Years ended
December 31,

 

Increase
(decrease)

 

2015

 

2014

 

 

(in thousands)

Expenses:

 

 

 

 

 

 

Research and development

 

 

$

 

14,396

 

 

 

$

 

7,797

 

 

 

$

 

6,599

 

Investment tax credits

 

 

 

(165

)

 

 

 

 

(214

)

 

 

 

 

49

 

 

 

 

 

 

 

 

 

 

 

 

14,231

 

 

 

 

7,583

 

 

 

 

6,648

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

 

5,479

 

 

 

 

2,266

 

 

 

 

3,213

 

Interest income

 

 

 

(109

)

 

 

 

 

(19

)

 

 

 

 

(90

)

 

Financial expenses

 

 

 

56,140

 

 

 

 

2,364

 

 

 

 

53,776

 

Income tax expense

 

 

 

156

 

 

 

 

95

 

 

 

 

61

 

 

 

 

 

 

 

 

Net loss and comprehensive loss

 

 

$

 

(75,897

)

 

 

 

$

 

(12,289

)

 

 

 

$

 

(63,608

)

 

 

 

 

 

 

 

 

Research and development expenses

Research and development expenses were $14.4 million for the year ended December 31, 2015, compared to $7.8 million for the year ended December 31, 2014. The $6.6 million increase was primarily due to:

 

 

$5.6 million increase in clinical studies and CRO related activities as a result of three FOP clinical studies initiated in 2014 and 2015;

 

 

$0.6 million increase in pre-clinical research activities for other potential indications;

 

 

$0.3 million increase in personnel related expenses in support of increased development activities; and

 

 

$0.1 million increase in facility and other expenses in support of increased development activities.

General and administrative expenses

General and administrative expenses were $5.5 million for the year ended December 31, 2015, compared to $2.3 million for the year ended December 31, 2014. The increase of $3.2 million in expenses is primarily due to a $1.4 million increase in pre-commercial marketing activities, a $0.7 million increase in personnel related expenses in support of increased development activities, a $0.6 million increase in professional fees and a $0.5 million increase in other general and administrative supporting expenditures.

Interest income

Interest income was $0.1 million for the year ended December 31, 2015, compared to $19,000 for the year ended December 31, 2014. The increase of $0.1 million in interest income is primarily due to an increase in short-term investments throughout 2015 at higher rates of return.

Financial expenses

Financial expenses were $56.1 million for the year ended December 31, 2015, compared to $2.3 million for the year ended December 31, 2014. The $53.8 million increase in financial expenses is primarily due to increased losses on the re-measurement at fair value of the embedded derivative as a result of a higher step-up in value of the conversion option in 2015 than in 2014.

65


 

Liquidity and Capital Resources

Sources of liquidity

We have funded our operations principally from the issuance of common shares, preferred stock and convertible notes to purchase common shares. In addition, we have recorded investment tax credits of $0.6 million since inception. As of March 31, 2017, we had cash and short-term investment of $43.7 million. Cash in excess of immediate working capital requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our short-term investments are held in guaranteed investment certificates with a Canadian chartered bank.

The Company is not subject to any externally imposed restrictions, covenants or capital requirements and has no arranged sources of financing.

Cash flows

Comparison of the three-month periods ended March 31, 2017 and 2016

The following table sets forth the primary sources and uses of cash for each of the periods set forth below:

 

 

 

 

 

 

 

 

 

Three-months ended
March 31

 

Increase
(decrease)

 

2017

 

2016

 

 

(in thousands)

Net cash provided by (used in):

 

 

 

 

 

 

Operating activities

 

 

$

 

(5,938

)

 

 

 

$

 

(5,645

)

 

 

 

$

 

(293

)

 

Investing activities

 

 

 

10,324

 

 

 

 

(40,006

)

 

 

 

 

50,330

 

Financing activities

 

 

 

9,896

 

 

 

 

 

 

 

 

9,896

 

 

 

 

 

 

 

 

Net (decrease) increase in cash

 

 

$

 

14,282

 

 

 

$

 

(45,651

)

 

 

 

$

 

59,933

 

 

 

 

 

 

 

 

Operating activities

The increase in cash used in operating activities for the three-months ended March 31, 2017, compared to the three-months ended March 31, 2016 is primarily due to an increase in general and administrative expenses related to the initial public offering. The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in working capital.

During the three-months ended March 31, 2017, operating activities used $5.9 million in cash, primarily resulting from our research and development and general and administrative expenses, as well as cash used for changes in working capital. The significant items accounting for the change in working capital include a decrease in accounts payable and accrued liabilities, an increase in deferred financing costs and a decrease in other current assets.

During the three-months ended March 31, 2016, operating activities used $5.6 million in cash, primarily resulting from research and development and general and administrative expenses, as well as cash used for changes in working capital. The significant items accounting for the change in working capital include decreases in accounts payable and accrued liabilities as well as prepaid expenses.

Investing activities

Net cash used in investing activities primarily consists of acquisition and maturity of short-term investments, in-licensing of intellectual property and purchases of fixed assets.

During the three-months ended March 31, 2017, investing activities provided $10.3 million in cash primarily resulting from the maturity of guaranteed investment certificates.

During the three-months ended March 31, 2016, investing activities used $40.0 million in cash primarily for investments in guaranteed investment certificates with a Canadian chartered bank.

66


 

Financing activities

During the three-months ended March 31, 2017, net cash provided by financing activities was $9.9 million resulting from net proceeds received from the issuance of 70,176 shares of our Class C redeemable convertible preferred stock.

During the three-months ended March 31, 2016, there were no financing activities.

Comparison of the years ended December 31, 2016 and 2015

The following table sets forth the primary sources and uses of cash for each of the periods set forth below:

 

 

 

 

 

 

 

 

 

Years ended
December 31,

 

Increase
(decrease)

 

2016

 

2015

 

 

(in thousands)

Net cash provided by (used in):

 

 

 

 

 

 

Operating activities

 

 

$

 

(18,828

)

 

 

 

$

 

(17,623

)

 

 

 

$

 

(1,205

)

 

Investing activities

 

 

 

(29,932

)

 

 

 

 

(60

)

 

 

 

 

(29,872

)

 

Financing activities

 

 

 

 

 

 

 

70,671

 

 

 

 

(70,671

)

 

 

 

 

 

 

 

 

Net (decrease) increase in cash

 

 

$

 

(48,760

)

 

 

 

$

 

52,988

 

 

 

$

 

(101,748

)

 

 

 

 

 

 

 

 

Operating activities

The increase in cash used in operating activities for the year ended December 31, 2016, compared to December 31, 2015 is primarily due to a $2.5 million increase in research and development expenses as we continue the development of FOP, which includes an increase in personnel related costs as well as in pre-clinical and clinical study costs. In addition, general and administrative expenses decreased by $2.1 million due to a reduction in pre-commercial marketing related activities. The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital.

During the year ended December 31, 2016, operating activities used $18.8 million in cash, primarily resulting from our research and development and general and administrative expenses, partially offset by cash provided from changes in working capital. The significant items accounting for the change in working capital include an increase in accounts payable and accrued liabilities, a decrease in prepaid expenses and other current assets.

During the year ended December 31, 2015, operating activities used $17.6 million in cash, primarily resulting from research and development and general and administrative expenses, partially offset by cash provided from changes in working capital. The significant item accounting for the change in working capital is the increase in accounts payable and accrued liabilities.

Investing activities

Net cash used in investing activities primarily consists of acquisition and maturity of short-term investments, in-licensing of intellectual property and purchases of fixed assets.

During the year ended December 31, 2016, investing activities used $29.9 million in cash primarily for investments in guaranteed investment certificates with a Canadian chartered bank.

During the year ended December 31, 2015, investing activities used $0.1 million in cash primarily for in-licensing of intellectual property.

Financing activities

During the year ended December 31, 2016, we had no net cash provided by financing activities.

67


 

During the year ended December 31, 2015, net cash provided by financing activities was $70.7 million resulting from net proceeds received from the issuance of 5,405,068 and 5,825,018 shares of our Class A and Class B redeemable convertible preferred stock, respectively.

Comparison of the years ended December 31, 2015 and 2014

The following table sets forth the primary sources and uses of cash for each of the periods set forth below:

 

 

 

 

 

 

 

 

 

Years ended
December 31,

 

Increase
(decrease)

 

2015

 

2014

 

 

(in thousands)

Net cash provided by (used in):

 

 

 

 

 

 

Operating activities

 

 

$

 

(17,623

)

 

 

 

$

 

(9,658

)

 

 

 

$

 

(7,965

)

 

Investing activities

 

 

 

(60

)

 

 

 

 

(120

)

 

 

 

 

60

 

Financing activities

 

 

 

70,671

 

 

 

 

11,987

 

 

 

 

58,684

 

 

 

 

 

 

 

 

Net (decrease) increase in cash

 

 

$

 

52,988

 

 

 

$

 

2,209

 

 

 

$

 

50,779

 

 

 

 

 

 

 

 

Operating activities

The increase in cash used in operating activities for the year ended December 31, 2015, compared to December 31, 2014 is primarily due to a $6.6 million increase in research and development expenses for the continued development of FOP, which includes an increase in personnel related costs as well as in pre-clinical and clinical study costs. In addition, general and administrative expenses increased by $3.2 million due to increases in pre-commercial marketing related activities, personnel related costs, professional fees and other corporate supporting expenditures. The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in working capital.

During the year ended December 31, 2015, operating activities used $17.6 million in cash, primarily resulting from our research and development and general and administrative operating expenses, partially offset by cash provided from changes in working capital. The significant item accounting for the change in working capital was an increase in accounts payable and accrued liabilities.

During the year ended December 31, 2014, operating activities used $9.7 million in cash, primarily resulting from research and development and general and administrative operating expenses.

Investing activities

Net cash used in investing activities primarily consisted of acquisitions and maturities of short-term investments, in-licensing of intellectual property and purchases of fixed assets.

During the year ended December 31, 2015, investing activities used $0.1 million in cash primarily for in-licensing of intellectual property.

During the year ended December 31, 2014, investing activities used $0.1 million in cash also primarily for in-licensing of intellectual property.

Financing activities

During the year ended December 31, 2015, net cash provided by financing activities was $70.7 million resulting from net proceeds received from the issuance of 5,405,068 and 5,825,018 shares of our Class A and Class B redeemable convertible preferred stock, respectively.

During the year ended December 31, 2014, net cash provided by financing activities was $12.0 million resulting from net proceeds received from the issuance of 4,919,809 shares of our Class A redeemable convertible preferred stock.

Funding Requirements and Planned Operations

To date, we have not generated any revenue from product sales and we do not know when, or if, we will generate any revenue from product sales in the future. We do not expect to generate significant

68


 

revenue from product sales unless and until we obtain regulatory approval to commercialize our current product candidate or future product candidates. We anticipate that we will continue to generate losses for the foreseeable future, and we expect these losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. We are subject to all of the risks incident in the development of new therapeutic products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Upon the closing of this offering, we expect to incur additional costs associated with operating as a public company. We anticipate that we will need additional funding in connection with our continuing operations.

We believe that our existing cash and short-term investments as of March 31, 2017 will be sufficient to fund our anticipated operating expenses for at least the next twelve months from March 31, 2017. However, we will eventually require additional capital for the further development of our existing product candidate and may also need to raise additional funds sooner to pursue other development activities related to additional product candidates.

Until we can generate a sufficient amount of revenue from our products, if ever, we expect to finance future cash needs through public or private equity or debt offerings. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing stockholders, increased fixed payment obligations and these securities may have rights senior to those of our common shares. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations at March 31, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than
1 year

 

1 to 3
years

 

3 to 5
years

 

More than
5 years

 

Total

 

 

(in thousands)

Operating lease obligations

 

 

 

559

 

 

 

 

777

 

 

 

 

39

 

 

 

 

 

 

 

$

 

1,375

 

On July 2, 2015, we entered into a non-cancelable operating lease that expires on June 30, 2020 for office space at 4150 Sainte-Catherine Street West, Suite 550 in Montreal, Quebec, Canada. We also lease office space at 275 Grove Street, Suite 2-400 in Newton, Massachusetts under a non-cancelable operating lease that expires on April 30, 2019.

We also have obligations to make future payments to third parties that become due and payable on the achievement of certain development, regulatory and commercial milestones (such as initiation of a clinical trial, filing of an NDA, approval by the FDA or product launch). We have not included these commitments on our statement of financial position or in the table above because the achievement and timing of these milestones is not fixed or determinable. These commitments include:

 

 

In accordance with an exclusive licensing agreement with Hoffman-La Roche, we are committed to pay Roche (i) a total of $1,000,000 in milestone payments upon the achievement of certain clinical milestones, (ii) up to a total of $11,000,000 in milestone payments upon the achievement of certain regulatory milestones in connection with the three clinical trial programs currently underway with an additional $1 million in milestone payments upon the achievement of certain regulatory milestones in connection with each subsequent indication, if any, and (iii) up to a total of $37,500,000 in milestone payments upon the achievement of certain sales milestones. Future royalty payments in the low teens based on net sales are also stipulated in the licensing agreement. The likelihood and timing of these payments is not known at this time.

69


 

 

 

In accordance with an exclusive licensing agreement with Thomas Jefferson University, we are committed to make a total of $100,000 in milestone payments upon the achievement of certain clinical milestones and a total of $250,000 in milestone payments upon the achievement of certain regulatory milestones, in each case in connection with the first licensed product or licensed process that meets the relevant milestones. Future low single digit royalty payments based on net sales are also stipulated in the licensing agreement. Annual license maintenance royalty payments are also required as per the terms of the licensing agreement. Such maintenance royalty payments are non-refundable, but can be applied to royalties owing on sales per calendar year. The likelihood and timing of these payments is not known at this time.

 

 

In accordance with an exclusive licensing agreement with Yamaguchi University, we are committed to make a total of $75,000 in milestone payments upon the achievement of certain clinical milestones and a total of $150,000 in milestone payments upon the achievement of certain regulatory milestones, in each case in connection with the first licensed product that meets the relevant milestones. Future low single digit royalty payments based on net sales are also stipulated in the licensing agreement. We also have a royalty buy-out option pursuant to which we can terminate at any time in our sole discretion upon payment of a certain amount in exchange for our obligation to pay royalties to Yamaguchi University under the license agreement. The likelihood and timing of these payments is not known at this time.

 

 

In March 2017, we entered into an exclusive licensing agreement with Galderma to obtain access to RARg agonists and were granted exclusive rights to use these RARg agonists in nondermatological indications. In accordance with this agreement with Galderma, we are committed to pay Galderma a total of $2,000,000 in milestone payments upon the achievement of certain clinical milestones and up to a total of $25,500,000 in milestone payments upon the achievement of certain regulatory milestones, in each case in connection with the first product that meets the relevant milestones. Future single digit royalty payments based on net sales are also stipulated in the licensing agreement. The likelihood and timing of these payments is unknown at this time.

We enter into contracts in the normal course of business with CROs for pre-clinical research and clinical studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable contracts and not included in the table of contractual obligations and commitments.

Our preferred shares are also not considered a contractual obligation and commitment as the preferred shares will automatically convert to common shares upon the completion of this offering.

Quantitative and Qualitative Disclosures about Market Risks

We are exposed to certain financial risks, including the financial risk related to fluctuations of foreign exchange rates. We incur a portion of our expenditures in Canadian dollars and in Euros. A change in the currency exchange rates between the U.S. dollar relative to the Canadian dollar or the Euro could have a significant effect on our results of operations, financial position or cash flows. We do not have in place any tools to manage our foreign exchange risk, other than keeping expected foreign currency cash requirements in the foreign currency to form a natural hedge. We are exposed to currency risk through our cash, sales tax and other receivables and accounts payable and accrued liabilities denominated in Canadian dollars and Euros. Based on our net exposures as at March 31, 2017, and assuming all other variables remain constant, a 10% depreciation or appreciation of the U.S. dollar against the Canadian dollar and the Euro would result in an increase/decrease of less than $0.1 million on the Company’s results of operations.

Critical accounting judgments and key sources of estimation uncertainty

The management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with IFRS as issued by the IASB. The preparation of these financial statements in conformity with IFRS requires us to make

70


 

judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of revenues, expenses, assets and liabilities. Actual results could differ from those estimates.

On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on the most probable set of economic conditions and planned course of action, historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our financial statements appearing 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 financial statements.

Estimation of accrued expenses

As part of the process of preparing our 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 on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each statement of financial position date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our 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 performing research and development services on our behalf;

 

 

investigative sites or other providers in connection with clinical trials;

 

 

vendors in connection with non-clinical development activities;

 

 

vendors related to product manufacturing, development and distribution of clinical supplies; and

 

 

various external consultants.

We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage non-clinical studies and 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 patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated 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 accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differs from the actual status and timing of services performed we may report amounts that are too high or too low in any particular period. To date, we have not made any material adjustment to our prior estimates of accrued research and development expenses.

