ftsv-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                      

Commission File Number: 001-38554

 

FORTY SEVEN, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

47-4065674

( State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1490 O’Brien Drive, Suite A

Menlo Park, California 94025

 

94025

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (650) 352-4150

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by 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. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 2, 2018, the registrant had 31,064,600 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


Table of Contents

 

 

 

Page no.

PART I: FINANCIAL INFORMATION

 

Item 1.

Financial Statements

1

 

Condensed Balance Sheets

1

 

Condensed Statements of Operations and Comprehensive Loss

2

 

Condensed Statements of Cash Flows

3

 

Notes to Condensed Financial Statements

4

Item 2.

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

11

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

18

Item 4.

Controls and Procedures

18

PART II: OTHER INFORMATION

 

Item 1.

Legal Proceedings

20

Item 1A.

Risk Factors

20

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

Item 3.

Defaults Upon Senior Securities

53

Item 4.

Mine Safety Disclosures

53

Item 5.

Other Information

53

Item 6.

Exhibits

54

Signatures

 

55

 

Where You Can Find More Information

 

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (ir.fortyseveninc.com/investor-relations), SEC filings, webcasts, press releases, and conference calls. We use these mediums, including our website, to communicate with our stockholders and the public about our company, our products, and other issues. It is possible that the information that we make available may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website.

 

 

i


PART I: FINANCIAL INFORMATION

Item 1.

Financial Statements.

Forty Seven Inc.

Condensed Balance Sheets

(In thousands)

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

(Unaudited)

 

 

(1)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,426

 

 

$

24,417

 

Short-term investments

 

 

130,592

 

 

 

63,694

 

Prepaid expenses and other current assets

 

 

6,622

 

 

 

4,450

 

Total current assets

 

 

160,640

 

 

 

92,561

 

Property and equipment, net

 

 

1,175

 

 

 

1,358

 

Other assets

 

 

1,477

 

 

 

1,546

 

Total assets

 

$

163,292

 

 

$

95,465

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,890

 

 

$

3,705

 

Accrued liabilities

 

 

5,500

 

 

 

4,808

 

Deferred grant funding, current

 

 

4,134

 

 

 

2,759

 

Total current liabilities

 

 

13,524

 

 

 

11,272

 

Lease-related liabilities, noncurrent

 

 

376

 

 

 

476

 

Other long-term liabilities

 

 

157

 

 

 

255

 

Total liabilities

 

 

14,057

 

 

 

12,003

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Convertible preferred stock

 

 

 

 

 

149,397

 

Common stock

 

 

3

 

 

 

1

 

Additional paid-in capital

 

 

271,819

 

 

 

3,507

 

Accumulated other comprehensive loss

 

 

(32

)

 

 

(44

)

Accumulated deficit

 

 

(122,555

)

 

 

(69,399

)

Total stockholders’ equity

 

 

149,235

 

 

 

83,462

 

Total liabilities and stockholders’ equity

 

$

163,292

 

 

$

95,465

 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

(1)

The balance sheet as of December 31, 2017 is derived from the audited financial statements as of that date.

 

1


Forty Seven Inc.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except share and per share data)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

17,984

 

 

$

8,842

 

 

$

42,733

 

 

$

27,212

 

General and administrative

 

 

4,383

 

 

 

2,051

 

 

 

11,588

 

 

 

5,509

 

Total operating expenses

 

 

22,367

 

 

 

10,893

 

 

 

54,321

 

 

 

32,721

 

Loss from operations

 

 

(22,367

)

 

 

(10,893

)

 

 

(54,321

)

 

 

(32,721

)

Interest and other income, net

 

 

708

 

 

 

60

 

 

 

1,165

 

 

 

153

 

Net loss

 

 

(21,659

)

 

 

(10,833

)

 

 

(53,156

)

 

 

(32,568

)

Unrealized (loss) gain on available-for-sale securities

 

 

(4

)

 

 

13

 

 

 

12

 

 

 

(4

)

Comprehensive loss

 

$

(21,663

)

 

$

(10,820

)

 

$

(53,144

)

 

$

(32,572

)

Net loss per share, basic and diluted

 

$

(0.71

)

 

$

(1.67

)

 

$

(3.63

)

 

$

(5.06

)

Shares used in computing net loss per share, basic and diluted

 

 

30,430,898

 

 

 

6,504,467

 

 

 

14,643,348

 

 

 

6,438,138

 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

2


Forty Seven, Inc.

Condensed Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(53,156

)

 

$

(32,568

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

2,318

 

 

 

413

 

Depreciation and amortization

 

 

289

 

 

 

276

 

Amortization (accretion) of premiums (discounts) on marketable securities

 

 

(293

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(2,172

)

 

 

1,146

 

Other assets

 

 

69

 

 

 

20

 

Accounts payable

 

 

185

 

 

 

(231

)

Accrued liabilities

 

 

554

 

 

 

1,536

 

Deferred grant funding

 

 

1,375

 

 

 

2,478

 

Lease-related liabilities

 

 

(86

)

 

 

(62

)

Other long-term liabilities

 

 

(1

)

 

 

(16

)

Net cash used in operating activities

 

 

(50,918

)

 

 

(27,008

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(106

)

 

 

(68

)

Purchases of available-for-sale securities

 

 

(138,071

)

 

 

(27,000

)

Proceeds from maturities of available-for-sale securities

 

 

71,478

 

 

 

17,000

 

Net cash used in investing activities

 

 

(66,699

)

 

 

(10,068

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible preferred stock, net of issuance costs

 

 

 

 

 

40,377

 

Proceeds from issuance of common stock upon exercise of stock options

 

 

166

 

 

 

247

 

Proceeds from initial public offering, net of issuance costs

 

 

116,460

 

 

 

 

Net cash provided by financing activities

 

 

116,626

 

 

 

40,624

 

Net (decrease) increase in cash and cash equivalents

 

 

(991

)

 

 

3,548

 

Cash and cash equivalents — beginning of period

 

 

24,417

 

 

 

9,742

 

Cash and cash equivalents — end of period

 

$

23,426

 

 

$

13,290

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Conversion of convertible preferred stock to common stock at close of initial public offering

 

$

149,397

 

 

$

 

Deferred offering costs included in accounts payable and accrued liabilities

 

$

124

 

 

$

 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

 

3


 

Forty Seven Inc.