Valuation of embedded derivative conversion options

As part of assessing whether an instrument is a hybrid financial instrument and contains an embedded derivative, significant judgment is required in evaluating whether the host contract is more akin to debt or equity and whether the embedded derivative is clearly and closely related to the underlying host contract. We concluded that the host instrument of the preferred shares was a debt host due in part to the holder’s right to redeem the instrument at a point in time in the future based only

71


 

based on passage of time. We determined that the conversion option was not closely related to the debt host, and that the conversion option was required to be separated from the host instrument and accounted for as an embedded derivative due to its down-round protection feature. In applying our judgment, we rely primarily on the economic characteristics and risks of the instrument as well as the substance of the contractual arrangement.

The initial fair values of the embedded derivative conversion options and subsequent re-measurement at fair value at each reporting date up to and including December 31, 2016 were determined by using the Monte Carlo simulation model. The Monte Carlo simulation model better reflects non-static inputs, such as the anti-dilution (down-round protection) features of the preferred shares. A Monte Carlo simulation model is a valuation model that relies on random sampling and is often used when modeling systems with a large number of inputs and where there is a significant uncertainty in the future value of inputs and where the movement in inputs can be independent of each other.

Moreover, the use of this valuation model requires highly subjective assumptions. These assumptions are determined as of the measurement date and include the risk-free interest rate, the expected dividend yield, the expected volatility, the timing and amounts of subsequent rounds of financing, the expected timing and probability of exit events, and the underlying value of the company. Assumptions with regards to volatility, subsequent rounds of financing, time to exit and underlying value of the company are particularly important and sensitive, requiring significant judgment by management. Accordingly, any changes in the assumptions used in this model could significantly impact the values recognized as embedded derivative conversion options at inception and on subsequent re-measurement at each reporting date.

The risk-free rate is the rate of return on the U.S. Department of Treasury daily treasury yield curve rates over a period equal to the expected timing of an exit event. The expected dividend yield is nil as we do not expect to pay dividends in the near future. The expected volatility reflects the assumption that the volatility used in estimating the value of the embedded derivative in indicative of future trends, which may not necessarily be the actual outcome. Due to the last of a public market for the trading of our 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 similar companies that are publicly traded. For these analyses, we selected companies with comparable characteristics to us, including risk profiles, orphan drugs within their portfolios, positions within the industry and with historical share price information sufficient to meet the expected timing of an exit event.

The expected timing and amounts of subsequent rounds of financing reflect our best estimate of subsequent rounds of financing based on contracted commitments for subsequent rounds of financing, our financial condition, including cash on hand, and our historical and forecasted performance and cash burn.

The expected timing of exit events are based on our best estimate of possible exit events and their likelihood, considering the progress of our research and development programs, including the status of non-clinical studies and clinical trials of our product candidates, our stage of development and our commercialization and business strategy, our financial condition, including cash on hand, our historical and forecasted performance and operating results, the likelihood of achieving a liquidity event, such as the sale of the company or an initial public offering given prevailing market conditions, external market conditions affecting the biopharmaceutical industry and trends within the biopharmaceutical industry.

In the absence of a public trading market, the underlying value of our Company was performed using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accounts Audit and Accounting Practice Aid Series, with the assistance of a third-party specialist, and is subject to estimated based on the valuation techniques selected and an evaluation of the inputs used in creating the valuation. Valuation techniques used include the probability-weighted expected return method and the option-pricing method or a hybrid of both methods. In addition, various objective and subjective factors were also considered, including the prices at which we sold preferred shares and the superior rights and preferences of the preferred shares relative to our common shares, the progress of our research and development programs, our stage of development and our commercialization and business strategy, our financial condition, including cash on hand, our historical

72


 

and forecasted performance and operating results, the lack of a public market for our common shares and preferred shares, the likelihood of achieving a liquidity event, such as a sale of the company or an initial public offering given prevailing market conditions, the analysis of initial public offerings and the market performance of similar companies in the biopharmaceutical industry, external market conditions affecting the biopharmaceutical industry and trends within the biopharmaceutical industry. There are significant judgments and estimates inherent in these valuations. These judgments and estimates include assumptions regarding our future operating performance, the timing and likelihood of potential liquidity events and the determination of the appropriate valuation methodology at each valuation date. If different assumptions had been made, the fair value of our embedded derivatives and the resulting preferred share liability and accretion expense, as well as the re-measurement of the embedded derivatives could have been materially different.

The fair value of the embedded derivative conversion options at March 31, 2017, and at inception for the Class C convertible redeemable preferred shares, were estimated using a hybrid of the probability-weighted expected return method (PWERM), weighted at 75%, and a Monte Carlo simulation model, weighted at 25%. We integrated a PWERM model into our valuation methodology as, during the first quarter of 2017, we had undertaken tangible steps toward a qualifying IPO and we believe this model to be a more accurate estimation method of the conversion option as a result of the IPO commitments taken.

Under the PWERM methodology, the fair value was estimated based upon the future implied equity values using a range of low, medium and high exit multiples. Exit multiples were derived from comparable public company transactions that compared the invested capital (being the aggregate of debt and shares) to the pre-IPO equity values. The estimated implied equity value was discounted back from the estimated time to exit to the valuation date.

Share-based Payments

We issue share-based payments to employees and non-employee directors, generally in the form of stock options. We account for our share-based payment in accordance with IFRS 2, Share-Based Payments. IFRS 2 requires all equity-settled share-based payments to employees and others providing similar services to be measured at the fair value of the equity instruments at the grant date. The fair value determined at the grant date of the equity-settled share-based payments is expensed over the vesting period, based on our estimate of equity instruments that will eventually vest, or net of estimated forfeitures. On an ongoing basis, we revise our estimate of the number of instruments expected to vest. The impact of revisions, if any, is recognized under share-based compensation such that the cumulative expense reflects the revised estimate. We recognize the compensation cost of share-based payments to employees and directors using a graded vesting method where each installment that vests is treated as its own award and each installment is measured and recognized separately. Described below is the methodology we have utilized in measuring share-based compensation expense. Following the consummation of this offering, stock option values will be determined based on the quoted market price of our common shares.

We estimate the fair value of our stock-based awards to employees and directors using the Black-Scholes option pricing model that was developed to estimate the fair value of freely tradable, fully transferable stock options without vesting restrictions. The terms of the stock options that we have awarded differ significantly from actual options for which the Black-Scholes model was designed to evaluate. The Black-Scholes model requires the input of highly subjective assumptions, including (a) the expected volatility of our stock, (b) the expected term of the award, (c) the risk-free interest rate, and (d) expected dividends. The expected volatility reflects the assumption that the volatility used in estimating the fair value of the share-based compensation is indicative of future trends, which may not necessarily be the actual outcome. Due to the lack of a public market for the trading of our common 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 similar companies that are publicly traded. For these analyses, we have selected companies with comparable characteristics to ours including risk profiles, pre-commercial initial public offerings, orphan drugs within their portfolios, position within the industry, and with historical share price information sufficient to meet the expected life of the stock-

73


 

based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available and weigh the result with our own limited stock price history that is available. The expected life of the options reflects the assumption that the expected life of the options used in estimating the fair value of share-based compensation is indicative of future exercise patterns that may occur which many not necessarily be the actual outcome. Due to our limited operating history, we have estimated the expected life of our employee stock options using the “simplified” method, whereby, the expected life equals the average of the vesting term and the original contractual term of the option. The risk-free interest rates for periods within the expected life of the option are based on the U.S. Department of Treasury daily treasury yield curve rates in effect at grant date for time periods approximately equal to the expected life of the option. The expected dividend yield has been estimated at nil as we have never paid cash dividends and we do not expect to pay any cash dividends in the foreseeable future.

The assumptions we used to determine the fair value of stock options granted to employees and directors are as follows, presented on a weighted average basis.

 

 

 

 

 

 

 

 

 

 

 

Three-months
ended March 31,

 

Years ended
December 31,

 

2017

 

2016

 

2015

 

2014

Share price

 

 

$

 

9.70

   

 

 

n/a

   

 

$

 

0.92

   

 

$

 

0.29

 

Expected volatility

 

 

 

81.56

%

 

 

 

 

n/a

 

 

 

 

74.8

%

 

 

 

 

82.1

%

 

Expected term (in years)

 

 

 

6.0

 

 

 

 

n/a

 

 

 

 

6.0

 

 

 

 

6.0

 

Risk-free interest rate

 

 

 

2.04

%

 

 

 

 

n/a

 

 

 

 

1.6

%

 

 

 

 

1.9

%

 

Expected dividend yield

 

 

 

0.0

%

 

 

 

 

n/a

 

 

 

 

0.0

%

 

 

 

 

0.0

%

 

These assumptions represented our best estimates, but the estimates involved inherent uncertainties and the application of our judgment. We recognize compensation expense for only the portion of awards that are expected to vest. In developing a forfeiture rate estimate for pre-vesting forfeitures, we have considered our historical experience of actual forfeitures and expected forfeiture behaviors.

Award grants

The following table presents the grant dates, number of underlying shares, along with the corresponding exercise price for each option grant and the common shares fair value per share on the date of grant:

 

 

 

 

 

 

 

Date of grant

 

Number
of shares

 

Exercise
price per
share

 

Common
stock fair value
per share on
grant date

2/20/2014

 

 

 

321,344

   

 

$

 

0.29

   

 

$

 

0.29

 

5/28/2014

 

 

 

15,995

   

 

$

 

0.29

   

 

$

 

0.29

 

8/27/2014

 

 

 

1,134,566

   

 

$

 

0.29

   

 

$

 

0.29

 

11/14/2014

 

 

 

37,888

   

 

$

 

0.29

   

 

$

 

0.29

 

4/22/2015

 

 

 

280,782

   

 

$

 

0.69

   

 

$

 

0.39

 

12/14/2015

 

 

 

53,979

   

 

$

 

4.81

   

 

$

 

3.68

 

02/28/2017

 

 

 

174,454

   

 

$

 

9.70

   

 

$

 

9.70

 

04/30/2017

 

 

 

468,809

   

 

$

 

10.04

   

 

$

 

10.04

 

During the three-month period ended March 31, 2017, we recognized stock-based compensation expense of $83,741, of which $58,486 was recorded as research and development expense and $25,255 was recorded as general and administrative expense in our statement of operations. During the three-month period ended March 31, 2016, we recognized stock-based compensation expense of $52,739, of which $31,326 was recorded as research and development expense and $21,413 was recorded as general and administrative expense in our statement of operations.

During the year ended December 31, 2016, we recognized stock-based compensation expense of $174,419, of which $109,421 was recorded as research and development expense and $64,998 was recorded as general and administrative expense in our statement of operations. During the year ended December 31, 2015, we recognized stock-based compensation expense of $164,456, of which $63,941 was

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recorded as research and development expense and $100,515 was recorded as general and administrative expense in our statement of operations. During the year ended December 31, 2014, we recognized stock-based compensation of $142,811 of which $54,282 was recorded as research and development expense and $88,529 was recorded as general and administrative expense in our statement of operations.

As of March 31, 2017, we had $1.2 million of total unrecognized compensation expense, net of related forfeiture estimates, which is expected to be recognized over a weighted-average remaining vesting period of approximately 1.5 years. While compensation expense recognized to date has not been significant, we expect the impact of our stock-based compensation expense for stock option grants to increase in future periods from potential increases in the value of our common shares and anticipated increases in headcount.

Determination of fair value at grant date

We have historically granted stock options at exercise prices not less than the fair value of our common shares. We are a privately held company with no active public market for our common shares. Therefore, our board of directors has estimated the fair value of our common shares at various dates, with input from management, considering our most recently available third-party valuations of common shares and its assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. Once a public trading market for our common shares has been established in connection with the completion of this offering, it will no longer be necessary for our board of directors to estimate the fair value of our common shares in connection with our accounting for granted stock options as the fair value of our common shares will be its trading price on The Nasdaq Global Market.

In the absence of a public trading market for our common shares, our determination of the fair value of our common shares was performed using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accounts Audit in their Audit and Accounting Practice Aid Series: Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid. We performed these contemporaneous valuations, at times with the assistance of a third-party specialist as of May 31, 2013, February 28, 2015, June 30, 2015, February 28, 2017 and April 30, 2017 which resulted in valuations of our common shares of $0.29, $0.39, $3.68, $9.70 and $10.04 per share, respectively, as of those dates. In addition, our board of directors considered various objective and subjective factors, along with input from management, to determine its best estimate of the fair value of our common shares as of each grant date, including the following:

 

 

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

 

 

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

 

 

our stage of development and our commercialization and business strategy;

 

 

our financial condition, including cash on hand;

 

 

our historical and forecasted performance and operating results;

 

 

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

 

 

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

 

 

the likelihood of achieving a liquidity event, such as an initial public offering, or IPO, given prevailing market conditions;

 

 

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

 

 

external market conditions affecting the biopharmaceutical industry; and

 

 

trends within the biopharmaceutical industry.

There are significant judgments and estimates inherent in these valuations. These judgments and estimates include assumptions regarding our future operating performance, the stage of development of

75


 

our product candidates, the timing and likelihood of a potential IPO or other liquidity event, and the determination of the appropriate valuation methodology at each valuation date. If reasonable alternative assumptions had been used, our stock-based compensation expense, net loss attributable to common shareholders, and net loss per share attributable to common shareholders would not have been materially different.

Valuation methodologies

Our common share valuations were prepared using a hybrid of the probability-weighted expected return method, or PWERM, and the option-pricing method, or OPM.

OPM

The OPM treats common shares and convertible preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among various holders of a company’s securities changes. Under this method, the common shares has a value only if the funds available for distribution to stockholders exceed the value of the liquidation preferences at the time of a liquidity event, such as a strategic sale or merger. The common shares are modeled as a call option on the underlying equity value at a predetermined exercise price. In this mode, the exercise price is based on a comparison with the total equity value rather than, as in the case of a regular call option, a comparison with a per share stock price. Thus, common shares are considered to be a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the convertible stock liquidation preference is paid.

The OPM uses the Black-Scholes option-pricing model to price the call options. This model defines the securities’ fair values as functions of the current fair value of a company and uses assumptions, such as the anticipated timing of a potential liquidity event and the estimated volatility of the equity securities. The aggregate value of the common shares derived from the OPM is then divided by the number of shares of common shares outstanding to arrive at the per share value.

We used the OPM back-solve approach to estimate enterprise value under the OPM. The OPM back-solve approach uses the OPM to derive an implied equity value for one type of a company’s equity securities from a contemporaneous sale transaction involving another type of the company’s equity securities. For the OPM, we based our assumed volatility factor on the historical trading volatility of our publicly traded peer companies. At each valuation date, we determined the appropriate volatility to be used, considering such factors as our expected time to a liquidity event and our stage of development.

To derive the fair value of our common shares using the OPM, we calculated the proceeds to our common shareholders based on the preferences and priorities of our convertible preferred stock and common shares. We then applied a discount for lack of marketability to the common shares to account for the lack of access to an active public market.

PWERM

Under the PWERM methodology, the fair value of a company’s common shares is estimated based upon an analysis of future values for the company, assuming various outcomes. The common 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 stock. The future value of the common shares under each outcome is discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an indication of value for the common shares.

Hybrid Method

The hybrid method is a PWERM where the equity value in one of the scenarios is calculated using an OPM. In the hybrid method used by us, we considered two to four types of future-event scenarios: an IPO, a merger or acquisition transaction, an unspecified liquidity event and a liquidation scenario.

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The enterprise value for the IPO scenario was determined using the guideline public company method (GPC) and/or the guideline transactions method (GTC) under the market approach. The enterprise value for the unspecified liquidity event scenario was determined using the OPM back-solve approach. The liquidity scenario assumed the liquidation preference of the convertible preferred stock rendered the common share value to nil. The relative probability of each type of future-event scenario was determined based on an analysis of market conditions at the time, including then-current IPO valuations of similarly situated companies, and our expectations as to the timing and likely prospects of the future-event scenarios.

In our application of the GPC method, we considered publicly traded companies in the biopharmaceutical industry that recently completed IPOs as indicators of our estimated future value in an IPO. We then discounted that future value back to the valuation date at an appropriate risk-adjusted discount rate. We applied a discount for lack of marketability to the common shares to account for the lack of access to an active public market. In our application of the GTC method, we considered comparable companies in the biopharmaceutical industry that recently completed merger and acquisition transactions as indicators of our estimated future value. We then discounted the future value back to the valuation date at an appropriate risk-adjusted discount rate. We applied a discount for lack of marketability to the common shares to account for the lack of access to an active public market.

Our contemporaneous common share valuation as of May 31, 2013 was prepared using the PWERM method.

Our contemporaneous common shares valuations as of February 28, 2015, June 22, 2015, February 28, 2017 and April 30, 2017 were prepared using the hybrid method.

May 31, 2013 valuation

The following table summarizes the significant assumptions used to determine the fair value of our common shares of $0.29 as of May 31, 2013:

 

 

 

 

 

 

 

May 31, 2013 valuation

 

Liquidation

 

IPO

 

M&A

Key assumptions

 

 

 

 

 

 

Probability weighting

 

 

 

60

%

 

 

 

 

20

%

 

 

 

 

20

%

 

Liquidity date

 

 

 

n/a

 

 

 

 

5/31/2017

 

 

 

 

5/31/2017

 

Weighted average cost of capital range

 

 

 

n/a

 

 

 

 

30%-35

%

 

 

 

 

30%-35

%

 

Discount for lack of marketability (DLOM)

 

 

 

n/a

 

 

 

 

51

%

 

 

 

 

51

%

 

Estimated per share present value range of marketable common shares (before DLOM and probability weighting)

 

 

$

 

0.00

   

 

$

 

0.91-$1.33

   

 

$

 

1.99-$2.31

 

February 28, 2015 valuation

The following table summarizes the significant assumptions used to determine the fair value of our common shares of $0.39 as of February 28, 2015:

 

 

 

 

 

February 28, 2015 valuation

 

Liquidation

 

OPM(1)

Key assumptions

 

 

 

 

Probability weighting

 

 

 

35

%

 

 

 

 

65

%

 

Liquidity date

 

 

 

n/a

 

 

 

 

2/28/2017

 

Annual volatility

 

 

 

n/a

 

 

 

 

77

%

 

Risk-free interest rate

 

 

 

n/a

 

 

 

 

0.70

%

 

Discount for lack of marketability (DLOM)

 

 

 

n/a

 

 

 

 

35

%

 

Estimated per share present value of marketable common shares (before DLOM and probability weighting)

 

 

$

 

0.00

   

 

 

$0.93

 

 

 

(1)

 

We used the back-solve method of the OPM to solve for the equity value and corresponding value of common shares based on the $2.44 per share price of the Class A preferred stock extension agreed to in October 2014 and closed in March 2015. Given the proximity to the Class A preferred stock

77


 

 

 

 

extension, we believe the per share issuance price of the Class A preferred stock extension provides an indication of the fair value of our equity as of February 28, 2015.

The estimated per share fair value of our common shares calculated in our valuation as of February 28, 2015 of $0.39 per share increased from previous valuations of $0.29 per share primarily due to the following factors:

 

 

our improved financial position resulting from the $10 million Class A extension in October 2014;

 

 

initiation of our Phase 2 study of palovarotene in FOP patients and completion of enrollment of the first cohort of patients;

 

 

initiation of our natural history study in patients with FOP;

 

 

receipt of orphan drug designation from the FDA and the EMA; and

 

 

receipt of fast track designation from the FDA.

June 30, 2015 valuation

The following table summarizes the significant assumptions used in the hybrid method to determine the fair value of our common shares of $3.68 as of June 30, 2015:

 

 

 

 

 

 

 

June 30, 2015 valuation

 

Liquidation

 

IPO

 

OPM(1)

Key assumptions

 

 

 

 

 

 

Probability weighting

 

 

 

25

%

 

 

 

 

25

%

 

 

 

 

50

%

 

Liquidity date

 

 

 

n/a

 

 

 

 

6/30/2016

 

 

 

 

6/30/2017

 

Weighted average cost of capital

 

 

 

n/a

 

 

 

 

25

%

 

 

 

 

n/a

 

Annual volatility

 

 

 

n/a

 

 

 

 

n/a

 

 

 

 

73

%

 

Risk-free interest rate

 

 

 

n/a

 

 

 

 

n/a

 

 

 

 

0.64

%

 

Discount for lack of marketability (DLOM)

 

 

 

n/a

 

 

 

 

21

%

 

 

 

 

28

%

 

Estimated per share present value of marketable common shares (before DLOM and probability weighting)

 

 

$

 

   

 

 

$13.26

   

 

 

$2.96

 

 

 

(1)

 

We used the back-solve method of the OPM to solve for the equity value and corresponding value of common shares based on the $10.30 per share price of the Class B preferred stock issuance in June 2015. Given the proximity to the Class B preferred stock issuance, we believe the per share issuance price of the Class B preferred stock extension provides an indication of the fair value of our equity as of June 30, 2015.

The estimated per share fair value of our common shares calculated in our valuation as of June 30, 2015 of $3.68 per share increased from the February 28, 2015 valuation of $0.39 per share primarily due to the following factors:

 

 

enhanced Class B valuation;

 

 

addition of tier 1 investors in our Class B financing;

 

 

enhanced financial position on completion of our $60 million Class B financing;

 

 

increased probability of advancing towards an IPO scenario;

 

 

increased valuation thresholds at IPO pursuant to Class A and Class B financings;

 

 

data monitoring committee recommendation to continue the Phase 2 adaptive-design, dose-ranging study as designed, based on their review of initial efficacy and safety data obtained from the first cohort of patients;

 

 

initiation of enrollment in the second cohort of the Phase 2 trial; and

 

 

completion of the juvenile toxicity study allowing for the planned expansion of the Phase 2 trial to include children with FOP.

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February 28, 2017 valuation

The following table summarizes the significant assumptions used in the hybrid method to determine the fair value of our common shares of $9.70 as of February 28, 2017:

 

 

 

 

 

 

 

February 28, 2017 valuation

 

Liquidation

 

IPO

 

OPM(1)

Key assumptions

 

 

 

 

 

 

Probability weighting

 

 

 

5

%

 

 

 

 

75

%

 

 

 

 

20

%

 

Liquidity date

 

 

 

NA

 

 

 

 

9/30/2017

 

 

 

 

2/28/2019

 

Weighted average cost of capital

 

 

 

NA

 

 

 

 

25

%

 

 

 

 

NA

 

Annual volatility

 

 

 

NA

 

 

 

 

NA

 

 

 

 

78

%

 

Risk-free interest rate

 

 

 

NA

 

 

 

 

NA

 

 

 

 

1.2

%

 

Discount for lack of marketability (DLOM)

 

 

 

NA

 

 

 

 

11

%

 

 

 

 

27

%

 

Estimated per share present value of marketable common stock (before DLOM and probability weighting)

 

 

$

 

   

 

 

$13.74

   

 

 

$3.61

 

 

 

(1)

 

We used the back-solve method of the OPM to solve for the equity value and corresponding value of common shares based on the $11.88 per share price of the Class C preferred stock issuance on March 16, 2017. Given the proximity to the Class C preferred stock issuance, we believe the per share issuance price of the Class C preferred stock extension provides an indication of the fair value of our equity as of February 28, 2017.

The estimated per share fair value of our common shares calculated in our valuation as of February 28, 2017 of $9.70 per share increased from the June 30, 2015 valuation of $3.68 per share primarily due to the following factors:

 

 

enhanced Class C valuation;

 

 

enhanced financial position on completion of our $10 million Class C financing;

 

 

increased probability of advancing towards an IPO scenario;

 

 

positive results in the 40 subject, placebo controlled Phase 2 ’201 clinical trial, though none reached statistical significance;

 

 

preliminary data from the Phase 2 open label extension ’202 clinical trial supporting the results obtained in the Phase 2 ’201 clinical trial.

April 30, 2017 valuation

The following table summarizes the significant assumptions used in the hybrid method to determine the fair value of our common shares of $10.04 as of April 30, 2017:

 

 

 

 

 

 

 

April 30, 2017 valuation

 

Liquidation

 

IPO

 

OPM(1)

Key assumptions

 

 

 

 

 

 

Probability weighting

 

 

 

5

%

 

 

 

 

75

%

 

 

 

 

20

%

 

Liquidity date

 

 

 

n/a

 

 

 

 

9/30/2017

 

 

 

 

4/30/2019

 

Weighted average cost of capital

 

 

 

n/a

 

 

 

 

25

%

 

 

 

 

n/a

 

Annual volatility

 

 

 

n/a

 

 

 

 

n/a

 

 

 

 

80

%

 

Risk-free interest rate

 

 

 

n/a

 

 

 

 

n/a

 

 

 

 

1.3

%

 

Discount for lack of marketability (DLOM)

 

 

 

n/a

 

 

 

 

11

%

 

 

 

 

27

%

 

Estimated per share present value of marketable common stock (before DLOM and probability weighting)

 

 

$

 

   

 

 

$14.23

   

 

 

$3.70

 

 

 

(1)

 

We used the back-solve method of the OPM to solve for the equity value and corresponding value of common shares based on the $11.88 per share price of the Class C preferred stock issuance on March 16, 2017. Given the proximity to the Class C preferred stock issuance with no material changes to our business, we believe the per share issuance price of the Class C preferred stock extension provides an indication of the fair value of our equity as of April 30, 2017.

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The estimated per share fair value of our common shares calculated in our valuation as of April 30, 2017 of $10.04 per share remained materially unchanged as compared to the February 27, 2017 valuation of $9.70 per share primarily due to no material changes in the Company’s operations and no material changes in the estimated time to exit due to passage of time, as well as updated volatility, risk-free interest rate and DLOM inputs.

Initial public offering price

In consultation with the underwriters for this offering, we determined the estimated price range for this offering, as set forth on the cover page of this prospectus. The midpoint of the price range is $14.00 per share. In comparison, our estimate of the fair value of our common stock was $10.04 per share as of April 30, 2017. We note that, as is typical in IPOs, the estimated price range for this offering was not derived using a formal determination of fair value, but was determined by negotiation between us and the underwriters. Among the factors that were considered in setting this range were the following:

 

 

an analysis of the typical valuation ranges seen in recent IPOs for companies in our industry;

 

 

the general condition of the securities markets and the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies;

 

 

an assumption that there would be a receptive public trading market for pre-commercial biotechnology companies such as us; and

 

 

an assumption that there would be sufficient demand for our common stock to support an offering of the size contemplated by this prospectus.

The midpoint of the estimated price range for this offering reflects an increase over the estimated valuation as of April 30, 2017 of $10.04 per share. Investors should be aware of this difference and recognize that the price range for this offering is in excess of our prior valuations. Further, investors are cautioned not to place undue reliance on the valuation methodologies discussed above as an indicator of future stock prices. We believe the difference may be due to the following factors:

 

 

The initial offering price range necessarily assumes that this offering has occurred, a public market for our common stock has been created and that our preferred stock has converted into common stock in connection with this offering and, therefore, excludes the marketability or illiquidity discounts associated with the timing or likelihood of an initial public offering, the superior rights and preferences of our preferred stock and the alternative scenarios considered in the contemporaneous valuations over the past two years.

 

 

In the public markets we believe there are investors who may apply more qualitative valuation criteria to certain of our clinical assets than the valuation methods applied in our valuations.

 

 

The price that investors are willing to pay in this offering, for which the price range is intended to serve as an estimate, may take into account other things that have not been expressly considered in our prior valuations, are not objectively determinable and that valuation models are not able to quantify.

Investors should be cautioned that the midpoint of the price range set forth on the cover of this prospectus does not necessarily represent the fair value of our common stock, but rather reflects an estimate of the offer price determined in consultation with the underwriters.

There are significant judgments and estimates inherent in the determination of these valuations. These judgments and estimates include assumptions regarding our future performance, including the successful enrollment and completion of our clinical studies as well as the determination of the appropriate valuation methods. If we had made different assumptions, our stock-based compensation expense could have been different. The foregoing valuation methodologies are not the only methodologies available and they will not be used to value our common stock once this offering is complete. We cannot make assurances as to any particular valuation for our common stock. Accordingly, investors are cautioned not to place undue reliance on the foregoing valuation methodologies as an indicator of future stock prices.

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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 in the rules and regulations of the SEC.

JOBS Act Transition Period

In April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements under the JOBS Act. Subject to certain conditions, as an emerging growth company, we may rely on certain of these exemptions, including without limitation, providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. We would cease to be an emerging growth company upon the earliest of: (1) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (2) the date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates; (3) the issuance, in any three-year period, by our Company of more than $1.0 billion in non-convertible debt securities held by non-affiliates; or (4) the last day of the fiscal year ending after the fifth anniversary of our initial public offering.

Future Accounting Standards

The IASB has issued several new standards and amendments to standards and interpretations that are not yet effective for the year ended December 31, 2017, and although early adoption is permitted, they have not been applied in preparing our consolidated financial statements. We are currently evaluating the effect, if any, the following new standards and amendments will have on our financial results.

 

(i)

 

Financial Instruments (IFRS 9), effective for annual periods beginning on or after January 1, 2018, replaces the requirements of International Accounting Standard (IAS) 39, Financial Instruments, Recognition and Measurement for classification and measurement of financial assets and liabilities. IFRS 9 introduces a single classification and measurement approach for financial instruments, which is driven by cash flow characteristics and the business model in which an assets is held. This single, principle-based approach replaces existing rule-based requirements and results in a single impairment model being applied to all financial instruments. IFRS 9 also modifies the hedge accounting model to incorporate the risk management practices of an entity. Additional disclosures will also be required under the new standard. Early adoption of IFRS 9 is permitted.

 

(ii)

 

Leases (IFRS 16), effective for annual periods beginning on or after January 1, 2019, provides a comprehensive model for the identification of lease arrangements and their treatment in the financial statements of both lessees and lessors. It supersedes IAS 17, Leases and its associated interpretive guidance. Significant changes were made to lessee accounting with the distinction between operating and finance leases removed and assets and liabilities recognized in respect of all leases (subject to limited exceptions for short-term leases and leases of low value assets). Earlier application of IFRS 16 is permitted for companies that have also adopted IFRS 15, Revenues from Contracts with Customers.

Internal Controls and Procedures

A company’s internal control over financial reporting, or ICFR, is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons

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performing similar functions, and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. A material weakness is defined as a deficiency, or a combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.

The two material weaknesses in ICFR identified as of December 31, 2016 were: (i) the valuation of the embedded derivative and related preferred shares liability accounting, and (ii) lack of segregation of duties due to super-user access and insufficient journal entry review throughout the entire fiscal year. The preferred shares will be converted to common shares at the time of the closing of this initial public offering. Management introduced a new control in the fourth quarter of 2016 related to journal entry review, and in April 2017 management introduced another new control related to super-user access. We expect that these new controls combined will remediate the material weakness related to segregation of duties. Despite our efforts to remediate existing material weaknesses or due to the existence of other material weaknesses, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our ICFR is effective as required by Section 404.

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BUSINESS

Overview

We are a clinical stage biopharmaceutical company that is developing disease-modifying treatments for patients suffering from debilitating bone and other diseases with high unmet medical need. Our lead product candidate, palovarotene, is an oral small molecule that has shown potent activity in preventing abnormal new bone formation as well as fibrosis in a variety of tissues. We are developing palovarotene for the treatment of Fibrodysplasia Ossificans Progressiva (FOP) and Multiple Osteochondroma (MO) and have one registration trial and one Phase 2/3 clinical trial for two separate indications planned to commence in 2017 with data read-outs planned in 2019 and 2020. We believe that if approved in FOP or MO, palovarotene could become the standard of care in either or both of these indications.

FOP is an ultra-rare, chronic and severely disabling disease of abnormal bone formation, known as heterotopic ossification (HO). FOP is characterized by painful, recurrent episodes of soft tissue swelling (flare-ups) that result in bone formation in areas of the body where bone is not normally present, such as muscles, tendons and ligaments. Flare-ups begin early in life and may occur spontaneously or after certain events, including soft tissue trauma, vaccinations or influenza infections. Recurrent flare-ups and new bone formation progressively restrict movement by locking joints, leading to cumulative loss of function, disability and early death often due to reduced respiratory function. FOP is caused by a mutation of the bone morphogenetic protein (BMP) Type I receptor or ACVR1 (also known as ALK2) that leads to excess BMP signaling and new bone formation. Virtually all known patients have the same point mutation and have congenital malformations of the big toes at birth. We estimate that the prevalence of FOP is approximately 1.3 individuals per million lives, or approximately 9,000 globally. As of October 2016, there were known to be 800 diagnosed FOP patients worldwide. There are currently no approved medical treatment options to prevent the formation of heterotopic bone in FOP.

A 2011 Nature Medicine paper showed that palovarotene potently inhibited HO in animal models. Palovarotene had been previously tested by Roche Pharmaceuticals in 825 subjects, including healthy volunteers and patients with chronic obstructive pulmonary disease, where it was well-tolerated. Upon evaluation of the RARg agonist landscape, we determined that palovarotene had the most immediate potential in this class. As a result, we exclusively in-licensed palovarotene from Roche to form the basis of Clementia. In July 2014, the FDA granted Orphan Drug Designation for palovarotene as a treatment for FOP and in November 2014, we received Fast Track Designation. In November 2014, we were granted orphan drug status in the EU. Also, in July 2017 we received Breakthrough Therapy Designation from the FDA for the prevention of HO in patients with FOP. We have also secured IP related to palovarotene and in-licensed additional next generation RARg agonists.

In advance of the commencement of our pivotal palovarotene trial program, we completed the first, randomized, placebo-controlled, adaptive design Phase 2 study in FOP, which enrolled 40 patients. This study showed encouraging safety and efficacy results, as well as unique insights regarding the disease in general and how to better dose patients and measure disease impact. The results of the Phase 2 study along with our open label extension, which reported a total of 67 flare-ups, saw positive trends on certain of our secondary endpoints. Importantly, while our clinical trials have not demonstrated statistically significant results, the data suggest that palovarotene reduced the incidence of new HO by approximately 50% as determined by CT scan at 12 weeks. In those subjects who formed new HO, the mean volumes of new HO were reduced by approximately 70% as compared to the placebo-treated subjects. Palovarotene was well-tolerated in this study and no patient discontinued drug or dose de-escalated.

Our Phase 2 trial and open label extensions as well as additional insights have led us to design our registration trial and an additional clinical trial for palovarotene in FOP. Our Phase 3 trial, MOVE, for the treatment of FOP in adults and children, will enroll up to 80 patients who will be treated chronically with palovarotene and with increased doses during flare-ups. Based on clinical data generated from our Phase 2 study, open label extensions and our natural history study, the FDA has indicated that new HO is a clinically meaningful outcome provided we pre-specify the magnitude of treatment effect and support the HO findings with secondary endpoints, and is sufficient as a primary endpoint for a registration trial supporting approval. Furthermore, we will use the natural history study as the external

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control. We expect to initiate the MOVE trial in 2017 and report data in 2020 with an interim read-out in 2019.

We are also planning for a trial which aims to determine if palovarotene can inhibit new HO formation after surgical excision of HO. Patients will be treated prophylactically and after surgery at specific previously locked joints, in an effort to prevent the re-growth of abnormal bone typically observed in FOP patients and to attempt to increase range of motion at such joints. We intend to discuss the details and timing of this trial with FDA in the future.

In parallel with our Phase 2 trials, we have also completed enrollment in a first of its kind natural history study with 114 patients worldwide to characterize the progression of FOP across numerous outcomes. This study is tracking new HO formation across the body using whole body CT scans (WBCTs) as well as measuring range of motion across all joints. Cross-sectional data indicates a strong correlation between losses in physical function with age. Also, the total body volume of HO in individual patients as well as the number of joints with heterotopic ossification shows strong correlations with these functional outcomes. The findings of this study have been instrumental in establishing that HO is a clinically meaningful endpoint in FOP. Further, given that patients in this study have not received palovarotene, they could be eligible to enroll in our planned registration trial for FOP and we anticipate that many of them will choose to do so.

Like FOP, MO, also called multiple hereditary exostoses, is an ultra-rare genetic disease of new bone formation in children, which is mediated by excess BMP signaling. Patients with MO develop multiple benign bone tumors, also known as osteochondromas (OCs) or exostoses, on bones. MO affects approximately 20 individuals per million lives, or approximately 150,000 globally, which is approximately 15 times greater than that of FOP. Patients suffer from substantial morbidities that worsen over time until they reach skeletal maturity. Since it is believed that the mutations which cause MO also result in excess BMP signaling, we believe palovarotene can also inhibit this pathway in MO.

We have generated pre-clinical data demonstrating that palovarotene inhibits the number of OCs by approximately 80% in an animal model of MO as compared to vehicle-treated animals. Based on our knowledge of the safety and tolerability profile of palovarotene and our pre-clinical animal model data, we are planning to initiate a placebo-controlled Phase 2/3 study of palovarotene in MO this year. We expect to report Phase 2/3 clinical data for this trial in 2020 with a potential interim read-out in 2019.

We also believe that RARg agonists have great potential as inhibitors of BMP signaling in other indications. Palovarotene has been shown to exert multiple effects in various tissues including in ocular tissues, where RARg agonists generally demonstrate anti-fibrotic properties. As a result, we have conducted pre-clinical proof-of-concept studies in dry eye disease that show that an eye drop formulation of palovarotene can potently increase tear production and decrease corneal damage. Following the completion of these studies, we plan to initiate IND-enabling toxicity studies of an ophthalmologic formulation in order to begin Phase 1 and 2 clinical trials in dry eye disease in 2018. We are also focused on developing our RARg agonist platform beyond palovarotene for larger, related disease markets, such as in ankylosing spondylitis or trauma-induced HO. As part of this development process, we are currently in the process of characterizing second generation RARg agonists that we recently licensed from Galderma.

Our Team

We have assembled a team of highly skilled and experienced employees, directors and consultants with broad capabilities in drug discovery, development, regulation and commercialization and particular expertise in orphan diseases. Seventy percent of our employees possess advanced scientific degrees. Our management team has substantial industry experience in the orphan disease space and has an average of 24 years of industry experience, with a successful track record of developing and commercializing drug candidates such as Aldurazyme®, Cerezyme®, Fabrazyme®, Myozyme®, Soliris® and Vyndaqel®. Our board members include the former CEOs of companies that developed Synagis®, FluMist®, Gattex®, Natpara® and Strensiq®, the latter two drugs being for the treatment of rare bone diseases. We continue to leverage this specialized expertise and experience to rapidly pursue the development and commercialization of palovarotene in multiple indications. We are backed by a group of leading institutional life science investors, including OrbiMed, New Enterprise Associates, RA Capital

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Management, a fund managed by Janus Capital Management LLC, Rock Springs Capital, EcoR1 Capital, UCB Biopharma SPRL, BDC and Fonds de solidarité des travailleurs du Québec.

Our Pipeline

We believe that RARg agonists, such as palovarotene, have the potential for therapeutic use in a broad range of conditions, including diseases like FOP and MO that involve pathological bone formation as well as other indications characterized by excessive fibrosis or scarring such as dry eye disease. Our product pipeline consists of:

 

*

 

Phase 1 trials for palovarotene in FOP provide basis for proceeding directly to Phase 2/3 trials in MO

 

**

 

To our knowledge, no animal models for surgical release in FOP currently exist

Our Strategy

We strive to become a leading fully-integrated biopharmaceutical company that provides disease-modifying treatments to patients suffering from debilitating bone and other diseases with high unmet medical need. We are rapidly developing our lead product candidate, palovarotene, to treat FOP and MO. To achieve our goals, we are executing the following strategy:

Complete development and obtain regulatory approval for our lead product candidate, palovarotene, in FOP and MO. We believe that success in any one of our planned clinical trials can form the basis of FDA approval of palovarotene for the targeted indication. We expect to file for worldwide regulatory approvals of palovarotene in FOP and MO including in the United States, Europe and Japan after generating the relevant clinical data, which we expect to read out in 2019 and 2020.

Following the completion of our Phase 2 double-blind, placebo-controlled clinical trial of palovarotene in FOP, we are planning to commence a Phase 3 clinical trial for palovarotene in FOP in 2017, which will include multiple clinical sites around the world, including the U.S., Europe, Japan and

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South America. We anticipate enrolling up to 80 patients in this Phase 3 clinical trial. We expect to report clinical data from this trial in 2019.

Following the completion of our pre-clinical proof-of-concept studies showing that palovarotene potently suppresses the number of OCs expressed in animal models of MO, and based on the safety and tolerability profile of palovarotene observed to date, we are planning to initiate a placebo-controlled Phase 2/3 study of palovarotene in MO this year. We expect to report clinical data from this trial in 2020 with a potential interim read-out in 2019.

In addition, we are planning a study of palovarotene in subjects with FOP who will undergo surgical excision of HO. The primary objective of this study is to determine whether treatment with palovarotene immediately prior to and following surgical excision of HO at an ankylosed joint in subjects with FOP can improve range of motion. We intend to discuss the details and timing of this trial with FDA in the future.

Independently commercialize palovarotene and improve patient care in FOP and MO. We intend to establish our own commercial organization and have begun to develop a global commercial plan under the leadership of our chief commercial officer. Our plan includes establishing the sales, marketing and reimbursement functions required to commercialize palovarotene in global markets. Advocacy groups, patients, caregivers and thought leaders are extremely active and vocal in the FOP and MO communities. We actively collaborate with these patient groups through a number of initiatives including participation in local meetings and educational initiatives such that we better understand the burdens and unmet needs that patients face, and so that we can better facilitate their access to palovarotene, should it be approved.

Develop palovarotene for other indications including Dry Eye Disease. Palovarotene as a RARg agonist is an inhibitor of BMP signaling and has been shown to exert multiple effects in various tissues including bone, muscle and ocular tissues where it generally demonstrates anti-fibrotic properties. Following the completion of our pre-clinical proof-of-concept studies showing that an eye drop formulation of palovarotene can potently increase tear production and decrease corneal damage, we are initiating IND-enabling toxicity studies of an ophthalmologic formulation in order to begin Phase 1 and 2 clinical trials in dry eye disease in 2018.

Expand our RARg agonists platform. We believe that RARg agonists other than palovarotene have great potential as inhibitors of BMP signaling in other indications and in particular in inhibiting HO in larger disease markets, such as ankylosing spondylitis or trauma-induced HO. As a result, we intend to further develop our RARg agonist platform beyond palovarotene. We are currently in the process of characterizing second generation RARg agonists recently licensed from Galderma. From these compounds, derived from four different structural families, we expect to select leads to be developed internally as well as through out-licensing to external partners.

Evaluate opportunities to expand our leadership in our areas of expertise. We may also selectively form collaborative alliances to expand our capabilities and product offerings into new therapeutic areas and potentially accelerate commercialization in select geographic markets. Additionally, we may pursue acquisition or in-licensing of product candidates, particularly in our core focus area of rare bone diseases.

Our History

A 2011 paper published in Nature Medicine by the team of Dr. Maurizio Pacifici showing that palovarotene, a RARg agonist and drug previously developed by Roche, potently inhibited new bone formation in animal models of FOP, was the basis for the creation of Clementia. Shortly after this publication, we evaluated the RARg agonist landscape and determined that palovarotene had the most immediate potential of the agonists in this class. The scientific breakthrough of Dr. Pacifici and his team represented a key opportunity for several reasons. First, palovarotene had an established safety profile, reflected in the fact that it was well-tolerated in 825 subjects previously tested by Roche, some of whom were followed for up to two years. Also, palovarotene is a small molecule and is taken as a once a day pill, an ideal route of administration. Furthermore, there were no clinical trials being conducted in FOP, a debilitating disease which is life-shortening and for which there is a significant unmet medical need.

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Consistent with our belief that RARg agonists as a class have great potential, we also secured IP and options to in-license additional second generation RARg agonists, which we have exercised.

Our Programs

Our programs currently focus on diseases involving tissue transformation via retinoic acid receptors (RARs). RARs are expressed in a variety of tissues and are involved in the growth, shape and maintenance of tissues (morphogenesis). In particular, the RARg receptor sub-type is expressed in cells that produce cartilage and plays a role in biological pathways responsible for endochondral bone formation (the process of new bone formation which occurs via cartilage formation). RARg is also present in multiple other cells and tissues where it mediates the growth and differentiation of specific cell types, including those involved in fibrosis.

Our lead product candidate, palovarotene, is a RARg selective agonist that has shown potent activity in preventing chondrogenesis (cartilage formation) as well as fibrosis in a variety of tissues. We are currently developing palovarotene for the treatment of several diseases of abnormal new bone formation or fibrosis. We expect to initiate a Phase 3 clinical trial of palovarotene in FOP in 2017, MOVE trial, for the treatment of FOP in adults and children. We are also planning a clinical trial, which similarly aims to inhibit abnormal bone growth caused by FOP in patients after surgical release of locked joints. We are also conducting a natural history study of FOP, which tracks the progression of this disease prospectively over time. We believe that many of the participants in the natural history study will enroll in our Phase 3 trial in FOP. We are also developing palovarotene for the treatment of MO and plan to initiate a Phase 2/3 clinical trial for palovarotene in MO in 2017. We believe that success in any one of our planned clinical trials can form the basis of FDA approval of palovarotene for the targeted indication. Finally, we believe that the anti-fibrotic properties of palovarotene may have benefit in the treatment of dry eye disease and we are planning to initiate a Phase 1 trial in this indication in 2018.

In addition to palovarotene, we have pre-clinical and discovery programs evaluating next-generation RARg agonists.

Palovarotene

Palovarotene is an oral, once-daily pill that was initially developed by Roche which we exclusively licensed in January 2013. Palovarotene has been evaluated in a number of Phase 1 clinical trials as well as several Phase 2 clinical trials in COPD and emphysema. These trials enrolled a total of 825 individuals including 450 patients who were on 5 mg palovarotene for up to two years. While palovarotene did not demonstrate efficacy sufficient to warrant further development in these indications, its safety and toxicity profile was consistent with other retinoids and we deemed it acceptable to treat conditions such as FOP and MO.

RARg agonists, such as palovarotene exert their action on bone formation through regulation of the BMP pathway. RARg receptors are expressed in chondrogenic cells and chondrocytes and repress certain genes even in the absence of ligand. BMPs are part of the transforming growth factor b (TGF-b) family of extracellular signaling proteins. They regulate various cellular activities including differentiation and proliferation and are particularly involved in fibrosis. BMP signaling induces the complete pathway of endochondral bone formation during embryonic development and skeletal formation in children.

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Figure 1. Palovarotene Mechanism of Action: Suppressing Mediators of BMP Signaling

As illustrated in Figure 1, the BMP pathway begins with the binding of any of several extracellular BMP ligands such as BMP 2, 4, 7 and 9 to the BMP receptor which is membrane-bound. The receptor is comprised of two BMP Type II subunits and two BMP Type I subunits (also known as ACVR1 or ALK2), which when activated by ligands, recruit, bind and phosphorylate cytoplasmic signal transduction proteins called Smads 1/5/8. When Smads 1/5/8 become phosphorylated, they are able to bind to Smad 4, which together travel to the nucleus where they regulate the transcription of many genes including all those necessary for new bone formation.

Our lead indication, FOP, is caused by excess BMP signaling and is an example of the inappropriate activation of this pathway. Approximately 97% of patients with FOP have the R206H mutation in the ALK2 receptor which is believed to make the receptor overactive both on its own and in the presence of ligands. The mutated, overactive receptor leads to excess phosphorylation of Smads 1/5/8 and enhanced signals to the nucleus to form heterotopic bone. The result is that the abnormal gene sends signals to the body’s muscles and soft tissues instructing the muscles to repair themselves by forming bone rather than muscle or scar tissue. RARg agonists reduce the level of phosphorylated Smads 1/5/8 and the overall protein levels of Smads 1/5/8 and thereby repress excess BMP signaling.

Our second indication, MO, is also a disease believed to be mediated by excess BMP signaling. In this case, mutations in the Ext1 and Ext2 genes are believed to cause decreases in the heparan sulfate chains on proteoglycans and indirectly cause local increases in BMP at the surface of certain cells. Cell surface heparan sulfate is believed to act as a kind of reservoir for growth factors including BMP and their absence has been shown to result in local increases in BMP signaling and intracellular phosphorylated Smad levels. Since palovarotene has been shown to act directly on this pathway in FOP, we hypothesize that palovarotene could also be a potential treatment in MO.

Palovarotene’s unique mechanism of action confers upon it the ability to repress bone formation and fibrosis and is potentially suited to a variety of indications beyond those currently in development.

In July 2014, the FDA granted Orphan Drug Designation for palovarotene as a treatment for FOP and in November 2014, we received Fast Track Designation. In November 2014, we were granted orphan drug status in the EU. In Japan, we briefed the PMDA on our palovarotene FOP program in

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January 2017. Also, in July 2017 we received Breakthrough Therapy Designation from the FDA for the prevention of HO in patients with FOP.

Palovarotene for Fibrodysplasia Ossificans Progressiva (FOP)

Background

FOP is an ultra-rare, chronic and severely disabling disease of abnormal bone formation, known as HO. FOP is characterized by painful, recurrent episodes of soft tissue swelling (flare-ups) that result in bone formation in areas of the body where bone is not normally present, such as muscles, tendons and ligaments. Flare-ups begin early in life and may occur spontaneously or after soft tissue trauma, vaccinations or influenza infections. Recurrent flare-ups and new bone formation progressively restrict movement by locking joints, leading to cumulative loss of function, disability and early death often due to reduced respiratory function. FOP is caused by a mutation of ALK2 that leads to excess BMP signaling and new bone formation via cartilage formation.

At birth, subjects with FOP appear healthy but virtually all have a hallmark toe malformation in which both big toes are shortened and bent inwards. We estimate that the prevalence of FOP is approximately 1.3 individuals per million lives, or approximately 9,000 patients globally. As of October 2016, there were known to be 800 diagnosed FOP patients worldwide.

Patients with FOP typically experience episodic flare-ups, large painful swellings, which are usually red and warm to the touch. These flare-ups eventually resolve within weeks to months, often leaving behind new lesions of heterotopic bone. HO proceeds in two phases: a catabolic phase involving inflammation and muscle destruction followed by an anabolic phase leading to the formation of mature heterotopic bone.

The course of HO formation is episodic and cumulative throughout life and results in development of segments, sheets, and ribbons of extra bone throughout the body and across joints, thereby progressively restricting movement (Figure 2).

Figure 2. Heterotopic Ossification in a Patient with FOP

The result is cumulative immobility, with most FOP patients confined to a wheelchair by their mid-20s, if not much sooner, and requiring caregiver assistance to perform daily living activities. Life-threatening complications include severe weight loss due to locked jaws, and thoracic insufficiency syndrome due to constriction of the rib cage or severe deformity of the spine. The thoracic insufficiency

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syndrome commonly causes complications such as pneumonia and right-sided heart failure, leading to markedly shortened survival (median age at death of 40 years).

Current Therapies – None

Currently there are no approved medical treatment options to prevent the formation of heterotopic bone in FOP. We believe Clementia’s palovarotene program includes the first well-controlled trial for the treatment of this disease. Palliation is administered for symptomatic management of the disease. Removal of heterotopic bone is contraindicated, because surgical trauma to tissues can induce additional vigorous new bone formation. Glucocorticoids are used to manage symptoms of flare-ups affecting major joints. Non-steroidal anti-inflammatory agents, cyclooxygenase-2 inhibitors, mast cell stabilizers, and leukotriene inhibitors are reported by patients to manage chronic symptoms but have not been shown to inhibit new bone formation.

Our Approach

The goal of our development program is to obtain regulatory approval for palovarotene as a treatment for FOP in adults and children around the world. In order to do so, we developed an extensive clinical program which involved three overarching objectives. The first was to conduct Phase 2 clinical trials which could reproduce the effect of palovarotene seen in animal models of FOP. The second was to conduct a natural history study, which would enable us to describe disease progression in the absence of treatment and correlate the total amount of bone a patient has throughout their body with functional outcomes such as mobility or a patient’s report of physical function. Finally, if these first two objectives were successfully achieved, we would confirm these findings in a global Phase 3 trial.

As outlined below, our Phase 2 clinical studies examining the episodic treatment of flare-ups at varying doses of palovarotene were successful in answering many of our questions about the disease as well as showing trends toward the efficacy of palovarotene in FOP. As a result of our learnings from these clinical trials, we modified our dosing regimen from episodic treatment to chronic treatment in our open-label extension ‘202 Part B study. We are also conducting the first natural history study ever in FOP, which successfully enrolled more than 14% of the known worldwide population of FOP subjects and demonstrated strong correlations between the total body volume of HO and functional outcomes. To comply with Japanese regulatory requirements and eventually achieve marketing approval in Japan, we conducted a study in ethnic Japanese healthy volunteers, which enables us to enroll Japanese subjects into our Phase 3 clinical trial.

Based on clinical data generated from our Phase 2 randomized controlled trial, Part A of our Phase 2 open label extension study, and our natural history study, the FDA has indicated that new HO is a clinically meaningful outcome provided we pre-specify the magnitude of treatment effect and support the HO findings with secondary endpoints, and is sufficient as a primary endpoint for a registration trial supporting approval of palovarotene in FOP.

Phase 2 Studies to Support Pivotal Trials for Palovarotene

Our Phase 2 studies were designed to evaluate whether palovarotene could prevent new HO formation after a flare-up and address a series of fundamental questions about FOP. Our initial randomized Phase 2 clinical trial was designed as an episodic treatment trial in which palovarotene was administered at the time of a flare-up. The reasons for conducting an episodic treatment trial as opposed to a chronic treatment trial were that (i) this strategy more closely mimicked the animal studies where HO was induced by muscle injury (flare-up like) and treated with several doses of palovarotene, (ii) flare-up occurrence is unpredictable, thus enrolling patients at the time of a flare-up eliminated this variable, (iii) new HO formation had been previously detected by 6 weeks post flare-up, thus providing a relatively quick read-out of results, (iv) it was believed that HO formed approximately 80% of the time following a flare-up, thus potentially providing a high baseline with which to measure efficacy of palovarotene, and (v) we believed at that time that episodic treatment was less likely to affect the growth plate of children.

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Clementia is the trial sponsor of an IND submission for PVO-1A-201, which was filed on March 28, 2014. The purpose of the IND submission was to begin a Phase 2 randomized, double-blind, placebo-controlled efficacy and safety study of palovarotene for the treatment of subjects with FOP.

As can be seen in Figure 3 below, palovarotene was tested initially at three different doses (placebo, 10/5 mg and 5/2.5 mg) for 6 weeks followed by an observational period of an additional 6 weeks with no treatment in 40 subjects (‘201 study). This observational period was to ensure that no rebound in flare-ups occurred after withdrawal of drug. Also, the two-dose step-down regimen was based on animal model work which optimized efficacy while minimizing side effects. After this double-blind period, all subjects elected to enroll in the open-label extension trial (‘202 Part A), where they received the 10/5 mg dose for any subsequent flare-ups they experienced.

When we pooled the results of these Phase 2 trials, which reported a total of 67 flare-ups, and made cross-study comparisons, we saw positive trends on certain of our secondary endpoints. Importantly, the pooled data suggest that palovarotene reduced the incidence of new HO by approximately 50% as determined by CT scan at 12 weeks. In those subjects who formed new HO, the mean volumes of new HO were reduced by approximately 70% as compared to placebo-treated subjects. Aside from these positive trends in bone reduction following treatment with palovarotene, several other important lessons were learned from these Phase 2 trials. We learned that (i) CT scans are more sensitive than x-ray in detecting and measuring HO volume, (ii) in some subjects, it took longer than 6 weeks to form new HO, (iii) the process initiating HO formation was possibly occurring before patients could detect flare-up symptoms, and (iv) certain flare-ups could last longer than 6 weeks.

As a result of what was learned in our Phase 2 trials as well as critical new information from animal models showing the benefits of chronic palovarotene treatment, we decided to test a new chronic dosing regimen of palovarotene in the subjects already enrolled in our open-label extension study and termed this ‘202 Part B (Figure 3). We also opened this clinical trial to enroll additional subjects. This regimen includes a 5 mg chronic daily dose of palovarotene (in adults) with increased dosing at the time of a flare-up (20 mg for 4 weeks followed by 10 mg for 8 weeks). In children, only the weight-adjusted 20/10 mg regimen for flare-ups is being administered. Our decision was also informed by the fact that in several other diseases, such as multiple sclerosis and hemophilia, chronic treatment regimens have been found to be superior to episodic treatments alone.

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Figure 3. Palovarotene Clinical Trials: Overview

PVO-1A-201

Study PVO-1A-201, which we believe to be the first-ever placebo-controlled clinical trial in FOP, was a Phase 2, multi-center, randomized, double-blind trial (3:1 randomization) which was adaptive for dose, duration of treatment and timing of assessments. Within 1 week of a confirmed flare-up, subjects were randomized to receive either 10 mg palovarotene for 2 weeks followed by 5 mg for 4 weeks (10/5 mg, n=21), 5 mg palovarotene for 2 weeks followed by 2.5 mg for 4 weeks (5/2.5 mg, n=9), or placebo for 6 weeks (n=10); which in all cases was followed by a 6-week period without treatment. The study enrolled subjects as young as 7 years of age.

The study included imaging endpoints that assessed for new HO formation by x-ray and CT, and for the presence of soft tissue edema by magnetic resonance imaging (MRI) or ultrasound. Imaging was interpreted by a central laboratory using two blinded procedures: primary reads performed by two musculoskeletal radiologists who interpreted images relative to baseline within a single imaging modality and measured HO volume; and global reads performed by one of the central laboratory musculoskeletal radiologists, independent musculoskeletal and ultrasound radiologists, and the investigators who interpreted all images, across all imaging modalities and time points but without volume measurements.

The pre-specified primary endpoint of the study was the percent of responders (defined as subjects with no or minimal new HO at the flare-up site as assessed by x-ray) at Week 6 compared to placebo as assessed by primary reads. The statistical assumptions were that 80% of placebo-treated subjects would form new HO versus 20% of palovarotene-treated subjects in the 6-week period following the onset of a flare. These theoretical results would have had an 80% likelihood of demonstrating a statistically significant difference between the groups, which is usually defined as a p-value of less than 0.05 and generally understood to be an observed effect that has not occurred by chance. However, as it is more challenging to find statistically significant results in small cohorts, there is heightened difficulty achieving statistical significance for ultra-orphan diseases, like FOP and MO.

In reviewing the data, we made a number of observations. On the primary endpoint of percent of responders at Week 6 as assessed by x-ray, the study did not show a difference between the groups. The placebo group had one out of ten subjects with new HO, the 5/2.5 mg group had one out of nine

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subjects with new HO and the 10/5 mg group had no subjects with new HO. We believe this result was due to the fact that x-ray was not sensitive enough to detect new HO in all cases and that some subjects demonstrated new HO only at the Week 12 time point. The results of certain of our secondary endpoints presented below reflect the global read analyses using the more sensitive imaging modality (CT scan) at Week 12 in the per protocol population, which excludes one subject in the 10/5 mg group who received less than 80% of the required dose, except where noted.

 

 

HO Formation. A lower percentage of flare-ups in subjects on 10/5 mg (15%) had new HO as assessed by CT (or x-ray if CT was not available) at Week 12 than those on placebo (40%) and 5/2.5 mg (44.4%). This finding, which represents a 62% decline in the rate of new HO (p=0.0837), did not meet the 0.05 significance level.

 

 

HO Volume. In addition, the volume of new HO at Week 12 (primary read via CT) was lower in the 10/5 mg (21,841 mm3) and 5/2.5 mg (5,332 mm3) groups than in the placebo group (53,938 mm3). While the dataset is small and the differences did not meet the 0.05 significance level (p=0.4871), the results directionally support a treatment effect on volume of new HO.

Figure 4. Palovarotene inhibits new bone formation after flare-ups:
Study ’201: New HO by CT scan at Week 12

 

 

 

Percent of Flare-ups with New HO

 

Mean Volume (mm3) of New HO by CT

 

 

 

Patient reported flare-up symptoms. Flare-up pain and swelling symptoms were measured at baseline and study days 14, 28, 42, 63, and 84 using a Numeric Rating Scale (NRS) (0 to 10). Time to flare-up resolution was determined based on each patient’s reporting of flare-up status contained in a daily diary. There was no statistically significant difference in pain, swelling, or time to flare-up resolution in those subjects treated with palovarotene compared with placebo. However, there was a numerical trend toward a reduction in days to flare-up resolution in the 10/5 mg (34 days) and 5/2.5 mg (46 days) groups versus placebo (64 days). There was also a numerical trend toward a greater reduction in NRS of pain in the 10/5 mg group (-3.3) versus placebo (-2.1) at day 84.

 

 

Tolerability. No subjects discontinued treatment due to an AE. All subjects had at least one treatment-emergent adverse event (TEAE); most of which were mild in severity (62.5%), the majority were dry skin. There were dose-related increases in the number and severity of retinoid-associated TEAEs (60.0% in the placebo group, 88.9% in the 5/2.5 mg group, and 95.2% in the 10/5 mg group). The most common AE was dry skin (30.0%, 55.6%, and 81.0%, respectively). No other safety signals were observed. We believe that palovarotene showed an acceptable safety profile and was well-tolerated in this study.

 

 

SAEs. Four subjects had serious AEs: asthmatic crisis (placebo), hemorrhagic ovarian cyst (5/2.5 mg); myoclonus (10/5 mg) in a subject known to have this condition; and FOP flare-up (10/5 mg).

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PVO-1A-202 Part A Open Label Extension

Upon completion of each subject’s participation in Study PVO-1A-201, all subjects enrolled into open-label extension study, Part A (PVO-1A-202) in which the 10/5 mg palovarotene dosing regimen was evaluated in any subjects who experienced new flare-ups. Of these, 20 subjects experienced 28 new flare-ups, which were assessed in the same manner as flare-ups in the ‘201 study.

 

 

HO Formation. 30% of flare-ups (8 out of 27 evaluable) in subjects receiving palovarotene (10/5 mg) had new HO as assessed by CT at Week 12. However, 4 of these flare-ups (in 3 subjects) were determined to be continuations of their original flare-ups including from a placebo subject. If these flare-ups are removed from the analysis as not representing a distinct new flare-up, then the percentage of new HO in this study is 18%.

 

 

HO Volume. In addition, the volume of new HO at Week 12 (primary read) was measured in 27 evaluable flare-ups, 8 of which showed new HO and including those from ongoing flare-ups from the ‘201 study. Mean bone volume in these subjects (10/5 mg) was 7,506 mm3 (compared with 53,938 mm3 in placebo) indicating a large effect size (Cohen’s d=1.15). Effect sizes, unlike p values, are independent of sample size. Cohen’s d is an effect size index that measures the standardized difference between group means divided by the standard deviation and classifies effect sizes as small, medium, large and very large (Cohen’s d0.2, 0.5, 0.8 and 1.3, respectively).

Figure 5. Palovarotene inhibits new bone formation after flare-ups:
Study ‘202 Open Label Extension: New HO by CT scan at Week 12

 

 

 

Percent of Flare-ups with New HO

 

Mean Volume (mm3) of New HO by CT

 

In summary, in the pooled results from episodic treatment of 67 flare-ups in the ‘201 and ‘202 Part A clinical trials, we observed that palovarotene, relative to the placebo group in the ‘201 study:

 

 

reduced the percentage of subjects who developed HO after a flare-up by approximately 50%;

 

 

decreased the volume of HO in those who formed HO by approximately 70%; and

 

 

diminished subject-reported time to flare-up resolution.

This evidence indicates that palovarotene may yield substantial improvement in clinically meaningful endpoints in FOP, a disease for which there are no approved drugs. The results also warrant moving forward with the design of a Phase 3 program in FOP with assessment of new HO volume as a primary endpoint.

Natural History Study

In December 2014, in parallel with our Phase 2 clinical trials, we initiated, and have since completed enrollment of 114 subjects in our study, “A Natural History Study of Fibrodysplasia Ossificans Progressiva (FOP).” Based on the International Fibrodysplasia Ossificans Progressiva Association’s finding that as of October 2016, there were 800 confirmed FOP patients worldwide, the patients enrolled in our natural history study represent more than 14% of the patients in the world confirmed to have the disease. The natural history study is being conducted to characterize FOP

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progression of disease across numerous outcomes and to understand the relationship between new bone formation in FOP and functional outcomes. Imaging outcomes include whole body CT scans (WBCTs) measured at yearly timepoints, as well as CT imaging at the location of flare-ups. Functional endpoints include range of motion, Cumulative Analogue Joint Involvement Score (CAJIS Score), and physical function measured by a patient-reported outcome questionnaire (FOP-PFQ) we specifically adapted to FOP and global health scales.

Cross-sectional data available for 114 of these patients indicates a strong correlation between losses in range of motion, physical function and age. Also, the total body volume of HO in patients is strongly correlated with functional outcomes. The measurement of HO volume is objective and quantifiable. Furthermore, HO is the foremost feature of FOP.

Our natural history study is also collecting data on flare-ups occurring in untreated subjects in the same manner as was collected in our Phase 2 clinical trials. These results indicate that untreated subjects formed new HO 44% of the time following a flare-up and the mean volume of new HO in those who did form bone was 34,625 mm3. These results are largely in line with what was observed in placebo treated subjects in the ‘201 trial (40% incidence of new bone and mean bone volume of new HO of 53,938 mm3), lending further support to the efficacy signal of palovarotene in FOP.

Thus far, we have collected information on the progression of HO at 12 months in 46 of our natural history study subjects. The location and volume of all new HO across the body was measured. 41% of the individuals with 12 month WBCTs showed evidence of new HO. The mean bone volume of new HO lesions was 41,662 mm3, a number consistent with the amount of bone formed in untreated subjects after an individual flare-up. We believe these results are consistent with our observations in placebo-treated patients in the ‘201 trial.

We anticipate that by the end of the year, we will have 12 month WBCT data on a majority of our natural history study patients as well as 24 month WBCT data on a subset of subjects. Given that patients in our natural history study have not received palovarotene, they could be eligible to enroll in our planned Phase 3 trial, and we anticipate that many of them will choose to do so.

PVO-1A-202 Part B Open Label Extension

During the course of our ‘202 Part A open-label study and based on specific outcomes we were seeing in individual cases in our studies, we believed it was appropriate to amend this study and add a Part B to evaluate chronic dosing and escalation of dosing during flare-ups. Part B of this open-label study is now evaluating chronic daily treatment of 5 mg in adults as well as higher and longer dosing during flare-ups, for adults and weight-based equivalent doses for children.

Despite the fact that our episodic dosing regimen provided an efficacy signal, we felt that this new chronic dosing regimen could potentially improve efficacy. For one, animal model studies with palovarotene indicated dose-dependent reduction in HO; therefore, we believed that as long as palovarotene was well-tolerated, higher doses would further reduce new HO. Also, we learned that for at least one subject who enrolled with nascent HO at baseline the process of HO formation may be difficult to suppress once it has begun, therefore administering palovarotene prior to detection of any symptoms could be advantageous. We also noted that of the subjects who formed new HO in our ‘202 Part A study, most of them had either formed HO in the ‘201 study or had ongoing symptoms in the 6 week observational period in which no palovarotene was received. This indicated to us that chronic treatment without interruptions in drug dosing might be preferable to episodic treatment alone. Importantly, new data published in the R206H mouse model (the mouse model which most closely mimics human FOP), indicated that chronic doses of palovarotene (5 mg HED) were not detrimental to growing bones but may be beneficial in that palovarotene treatment restored the appearance of growth plates and preserved bone growth as compared to the R206H FOP animal model. Although this animal model data suggested a potential benefit from chronic palovarotene treatment in children with FOP, the tolerability profile of our new chronic dosing regimen with higher dose treatment for flare-ups had not yet been established. Therefore, only adults are currently being treated with chronic daily dosing. Now that preliminary data has been gathered, we intend to amend the ‘202 Part B protocol to administer chronic daily dosing in children.

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We currently have 50 subjects enrolled in our ‘202 Part B open-label extension study: 40 adults and 10 pediatric subjects. All subjects who are receiving chronic treatment underwent baseline WBCTs at study entry and will be assessed with WBCT at 12 months. Adults are being administered 5 mg of palovarotene daily in the absence of a flare-up. Children who have not achieved skeletal maturity receive treatment for flare-ups but not chronic daily treatment. During a flare-up, 20 mg for 28 days followed by 10 mg for 56 days is administered to all subjects, with weight-based dosing for children.

Based on preliminary flare-up data obtained for this new dosing regimen in our ‘202 Part B, we believe that we are seeing improved efficacy over our previous episodic treatment regimen. Overall, as of March 31, 2017, 19 flare-ups have been evaluated in ‘202 Part B for whom we have 12 week CT data, 9 flare-ups in pediatric subjects who received only episodic treatment and 10 flare-ups in adults who received prior chronic treatment. One subject had a fracture of heterotopic bone in the hip area that appeared to heal normally while on palovarotene. Although these data are sparse and this study is ongoing, subjects mean bone volume of new HO in the chronically treated group has thus far been much lower (approximately 90%, see Figure 6) than that observed in our ‘201 and ‘202 episodic treated groups.

Since palovarotene’s mechanism of action may also include anti-inflammatory activity, we examined the possibility that subjects on chronic daily dosing might also be experiencing less flare-ups. Preliminary analysis suggests an approximate 19% decrease in the flare-up rate of subjects on chronic daily dosing as compared to the flare-up rate of subjects on episodic dosing in our ‘201 and ‘202 clinical trials (as measured by the number of flare-ups per patient month exposure). Taken together, we believe these data suggest improved efficacy over our previous episodic dosing regimens.

Since flare-ups from all our studies were assessed in the same manner, we compared the volume of new HO formation following a flare-up in each of three groups: (i) untreated patients (from our ‘201 placebo group and the natural history study), (ii) patients who received only either the 10/5 mg or 20/10 mg doses episodically during flare-ups (from the ‘201 and ‘202 Part A and B studies) and (iii) patients receiving chronic daily dosing (from ‘202 Part B). In each group we included flare-ups that did not form bone (0 mm3). See Figure 6.

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Figure 6. All flare-up combined cross-study results comparing episodic treatment to chronic treatment: New HO by CT scan at Week 12

 

Mean Volume (mm3) of New HO—All Flare-ups

The endpoint we are proposing in our Phase 3 clinical trial is one that measures the annualized change in new HO volume by WBCT. This is the precise endpoint we have measured and are continuing to measure in our natural history subjects. In general, the mean HO volumes observed at 12 months in the natural history study are similar to what we observed in our placebo subjects from the ’201 flare-up study both in terms of the proportion who formed new HO after a flare-up as well as the mean bone volume of HO in those who did form bone. Although we have not collected data on this endpoint in our previous clinical trials, we believe that the flare-up data is suggestive of what will be seen across the body. In addition, we will have preliminary data on this endpoint from subjects in our ‘202 Part B by early 2018 and anticipate reporting these results at that time.

We have observed an increase in certain specific mucocutaneous side-effects as compared to our ‘201 and ‘202 Part A episodic dosing regimen, although the overall level of side-effects was similar. These included pruritus (or itchiness), excoriation (or skin abrasion), rash and alopecia (or hair loss), of which none were considered severe. In contrast to our previous studies, four out of twenty subjects have required dose de-escalation during flare-up dosing due to intolerable mucocutaneous side-effects attributed to dry skin, alopecia and pruritus. In general, symptoms improve at about 3 days after dose de-escalation. Overall, we believe that the predicted benefit of chronic daily dosing and 20/10 mg for flare-ups greatly outweigh the manageable tolerability issues observed and we intend to carry this regimen forward in our Phase 3 clinical trial.

Planned Clinical Trials

We plan to initiate a global Phase 3 clinical trial, the MOVE trial, which we believe, if successful, could lead to regulatory approval for palovarotene for the treatment of FOP in adults and children in the United States and Europe, as well as other major markets worldwide. The treatment regimen to be administered will be identical to that currently being tested in our ‘202 Part B study, except that children will also receive chronic dosing in addition to higher dose treatment for flare-ups.

We are also planning a trial to determine whether treatment with palovarotene immediately prior to and following surgical excision of HO in an ankylosed joint in subjects with FOP can improve range of motion at 3 months. If this trial is successful, it could allow patients who have certain locked joints to regain mobility.

MOVE Trial for FOP

We anticipate that the Phase 3 MOVE trial will be a global multi-site study which will evaluate the efficacy and safety of palovarotene in preventing new HO in subjects with FOP. We anticipate that adults and children as young as 4 years of age will receive oral palovarotene 5 mg once daily or weight-based equivalent for children. During flare-ups, all subjects will receive 20 mg for 28 days followed by

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10 mg for 56 days or weight-based equivalent and will then return to the 5 mg daily dose. Patients will not be required to come to the clinic during flare-ups unless requested by principal investigators.

We anticipate enrolling up to 80 subjects at approximately 15-20 clinical sites worldwide. WBCTs will be assessed at baseline and months 6, 12, 18 and 24. We anticipate our primary endpoint will be annualized change in new HO volume as measured by WBCT as compared to data from the natural history study which will serve as the external control. Pre-specified interim analyses will be performed to evaluate for early stopping based on efficacy or futility. Since at any given time point, individual patients will have differing follow-up durations depending on when they enrolled into the clinical trial, this endpoint has the advantage of accounting for all of the data available at the time of analysis, including 12 and 24 month WBCT data from the natural history study. WBCTs derived from the natural history study or treated subjects in the MOVE trial will be read by a central imaging lab with musculoskeletal radiologists blinded to the patient group. HO is outlined at baseline using image analysis software and any new HO measured at subsequent time points is also outlined and reported as new HO in mm3. Recent regulatory interactions support this endpoint as a clinically meaningful outcome measure and sufficient as the primary endpoint in Phase 3 to support approval, provided we pre-specify the magnitude of the treatment effect and support the HO findings with secondary endpoints. Secondary and exploratory endpoints will include the percent of subjects with new HO at 6, 12, 18 and 24 months, change in the number of body regions with any HO, CAJIS measure of physical mobility, our FOP-PFQ and PROMIS Global Health Scale which will be assessed. We anticipate that our clinical trial will commence in 2017 with planned clinical read-outs in 2019 and 2020.

Detailed safety evaluations will include AE and serious AE reporting, electrocardiograms, vital signs, laboratory parameters and concomitant medication reporting. Also, as required with all retinoids, suicide ideation will be assessed with the C-SSRS questionnaire. For subjects with open epiphyses (active growth plate), knee and hand or wrist radiographs will be taken as well as knee height measurements for the assessment of linear growth. We believe, but cannot be certain, based on previous juvenile toxicity data, that the growth plate of children will be either minimally affected or unaffected.

We anticipate that many patients currently enrolled in our natural history study will elect to enroll in our Phase 3 MOVE trial. Our natural history study represents the largest collection of data on untreated FOP patients in the world and is unlikely to be reproduced. Since our natural history study measured and is continuing to measure WBCT annually, we will use these data as the external control in the Phase 3 study.

The fact that our primary endpoint in Phase 3 will be annualized change in new HO volume by WBCT, meaning the change in HO from baseline to final scan divided by the number of years between baseline and final scan, has many advantages. First, using an annualized change enables us to integrate all the CT scan volume information we will have at our pre-specified analysis time points, including from subjects in the natural history study who have new HO volume data at 12 and 24 months. Also, by using new HO volume as our endpoint, we are capturing much more information than in our percent responder analysis in the ’201 study, since both the presence and absence of HO (bone volume of 0 mm3) as well as the volume of new HO across the body are included in the same endpoint. This provides greater sensitivity to capture all of palovarotene’s potential effects, including reductions in the proportion of subjects who form new HO, reductions in new HO bone volume and potential reductions in the flare-up rate in treated subjects.

We believe that the efficacy seen in our Phase 2 studies after a single flare-up may translate to similar efficacy when evaluating new HO across the body since the biological action and the bioavailability of palovarotene is likely similar at different locations in the body. We may also see additional improvement in the reduction of HO volume from potential reductions in the flare-up rate.

In parallel with our Phase 3 trial, we will be conducting other supportive clinical and non-clinical studies including, among others, drug-drug interaction and food effect studies.

Based on discussions with European regulatory authorities, we believe that positive results from the MOVE trial could result in conditional marketing authorization of palovarotene for the treatment of FOP in Europe. Standard marketing authorization would be subject to a showing of sufficient functional benefits to FOP patients from treatment with palovarotene.

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Surgical Release Trial for FOP

We are also planning a clinical trial which will be an efficacy and safety study of palovarotene in subjects with FOP undergoing surgical excision of HO. The objective is to determine whether treatment with palovarotene immediately prior to and following surgical excision of HO in an ankylosed joint in subjects with FOP can improve range of motion. We intend to discuss the timing and details of the protocol in the future.

Currently, there are no approved therapeutic treatments which can reduce or eliminate heterotopic bone which locks a joint into place. In non-FOP subjects, surgical removal of heterotopic bone is possible and can result in increased range of motion. Patients with FOP are currently advised not to undergo surgeries since these have been reported to lead to new HO formation. Certain patients with FOP also have compromised respiratory function due to restrictions in the ability of the chest wall to expand, and other issues related to lack of mobility in the neck and other body regions. Nonetheless, patients have undergone surgeries, of the jaw, for example, to change the position of the locked jaw and create a space for eating and speaking.

Since palovarotene has shown an efficacy signal in reducing HO after flare-ups, we intend to cautiously determine whether it can also prevent regrowth of HO after surgery.

Our proposed primary efficacy endpoint will be change in range of motion at the joint where surgical excision occured at day 84 as compared to pre-operative baseline. Proposed secondary endpoints will include change in range of motion at the joint where surgical excision occurred at day 42, change in physical function using the upper extremity items from the FOP-PFQ as compared to pre-operative baseline, change from pre-operative baseline in HO volume by CT scan at day 84 as well as change from post-operative HO volume by CT scan at discharge (day 5 or 6) compared to day 84.

We intend to discuss the surgical release clinical trial with FDA prior to initiation.

Earlier Development Work

Extensive pre-clinical animal model work has consistently demonstrated dose-dependent declines in new HO formation with palovarotene treatment. In the ALK2 (Q207D) mouse model of HO, animals were injected with cardiotoxin to initiate the inflammatory triggering event leading to HO. Treatment started on the day of muscle injury, and continued with various concentrations of palovarotene or vehicle for 14 days. Soft tissue x-ray and mCT images after 15 days revealed the presence of HO in vehicle controls, and a dose-dependent decrease in the presence and volume of HO in palovarotene-treated mice, including near abrogation of HO formation (Figure 7).

Figure 7. Palovarotene Dose Response in Q207D Mouse Model

**p<0.01;  ****p<0.0001

A full non-clinical toxicology program has been conducted, including juvenile toxicology, which we believe supports chronic dosing in both adults and children with FOP. From these studies, we predicted that at the doses being tested (10/5 mg weight-based equivalent), the 6 week treatment of pediatric patients with palovarotene would have minimal to no impact on the growth plate. In fact, using

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radiographic measures of growth plate function and linear growth velocity, we observed no evident impact on the growth plate in children in our studies. In the preliminary data we have collected in pediatric subjects tested with 20/10 mg, there has also been no evident impact on the growth plate.

The effectiveness of palovarotene was also tested in the ALK2 R206H knock-in mouse model of FOP. In this highly physiological animal model of FOP (which has abnormal posterior toe formation), growth plate abnormalities were discovered as was the observation that long bone elongation was impaired in the absence of treatment. This was not previously known. Palovarotene administered on alternate days at an average human equivalent dose of approximately 5 mg surprisingly preserved long bone growth and near-normalized growth plate organization and cartilage matrix deposition. Furthermore, palovarotene treatment significantly reduced the formation of spontaneous HO in these mice. These data, along with the efficacy signal emerging from our Phase 2 studies at the time, provided one of the key elements in our decision to modify our regimen to one which included a chronic treatment component in addition to flare-up treatment.

Palovarotene in Multiple Osteochondroma (MO)

Background

Palovarotene has been previously shown to inhibit the downstream signaling of BMP receptors via Smads 1/5/8 in FOP. Since it is believed that the mutations which cause MO also result in excess BMP signaling through Smads 1/5/8, we believe palovarotene may also inhibit this pathway in MO. In this manner, palovarotene treatment could potentially reduce morbidity and deformity and preserve function in patients with MO.

MO, also called multiple hereditary exostoses, is an ultra-rare genetic musculoskeletal condition in which multiple benign bone tumors, also known as OCs or exostoses, develop on bones. MO affects approximately 20 individuals per million lives or approximately 150,000 globally, which is approximately 15 times greater than FOP. MO is typically diagnosed in early childhood with a median age at diagnosis of 3 years due to symptomatic OCs. These are comprised of growth plate-like cartilage cap overlying a bony base. They originate as an outgrowth of growth plates but frequently detach from the growth plate as a child grows. OCs form at the end of most long bones and on flat bones, such as the hip, shoulder blade or ribs. MO is phenotypically variable and associated with skeletal abnormalities including short stature, joint deformity including dislocation of the hand or valgus deformity of the knee, bowed bones and limb length discrepancies, and early onset osteoarthritis. Functional problems and morbidity occur due to pain, reduced mobility and range of motion, entrapment of blood vessels, nerves, tendons and spinal cord compression. Of patients with MO, 70% often undergo surgeries, sometimes in excess of 20, to remove OCs or address deformities. In 2-5% of patients with MO, OCs become neoplastic during adulthood.

Once bone growth is complete in late adolescence and early adulthood, it is believed that new OCs do not form; however, existing OCs can still grow and cause morbidity. Disease severity has been classified according to the number of OCs detected at a certain age as well as the number of sites with deformities or functional limitations. Class I represent less severe subjects with exostoses but without functional limitations or deformities. Class II and III represent those with multiple OCs and with functional limitations. From a registry of 529 patients, 62% were deemed to be moderate to severe, or Class II and III, while the remainder presented with milder disease. Figure 8 illustrates the appearance of OCs at multiple locations around the knees and ankles. These can be discerned visually and by clinical exam. The inward bent of the knees (valgus of the knee) is also apparent. (Images reproduced from Bovée. J.V. (2008) Orphanet Journal of Rare Diseases, 3, 3)

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Figure 8. Appearance of OCs

Like FOP, MO is an ultra-rare genetic disease of new bone formation in children, which is mediated by excess BMP signaling. Loss-of-function mutations in Exostosin1 (Ext1) and Exostosin2 (Ext2) genes are thought to be causal in 90% of patients with MO. Ext1 and Ext2 genes encode glycosyl transferases responsible for the elongation of heparin sulfate chains present on proteoglycans at the surface of cells. It has been proposed that reductions in cell surface heparin sulfate resulting from these mutations lead to local increases in BMP and Smad signaling. These local increases in BMP likely mediate OC formation.

Palovarotene acts by inhibiting Smad-mediated BMP signaling and is therefore being investigated as a potential treatment for the prevention of new bone formation in FOP and MO.

Current Therapies

There are currently no approved therapies for MO nor are we aware of any drug therapies in development for this disease. Surgical excision is the only treatment available for symptomatic OCs and can be associated with serious complications. No Orphan Drug Designations have been granted to any company for MO.

Our Approach

The goal of our clinical development program in MO is to obtain regulatory approval for the use of palovarotene for the treatment of MO worldwide. We intend to use all of our learnings from the development program in FOP, to design the most efficient path to approval for MO. Since we have obtained access to an extensive registry of MO patients via our collaboration with the Rizzoli Institute, we do not believe that it will be necessary to conduct a natural history study. Also, because of our extensive studies, including juvenile toxicity studies, and experience with oral palovarotene in the clinic, we do not believe we will need to conduct any additional pre-clinical or clinical studies prior to initiating our clinical trial in MO. Because of the rarity, severity and unmet medical need in MO, we believe it may be possible to conduct a single Phase 2/3 trial, which, if successful, could support our application for regulatory approval.

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Earlier Development Work

Dr. Yu Yamaguchi (a professor at Sandford Burnham Prebys Medical Discovery Institute) developed an animal model of MO, the Ext1 gene knockout mouse model (Ext1-CKO). A study with this model was completed and BMP signaling was shown to be enhanced in the outermost cells of the growth plate, or perichondrium. In collaboration with Dr. Yamaguchi, we have generated pre-clinical data showing that a 2.6 mg human equivalent daily dose of palovarotene inhibits the number of OCs by 80% as compared to vehicle-treated Ext1-CKO animals.

Figure 9. Palovarotene Treatment Significantly Reduces Osteochondroma Formation in a Animal Model of Multiple Osteochondroma

Briefly, conditional knock-out of Ext1 in mice leads to the formation of phenotypes characteristic of MO. Bony tuberosities with a cartilage cap are first detectable at 2 weeks and by one month, all animals develop multiple OCs with histological features consistent with human MO.

The Ext1-CKO mice were treated with palovarotene (0.882 mg/kg) or vehicle by daily oral gavage for 4 weeks. The effect of palovarotene on the formation of OCs in the mouse model was evaluated using whole-mount skeletal preparations stained with alcian blue. OCs were identified and counted in multiple limb bones (humerus, radius, ulna, femur and tibia) and each of the 24 rib bones from each mouse.

The sum of these counts (total number of OCs in limb bones) versus vehicle treated bones is presented in Figure 9 above. In vehicle-treated Ext1-CKO mice (n=8), 100% of the animals showed presence of OCs at all bones after 4 weeks of treatment. The mean total number of OCs at the limb bones (119±11.2) was significantly greater in vehicle treated Ext1-CKO mice compared to palovarotene treated Ext1-CKO mice (n=8;19.9±6.9) representing an 83% decrease (p<0.0001). Furthermore, results in rib bones also showed a similar 80% decline in the number of new OCs in the palovarotene treated group (35.4±9.5) vs. vehicle-treated animals (178.1±27.1) p<0.0001.

Palovarotene treatment had no effect on crown-rump length after 4 weeks of daily oral treatment in Ext1-CKO mice compared to vehicle controls. There was a small effect on long bone length in palovarotene treated animals, which may be attributable to the young age at which these animals were treated. This effect was not seen in a subsequent experiment where dosing began in animals that were one week older.

We believe that the consistency of these results on OC numbers, the magnitude of the effect and the relatively low dose of palovarotene used in these animal model studies, could potentially translate into the clinic. We note that other examples of animal models of bone disease such as osteoporosis and hypophosphatasia have previously translated in vivo findings into the clinic.

Planned Phase 2/3 Trial

Following these proof-of-concept animal studies, and as a result of our extensive clinical experience with palovarotene, we are planning to initiate a Phase 2/3 clinical trial in MO. The objective of the study will be to evaluate the efficacy and safety of palovarotene in MO in subjects with confirmed Ext1 or Ext2 mutations. A protocol for a multi-center, randomized placebo-controlled study is being

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finalized. We will submit the protocol to the FDA, and finalize it after FDA feedback, as part of the IND we plan to submit for palovarotene for the treatment of MO.

In this trial we expect to study multiple doses of oral palovarotene compared with placebo. The doses being considered are weight-based equivalents of 5 mg or 2.5 mg daily oral, and potentially another, lower dose. The primary endpoint is expected to be a multidomain endpoint including new OC, new joint deformity or new functional impairment and surgery. Secondary endpoints will include the size of OCs as assessed by whole body MRI, pain and quality of life measures. Enrollment will likely be limited to children as young as 4 years old.

As with our FOP clinical studies, detailed safety evaluations will include AE and serious AE reporting, electrocardiograms, vital signs, laboratory parameters and concomitant medication reporting. Also, as required with all retinoids, suicide ideation will be assessed with the C-SSRS questionnaire. For subjects with open epiphyses (active growth plates), knee and hand or wrist radiographs will be taken as well as knee height measurements for the assessment of linear growth. We believe but cannot be certain that due to the relatively low doses being tested, and based on our previous juvenile toxicity data that the growth plate of children will be either minimally affected or unaffected.

In order to better understand the epidemiology and natural history of MO, we have concluded an agreement with Dr. Luca Sangiorgi, M.D. Ph.D., the head of the Medical Genetics and Rare Orthopaedic Diseases department of Istituto Ortopedico Rizzoli di Bologna (the Rizzoli Institute), who has built a registry of over 600 subjects, 200 of which are pediatric subjects. We anticipate using the rate of progression of this disease to estimate the time required to measure a significantly different number of events in palovarotene treated subjects as compared to placebo. We anticipate that this will commence in 2017 and report data in 2020 with a potential interim read-out in 2019 with planned data read-outs in 2019 and 2020. The terms of this agreement are more fully described under “Sponsored Research Agreements” below.

We intend to apply for Orphan Drug Designation for MO in the U.S. and in Europe in 2017 and later in Japan. We also anticipate applying for Fast Track Designation.

Palovarotene for Dry Eye Disease

Background

Dry eye disease is a multifactorial ocular condition in which the eye does not adequately produce tears. Dry eye disease is one of the most common ocular morbidities, affecting about 7% of the U.S. population. General estimates for the prevalence of dry eye disease are 14.5%. The disorder is most prevalent in elderly patients and women, in particular menopausal or post-menopausal women. There are both primary and secondary causes for dry eye disease, which result in disruptions to the precorneal tear film. The primary causes include systemic disorders, while the secondary causes can be from hormonal imbalances, environmental conditions (extreme temperatures, low humidity) and inflammatory disease. Other risk factors for dry eye disease include extensive use of display screens, refractive surgery, contact lens wear and certain medications. Hyper-osmolarity of the tears stimulates inflammatory mediators. Consequently, dry eye disease is characterized by ocular discomfort (including redness, gritty or burning eyes, and foreign body sensation), mucous discharge, disturbed vision, and tear film instability. Advanced dry eye disease can lead to pain, ulcers, or scars on the cornea, and some loss of vision.

Histopathologic changes with dry eye disease involve gradual pathologic transition of nonkeratinized stratified epithelium, including nonsecretory-cornea and/or secretory-conjunctiva, to a nonsecretory, keratinized epithelium. This process involves an increase of cellular stratification, a loss of conjunctival goblet cells, an abnormal enlargement of non-goblet epithelial cells and keratinization, making this a keratoconjunctive disorder.

The precursor to retinoids, Vitamin A, is required for ocular health. Specifically, Vitamin A is required for the maintenance of the cornea and conjunctiva as well as the retina. Vitamin A deficiency causes xeropthalmia, a severe form of dry eye disease that can lead to keratomalacia and blindness when untreated. Conditions resulting from Vitamin A deficiency include squamous metaplasia of the

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cornea and conjunctiva, corneal ulcerations, night blindness and retinopathy. Meanwhile, the literature indicates that replacement with Vitamin A or all-trans retinoic acid (ATRA) can restore corneal health.

Receptors for RARa, b and g are widely distributed in ocular tissues. In vitro data from Dr. Kazuhiro Kimura, affiliated with Yamaguchi University, suggest that the previously observed beneficial effects of ATRA on ocular health may be mediated via RARg receptors since ligands such as palovarotene, which are selective for RARg receptors were able to completely reproduce the effects of ATRA in an ex vivo model of corneal fibrosis whereas ligands which preferentially bind RARa or RARb receptors had minimal or no effect. Specifically, palovarotene inhibits IL-1b induced fibrosis and specific matrix metalloproteases. In vivo data from Dr. Kimura supports a role for palovarotene in preventing fibrosis after corneal ulcerations and laser-induced CNV.

There is an extensive literature on the beneficial effects of retinoids in dry eye disease. Numerous studies using Vitamin A, ATRA or retinyl palmitate demonstrate statistically significant effects on signs and symptoms of dry eye disease in the clinic. For example, in a 2009 study by Kim et al., retinyl palmitate demonstrated statistically significant improvements in tear production, impression cytology grade, corneal staining, change in goblet cell number and changed in blurred vision. Furthermore, retinyl palmitate’s effects, as compared to cyclosporine, the active ingredient in Restasis®, were better in terms of tear production, impression cytology grade and blurred vision. These clinical findings are consistent with known in vitro actions of retinoids on ocular tissues including the transcriptional regulation of genes which promote ocular surface hydration and corneal epithelial healing. Other genomic effects of retinoids include the reduction of keratinization, protection of cornea from dissolution and the suppression of oncogenic proliferation of neoplasia.

There are contradictory reports in the literature with respect to the effect of retinoids on Meibomian gland function. Most if not all studies that report a detrimental effect of retinoids on this gland come from studies using 13-cis-retinoic acid or Accutane. Accutane has been found to induce dry eye disease in a subset of patients and is likely detrimental to Meibomian glands. However, this was not observed in Roche’s long term studies with palovarotene and we have found no detrimental effects to Meibomian gland histology in our animal model studies. We believe this is likely a drug specific effect which does not apply to other retinoids.

Despite the compelling evidence of the beneficial effects of Vitamin A and other retinoids on dry eye disease and other keratoconjunctive disorders, these have not been developed as commercial drugs except for a few small suppliers. We believe that one reason for this is that retinoids are believed to cause dry eye disease and be detrimental to Meibomian glands due to the experience with Accutane. We also believe that the relative instability of most retinoids in solution has impeded their commercial development as eye drops. Palovarotene is stable in solution and our eye drop formulation has been found to be stable at room temperature for at least 3 months. Another potential reason for lack of development of retinoids for ocular disorders is the fact that most known retinoids lack intellectual property protection.

The scientific insights of Dr. Kimura on the relative importance of RARg receptors for mediating anti-fibrotic effects in the eye, our own in vivo studies with palovarotene as well as the historical evidence supporting the clinical benefits of retinoids in dry eye disease, we believe provide a strong rationale for the development of palovarotene eye drop formulation for the treatment of dry eye disease.

Current Therapies

The treatment options available for dry eye disease do not treat the underlying disease process. Available treatment options are encompassed in the following categories: avoidance of exacerbating factors, eyelid hygiene, tear supplementation, tear retention, tear stimulation, and anti-inflammatory agents. These symptomatic treatments include artificial tears, lubricants, anti-inflammatory drugs, including topical steroids, topical cyclosporine (generic), Restasis® (cyclosporine emulsion), Lifitegrast®, tear retention devices (plug lacrimal puncta preventing tear drainage), topical antihistamines and mast cell stabilizers. Allergan’s Restasis® as well as Shire’s Lifitegrast® are currently the standard of care.

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Our Approach

Our goal for the dry eye disease development program is to develop our ophthalmic formulation of palovarotene until early proof-of-concept clinical studies in man and consider potential licensing partners at that time. The path to approval in dry eye disease has been well established and the endpoints are well defined. Furthermore, the costs of early development up to proof-of-concept clinical studies in man are relatively small as compared to other programs. We intend to perform the local toxicology and pharmacokinetic studies necessary to initiate a Phase 1 and Phase 2 program in 2018.

Pre-clinical Work

In order to develop an eye drop formulation for palovarotene, several aqueous additives were tested as part of a formulation screen and the best combination selected for pre-clinical proof-of-concept studies. This formulation has been found to be stable at room temperature for at least 3 months.

Our palovarotene eye drop formulation was initially tested in an ocular irritation study in rabbits. The study was designed to evaluate tolerability of palovarotene formulation dosed for 5 consecutive days, 3 times a day. No treatment related immediate signs of ocular irritation or toxicity were observed and no abnormal clinical observations were recorded at two different doses of palovarotene including in daily ophthalmic examinations (anterior and posterior segments, body weight or weight change, ocular scoring scale, or changes in skin, fur, eyes, mucous membranes or other organ systems).

The palovarotene ocular formulation was also tested in an animal model of dry eye disease, the botulinum toxin B (BTX-B) model, which involves injection of BTX-B into the lacrimal gland and has been well characterized as a model of dry eye disease syndrome in humans. Eye drop formulations at 3 doses of palovarotene (low, mid, high) compared to current standard of care, Restasis®, were used in this model. Endpoints included ophthalmic examinations, tear production measurement, corneal fluorescein staining and histopathology. These endpoints (except histopathology) are the same as those measured in human clinical trials. As shown in Figures 10 and 11, the high and mid doses of palovarotene were more effective than Restasis® in restoring tear production and reducing corneal fluorescein in this animal model.

Figure 10. Palovarotene dose-dependently and significantly increases tear production in an animal model of dry eye disease

These results suggest a dose response effect with the high and mid doses of palovarotene leading to levels of tear production that are equivalent to normal tear production and low dose providing a smaller effect. Corneal fluorescein staining provides a measure of the effect of treatment on corneal scarring or fibrosis associated with dry eye disease. Figure 11 shows the results we obtained for this end point in the BTX-B model.

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Figure 11. Palovarotene dose-dependently and significantly decreases corneal fluorescein staining in an animal model of dry eye disease

These data indicate that the palovarotene eye drops dose-dependently reduce corneal damage in this animal model. The effect of high and mid doses of palovarotene is greater than the effect of Restasis®. Together, these in vivo proof-of-concept studies in an animal model of dry eye disease support the idea that palovarotene eye drops could provide an effective treatment for dry eye disease.

Non-clinical Safety Evaluation

We are currently planning the non-clinical safety studies necessary to initiate our Phase 1 and 2 clinical trials. For previously used products intended for administration by an alternate route, generally, only local (i.e., eye) toxicity studies are required. Repeat dose toxicity studies are being planned in two distinct species. Palovarotene ocular tissue distribution will be measured in several ocular tissues and systemic levels of palovarotene will also be measured. We anticipate that due to the relatively small doses of palovarotene being administered to the eye, systemic exposure will be well below what has been previously administered in the chronic toxicology studies that support oral dosing in humans.

Planned Phase 1 and Phase 2 Trials

We are currently developing protocols for Phase 1 and Phase 2 studies. We intend to initiate a Phase 1 trial and a Phase 2 trial for palovarotene in dry eye disease in 2018. The Phase 1 clinical trial will likely be a single-center, masked, vehicle-controlled dose-ranging study with the objective to evaluate pharmacokinetics, safety and tolerability of topical eye drops containing palovarotene versus vehicle in healthy volunteers. The Phase 2 study will likely be a multi-center, masked, vehicle-controlled dose-ranging study with the objective to evaluate safety and tolerability of two doses of palovarotene versus vehicle in subjects with moderate to severe dry eye disease.

Our Pipeline of Other RARg Agonist Candidates

Our work in FOP, MO, and ocular disorders, as well as in non-clinical studies designed to elucidate RARg agonist biology in a variety of cell systems has provided us with unique insights into the biological effects of systemically administered RARg agonists and their potential therapeutic applications. We believe that RARg selective agonists have substantial untapped therapeutic potential because of their potential anti-fibrotic and tissue regeneration and repair activities and because of their predicted safety profile (if palovarotene is representative of the group). Because of this, we undertook a systematic search for second generation RARg agonists which we could deploy in different indications. This search led us to our license agreement with Galderma for several novel RARg agonists in their portfolio. These agonists, derived from four structural families, possess numerous advantageous properties including high selectivity to the RARg receptor. Some of these next-generation RARg agonists have associated data packages, such as oral formulation and absorption, distribution,

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metabolism and excretion studies. These data are also licensed to Clementia through our agreement with Galderma.

An initial focus for the development of novel RARg agonists will be for therapeutic use in diseases, like FOP or MO, which involve pathological bone formation. There are several other potential indications for the prevention of HO with a large potential patient population, such as ankylosing spondylitis, a type of arthritis associated with excess BMP signaling, which the National Institute of Health estimates affects greater than 500,000 people in the United States and represents a high unmet medical need. Other indications, such as those characterized by excessive fibrosis or scarring, are also potential target indications for RARg agonists. On the basis of our scientific know-how and other clinical and commercial insights, a number of indications have been prioritized for animal model proof-of-concept studies in 2017 and 2018. Should these studies be successful, we plan to initiate the pre-IND activities necessary to initiate clinical trials in these new indications.

We believe that RARg agonists represent a new class of compounds with broad therapeutic potential comparable to other hormones such as corticosteroids. Our plans are to fully exploit this potential internally and in partnership with others. We intend to focus initially on our core competencies in HO and orphan drug development and access additional expertise through collaborations over time as we aim to become a fully-integrated pharmaceutical company.

Commercialization Strategy

Clementia currently intends to build the commercial infrastructure to support global commercialization of palovarotene for the debilitating bone disorders of FOP and MO, if approved. This will be accomplished by a targeted infrastructure because FOP and MO patients are managed by the same sub-specialist physicians focused on metabolic and skeletal dysplasia. A specialty sales force calling on this limited and focused group of physicians would be supported by sales management, medical liaison, internal sales support, an internal marketing group and distribution support. Also, patients, caregivers and advocacy groups are active, well organized, and networked through rare disease advocacy groups such as Rare Bone Disease Alliance, National Organization for Rare Diseases, Global Genes and EURORDIS.

Clementia already actively collaborates with the FOP and MO constituents through a number of initiatives including participation in patient meetings and educational initiatives, such that we better understand the burdens and unmet needs patients face, and so that we can better facilitate their access to palovarotene, should it be approved.

We estimate that the prevalence of FOP is approximately 1.3 individuals per million lives, or approximately 9,000 globally. As of October 2016, there were known to be 800 diagnosed patients worldwide. MO prevalence is estimated at 20 individuals per million lives, or approximately 150,000 globally. We will drive disease diagnosis and subsequent treatment of these identified patients by providing information, increasing physician awareness and creating more efficient referral pathways.

Outside of the United States and Europe, where appropriate, we may elect in the future to utilize strategic partners, distributors, or contract sales forces to assist in the commercialization of our products.

As our product candidates advance through our pipeline, our commercial plans may change. In particular, some of our research programs target potentially larger indications. Data, the size of the development programs, the size of the target market, the size of a commercial infrastructure, and manufacturing needs may all influence our strategies in the United States, Europe, and the rest of the world.

Manufacturing

Palovarotene drug substance synthesis was originally developed and optimized by Roche. Clementia further optimized this synthesis route due to the availability of novel chemistries. Our drug substance is currently manufactured by one manufacturer. It has demonstrated greater than two years stability under ambient conditions protected from light. Our drug product consists of a hard shell capsule, which can be opened by patients and sprinkled on food for those with locked jaws and pediatric subjects. Multiple dosage strengths are available to account for all potential doses

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administered in the clinic, including for weight-based dosing in children. We monitor stability of our drug substance and drug product according to ICH compliant stability programs.

Competition

Currently, there are no therapies that have been specifically approved for the treatment of FOP. To our knowledge, palovarotene is the only orally available RARg agonist that has been clinically tested in FOP. However, products approved for other indications, for example, cortisteroids and non-steroidal anti-inflammatory drugs, are used off-label to manage FOP symptoms during flare-ups. None of these medications has been shown to prevent HO.

Regeneron Pharmaceuticals Inc. has completed a Phase 1 trial in Belgium with an antibody against Activin A. As an antibody, it would be administered either via intravenous infusion or subcutaneous injection. Regeneron has stated that they will start a Phase 2 clinical trial in FOP in 2017.

Blueprint Medicines concluded a partnership with Alexion for the development of ALK2 specific serine-threonine kinase inhibitors. To our knowledge, these kinase inhibitors being developed for FOP are at the pre-clinical stage. A number of academic groups are also pursuing ALK2 kinase inhibitors and to our knowledge, these are also at the pre-clinical stage in FOP.

Regeneron and La Jolla Pharmaceutical Company have been granted orphan drug designation for their respective approaches in FOP. To our knowledge, the compounds being developed by La Jolla Pharmaceutical Company are pre-clinical small-molecule kinase inhibitors designed to bind to ALK2.

GRI Bio is developing an RARg selective agonist, GRI-0621, in a Phase 2 clinical trial in chronic liver disease in South Africa.

License Agreements

We have entered into exclusive license agreements to help support our development efforts.

Roche Agreement

In January 2013, we entered into a license agreement with Roche for the composition of matter of palovarotene, for which we have the worldwide rights to develop and commercialize. We are obligated to pay Roche certain clinical/regulatory/sales milestones and royalties on products developed from this technology. Termination of our license agreement with Roche would have a material adverse impact on our ability to develop and commercialize palovarotene.

Pursuant to the terms of the agreement, we were granted the exclusive worldwide right to research, develop, make, have made, use, sell, have sold, offer for sale and import palovarotene, any other compounds covered by certain Roche patents, and any pharmaceutical or therapeutic products containing either palovarotene or such other licensed compounds, for all human pharmaceutical uses and indications. Additionally, Roche transferred to us certain regulatory information on the licensed compounds, including palovarotene, pursuant to the license agreement. The Roche license also grants us a right, subject to Roche’s exclusive negotiation rights described below, to sublicense our licensed rights to third parties, provided each sublicensee enters into a written agreement with us with terms consistent with our agreement with Roche.

Roche has the first right, but not the obligation, to prepare, file, prosecute and maintain certain patent rights at Roche’s sole expense.

The license agreement requires us to use commercially reasonable efforts to develop, obtain regulatory approval of, and commercialize a product containing palovarotene. The license agreement includes commitments to pay Roche (i) a total of $1,000,000 in milestone payments upon the achievement of certain clinical milestones, (ii) up to a total of $11,000,000 in milestone payments upon the achievement of certain regulatory milestones in connection with the three clinical trial programs currently underway with an additional $1 million in milestone payments upon the achievement of certain regulatory milestones in connection with each subsequent indication, if any, and (iii) up to a total of $37,500,000 in milestone payments upon the achievement of certain sales milestones. The agreement also requires us to pay Roche a royalty rate in the low teens based on net sales of products containing palovarotene or the other licensed compounds during the royalty term. The Roche agreement provides that the royalty rate

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will be adjusted significantly downward on a country-by-country basis if generic versions of the licensed products are introduced and sold in the relevant country and the sale of such generic versions have a certain impact on our net sales. Under the agreement, we are also required to pay any consideration owed to third parties related to such third parties’ intellectual property rights covering the licensed technology, though such payments may be at least partially offset by a reduction in royalties payable to Roche.

The Roche Agreement will expire on a licensed product-by-product and country-by-country basis upon the later of (i) the date of expiration of the last to expire patent having a valid claim relating to such licensed product in a particular country, or (ii) 10 years after the first commercial sale of a licensed product in such country. Either party may terminate the agreement for the material breach or insolvency of the other party. In the event the agreement is terminated by Roche for our material breach or insolvency, the rights and licenses granted to us under the agreement would terminate. In addition, upon termination under certain circumstances, rights in regulatory filings and certain other intellectual property may revert to Roche. Termination of our rights under the Roche license would have a material adverse effect on us.

Thomas Jefferson University (TJU) Agreement

In February 2014, we entered into a license agreement with TJU to use palovarotene for treating muscle tissue damage. We are obligated to pay TJU certain clinical/regulatory/sales milestones and royalties on the sales of certain licensed products and processes. Termination of our license agreement with TJU would have a material adverse impact on our ability to develop and commercialize palovarotene in its current formulation.

Pursuant to the terms of the agreement, we were granted the exclusive worldwide right to make and have made, to use and have used, to sell and have sold, to offer for sale, to import, to export, to research, develop and improve upon methods for muscle repair and regeneration comprising administering therapeutically effective amounts of RAR agonists (such as palovarotene) for treating muscle tissues damage. The TJU license also grants us a right to sublicense our licensed rights to third parties, provided that our license from TJU is exclusive at the time of the granting of the sublicense and that each sublicensee enters into a written agreement with us with terms consistent with our agreement with TJU.

The license agreement requires us to use commercially reasonable diligent efforts to effect introduction of a product containing palovarotene into the commercial market as soon as practicable. At any time after three (3) years from the effective date of the TJU license, TJU may terminate the agreement or render the license non-exclusive if, in TJU’s reasonable judgment, the progress reports provided by us substantially demonstrate our failure to satisfy certain diligence obligations.

The agreement requires us to make a total of $100,000 in milestone payments upon the achievement of certain clinical milestones and a total of $250,000 in milestone payments upon the achievement of certain regulatory milestones, in each case in connection with the first licensed product or licensed process that meets the relevant milestones. The agreement also requires us to pay TJU a low single digit royalty rate on the amount of total net sales of licensed products or licensed processes during the term of the agreement. We must also pay TJU a low double digit royalty rate on the amount of non-royalty sub-license income we receive from a sub-licensee if we sub-license our license under the TJU agreement and we receive a revenue stream under the sub-license. Under the agreement, non-royalty sublicense income shall include the amount paid to us by a sublicensee pursuant to the sublicense, including but not limited to license fees, milestone payments and the fair market value in cash of any non-cash consideration of any kind for such sublicense.

The term of the license agreement remains in effect until the last patent or patent application containing a valid claim in the patent rights under the license have expired or been abandoned. Either party may terminate the agreement for the material breach or insolvency of the other party. In the event the agreement is terminated by TJU for our material breach or insolvency or on account of their determination that our progress reports substantially demonstrate that we neither used commercially reasonable efforts to put the licensed subject matter into commercial use and/or are not keeping it reasonably available to the public, nor engaged in research, development, manufacturing, marketing or sublicensing activity to achieve the above, the rights and licenses granted to us under the agreement

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would terminate. Termination of our rights under the TJU license would have a material adverse effect on us.

Upon the expiration of the TJU patent portfolio, our license agreement with and our license payment obligations to TJU will terminate and we will have a fully-paid, royalty-free, sublicensable license.

Yamaguchi University Agreement

In April 2015, we entered into a license agreement with Yamaguchi University for a patent family titled “therapeutic agent for keratoconjunctive disorders” and a patent family titled “an inhibitor for Retinochoroidal disorders.” We are obligated to pay Yamaguchi University certain clinical/regulatory milestones and royalties on sales of certain licensed products and processes. Termination of our license agreement with Yamaguchi University would have a material adverse impact on our ability to develop and commercialize palovarotene for the treatment of certain ocular disorders.

Pursuant to the terms of the agreement, we were granted the exclusive worldwide right to make and have made, to use and have used, to sell and have sold, to offer for sale, to import, to export, to research, develop and improve upon therapeutic agents for keratoconjunctive disorders and related patents. The Yamaguchi University license also grants us a right to sublicense our licensed rights to third parties, provided each sublicensee enters into a written agreement with us with terms consistent with our agreement with Yamaguchi University.

The agreement requires us to use commercially reasonable efforts to effect introduction of the licensed products into the commercial market as soon as practicable. The agreement requires us to make a total of $75,000 in milestone payments upon the achievement of certain clinical milestones and a total of $150,000 in milestone payments upon the achievement of certain regulatory milestones, in each case in connection with the first licensed product that meets the relevant milestones. The agreement also requires us to pay Yamaguchi University a low single digit royalty rate on the amount of total net sales of licensed products during the term of the agreement. We also have a royalty buy-out option pursuant to which we can terminate at any time in our sole discretion our obligation to pay royalties and make milestone payments, as well as our reporting obligations, in exchange for a one time payment to Yamaguchi University.

The Yamaguchi University agreement will expire on a licensed product-by-product and country-by-country basis upon the later of (i) the date of expiration of the last to expire patent having a valid claim relating to such licensed product in a particular country, or (ii) 10 years after the first commercial sale of a licensed product in such country. Yamaguchi University can terminate the agreement for our material breach or insolvency. In the event the agreement is terminated by Yamaguchi University for our material breach or insolvency, the rights and licenses granted to us under the agreement would terminate. We can terminate the license agreement upon 90 days’ notice.

Galderma Agreement

In March 2017, we exercised our option to enter into an exclusive license agreement with Galderma for certain retinoic acid receptor gamma agonists compounds. We are committed to make certain future payments based on the successful achievement of specific development and commercialization milestones related to the licensed Galderma compounds.

Pursuant to the terms of the agreement, we have been granted an exclusive worldwide right in certain fields and subject to certain exceptions, to (i) develop, make and use the retinoic acid receptor gamma agonists compounds in order to research, develop, manufacture and commercialize products that incorporate such compounds and (ii) research, develop, manufacture and commercialize such products. The Galderma license also grants us a right to sublicense our licensed rights to third parties, provided that, in case of (i), each sublicensee shall enter into a written agreement with terms consistent with our agreement with Galderma, and, in case of (ii), we will not be relieved from our obligations under the agreement with Galderma and will secure all covenants, obligations, and rights of the sublicensee.

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The license agreement requires us to use commercially reasonable efforts to develop at least one of the compounds as well as to commercialize the products incorporating the compounds. The agreement requires us to pay Galderma a total of $2,000,000 in milestone payments upon the achievement of certain clinical milestones and up to a total of $25,500,000 in milestone payments upon the achievement of certain regulatory milestones, in each case in connection with the first product that meets the relevant milestones. The agreement also requires us to pay Galderma a single digit royalty rate that varies based on the amount of total worldwide net sales of licensed products during the term of the agreement (including royalty on the net sales by the sublicensees).

The license agreement will remain in effect as long as we develop or commercialize the licensed product. Either party has a right to terminate the agreement for the material breach or insolvency of the other party. Termination by Galderma for our material breach or insolvency causes termination of the rights and licenses that are granted to us under the agreement. We have the right to terminate the agreement upon 90 days prior written notice to Galderma both without cause and because of our decision to discontinue development or commercialization.

Sponsored Research Agreements

Dr. Luca Sangiorgi

On September 18, 2015, we entered into an agreement (the Sangiorgi Agreement) with Dr. Luca Sangiorgi, M.D., Ph.D., the head of the Medical Genetics and Rare Orthopaedic Diseases at the Rizzoli Institute. Under the Sangiorgi Agreement, Dr. Sangiorgi performs clinical consulting services in support of our palovarotene development program and the potential role of palovarotene as a treatment for MO (contract field). The agreement prohibits Dr. Sangiorgi from providing any services in the contract field for any other party during its term without our prior written consent. The Sangiorgi Agreement is effective until September 18, 2018. Either party may terminate the agreement in the event of material uncured breach of the other party or for convenience subject to a prior written notification of the other party. No material payments have been made to date pursuant to this agreement.

Instituto Ortopedico Rizzoli

On April 27, 2017, we entered into an agreement (the Rizzoli Agreement) with the Rizzoli Institute itself. Under the terms of the Rizzoli Agreement, the Rizzoli Institute will perform research activities (consisting of elaborations and analyses on data extracted from Rizzoli Institute’s registries and databases) and provide us with a scientific report for use in our MO development program. Dr. Sangiorgi is the chief scientific investigator responsible for the analysis. The Rizzoli Agreement contains bilateral confidentiality provisions. Confidential information shared by the parties under the agreement is for the purpose of the research project only, with no further disclosure permitted. We are not allowed to publish or distribute the report; however, we can use the results for regulatory purposes. Rizzoli Institute is free to use and supply to third parties the analyses and registry data in its sole discretion. We will own intellectual property rights in the analyses and the final scientific report.

The Rizzoli Agreement is effective until December 15, 2018. Either party may terminate the agreement in the event of material uncured breach of the other party or at will subject to a prior written notification of the other party. No material payments have been made to date pursuant to this agreement.

Sanford Burnham Prebys Medical Discovery Institute (SBP)

We entered into a Commercial Sponsored Research Agreement with SBP on June 21, 2016. This agreement relates to services provided by SBP to us as part of a research program led by Dr. Yamaguchi, a professor of human genetics at SBP. This agreement provides us with an exclusive option to license any joint-IP developed under the agreement. We have a 3 month period following disclosure to exercise the option. The agreement provides SBP with an exclusive license to use the IP generated under the project (Clementia IP or Joint-IP) for non-commercial, internal research and educational purposes only. SBP has the right to publish any results of the research program after

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disclosure to us. After disclosure of a draft manuscript by SBP, we have up to 90 days to protect any IP related to the disclosed content.

The research program provided for in the agreement is to end within 12 to 18 months after the effective date of the agreement. Either party can terminate the agreement in the event of material uncured breach of the other party. We can also terminate the agreement with or without cause upon 60 days prior written notice. SBP can also terminate the agreement upon our bankruptcy or certain similar events. No material payments have been made to date pursuant to this agreement.

Intellectual Property

We strive to protect the proprietary technology that we believe is important to our business, including seeking and maintaining patents intended to cover our product candidates and compositions, their methods of use and processes for their manufacture, and any other aspects of inventions that are commercially important to the development of our business. We also rely on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.

We plan to continue to expand our intellectual property estate by filing patent applications directed to compositions, formulations and methods of treatment created or identified from our ongoing development of our product candidates. Our success will depend on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions and know-how related to our business, defend and enforce our patents, preserve the confidentiality of our trade secrets and operate without infringing the valid and enforceable patents and proprietary rights of third parties. We also rely on know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position. We seek to obtain domestic and international patent protection, and endeavor to promptly file patent applications for new commercially valuable inventions.

The patent positions of biopharmaceutical companies like us are generally uncertain and involve complex legal, scientific and factual questions. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and patent scope can be reinterpreted by the courts after issuance. Moreover, many jurisdictions permit third parties to challenge issued patents in administrative proceedings, which may result in further narrowing or even cancellation of patent claims. We cannot predict whether the patent applications we or our strategic partners are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient protection from competitors.

Because patent applications in the United States and certain other jurisdictions are maintained in secrecy for 18 months or potentially even longer, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain of the priority of inventions covered by pending patent applications. Moreover, we may have to participate in interference proceedings or derivation proceedings declared by the U.S. PTO, to determine priority of invention.

Clementia Licensed Intellectual Property

We have exclusively licensed patents claiming palovarotene as a composition of matter from Roche (the Roche patent portfolio), which has a statutory expiration date in 2021. We have an exclusive worldwide license to patents claiming the use of palovarotene for treating muscle tissue damage from TJU (the TJU patent portfolio), which has a statutory expiration date in 2031. We have an exclusive worldwide license to patents claiming the use of certain RARg agonists, including palovarotene, for treating keratoconjunctive disorders and claiming the use of palovarotene for treating retinochoroidal disorders from Yamaguchi University (the Yamaguchi University patent portfolio), which have a statutory expiration date in 2033 or 2034.

The licensed Galderma RARg agonists include lead compounds from four distinct structural families. Two families are claimed in recently filed patent applications; one with an expected statutory patent expiry date of December 2034 and a second with an expected statutory patent expiry date of December 2035. The third family includes lead compounds that have not been publicly disclosed, nor

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has any patent specifically claiming these compounds been filed. The forth structural family includes lead compounds that are disclosed in expired Galderma patents.

The Roche patent portfolio includes granted patents in over 45 countries, including the United States, Canada and the primary countries of the European Union (26 countries). The Roche patent portfolio includes a United States patent that is scheduled to expire in 2021, without taking into account any potential patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Act. The Roche patent portfolio includes a European patent, validated in numerous European jurisdictions, that has a statutory expiration date in 2021, absent any adjustments or extensions.

The TJU patent portfolio includes granted patents issued in the United States, Australia, Japan, New Zealand and South Africa, and pending patent applications in Brazil, Canada, China, Europe, the United States, and other countries. The TJU patent portfolio includes a United States patent that has a statutory expiration date in 2031, without taking into account any potential patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Act. The TJU patent portfolio includes a European patent application that, if granted, would have a statutory expiration date in 2031, absent any adjustments, extensions or supplementary protections.

The Yamaguchi University patent portfolio includes a granted U.S. patent and patent applications pending in Canada, China, Europe, Japan, the United States, and other countries.

Clementia Owned Intellectual Property

Four patent applications have been filed by and assigned to Clementia:

A pending U.S. utility patent application (filed December 2016) with claims directed to antisense oligonucleotides and their use for treating FOP;

Patent Cooperation Treaty (PCT) application (filed June 2017) with claims directed to therapeutic treatment regimens for treating heterotopic ossification in FOP using palovarotene; and

A U.S. provisional patent application (filed November 2016) with claims directed to the use of RARg agonists, including palovarotene, in treating MO.