Notes to Condensed Financial Statements

1.

Description of Business

The Company is a clinical-stage immuno-oncology company focused on developing novel checkpoint therapies to activate macrophages in the fight against cancer. Forty Seven was founded based on the insight that blocking CD47, a key signaling molecule that is over-expressed on cancer cells, renders tumors susceptible to macrophages and the innate immune system. By harnessing macrophages, the Company believes that its lead product candidate, 5F9, dosed as a monotherapy and in combination with marketed cancer therapies, can transform the treatment of cancer.

Liquidity

In the course of its development activities, the Company has sustained operating losses and expects to continue to generate operating losses for the foreseeable future. The Company’s ultimate success depends on the outcome of its research and development activities. The Company had cash, cash equivalents and short-term investments of $154.0 million as of September 30, 2018. Since inception through September 30, 2018, the Company has incurred cumulative net losses of $122.6 million. Management expects to incur additional losses in the future to conduct product research and development and recognizes the need to raise additional capital to fully implement its business plan.

The Company intends to raise such capital through the issuance of additional equity financing and/or third-party collaboration funding. However, if such financing is not available at adequate levels, the Company will need to reevaluate its operating plan and may be required to delay the development of its products. The Company expects that its cash, cash equivalents and short-term investments will be sufficient to fund operating expenses and capital expenditure requirements for a period of at least one year from the date the unaudited financial statements are filed with the Securities and Exchange Commission (“SEC”).

Reverse Stock Split

In June 2018, the Company’s board of directors approved an amended and restated certificate of incorporation to effect a reverse split of shares of the Company’s common stock and convertible preferred stock on a 1-for-7.75 basis (the “Reverse Stock Split”). The par values of the common stock and convertible preferred stock were not adjusted as a result of the Reverse Stock Split. All references to common stock, options to purchase common stock, restricted stock, share data, per share data, convertible preferred stock and related information contained in the financial statements have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented. The Reverse Stock Split was effected on June 14, 2018.

Initial Public Offering

On July 2, 2018, the Company completed its initial public offering (“IPO”) of 7,035,000 shares of common stock, and subsequently on July 27, 2018, the Company issued and sold an additional 1,055,250 shares upon the exercise of the underwriters’ over-allotment option. In connection with the IPO, including the over-allotment option, the Company issued and sold an aggregate of 8,090,250 shares of common stock at $16.00 per share, raising $116.3 million in proceeds, net of underwriting discounts and commissions of $9.1 million and offering expenses of $4.1 million. Upon the closing of the IPO, all outstanding shares of convertible preferred stock were automatically converted into 16,215,896 shares of common stock.

2.

Summary of Significant Accounting Policies

Basis of Presentation

The interim condensed balance sheet as of September 30, 2018, the condensed statements of operations and comprehensive loss for the three and nine months ended September 30, 2018 and 2017, and the statements of cash flows for the nine months ended September 30, 2018 and 2017 are unaudited. The unaudited interim condensed financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of September 30, 2018, its results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017. The financial data and the other financial information contained in these notes to the condensed financial statements related to the three month and nine month periods are also unaudited. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other future annual or interim period. The condensed balance sheet as of December 31, 2017 included herein was derived from the audited financial statements as of that date. These condensed financial statements should be read in conjunction with the Company's audited financial statements included in the prospectus dated June 27, 2018 (“Prospectus”) that forms a part of the Company's Registration Statements on Form S-1 (File Nos. 333-2225390 and 333-225933), as filed with the SEC pursuant to Rule 424 promulgated under the Securities Act of 1933, as amended.

4


Forty Seven Inc.

Notes to Condensed Financial Statements

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions made in the accompanying financial statements include but are not limited to the fair value of common stock, the fair value of stock options, income tax uncertainties, and certain accruals. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates.

Fair Value Measurement

Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active;

Level 3— Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

  

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases and provide enhanced disclosures. In July 2018, the FASB issued guidance to permit an alternative transition method for Topic 842, which allows transition to the new lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company expects to adopt Topic 842 as of January 1, 2019 under this new alternative transition method. While the Company does not expect a material impact from adoption on its statements of operations or comprehensive loss, the Company does expect to record a material increase in its assets and liabilities on the balance sheet upon adoption of this standard.  Upon adoption, the Company expects to recognize a right-of-use asset and a lease liability for the headquarters property lease. The Company is currently in the process of analyzing its existing leases and other contractual arrangements to determine the impact that this standard will have on its financial statements.

3.

Fair Value Measurements

The Company measures and reports its cash equivalents and short-term investments at fair value.

Money market funds are measured at fair value on a recurring basis using quoted prices and are classified as a Level 1 input. Short-term investments are measured at fair value based on inputs other than quoted prices that are derived from observable market data and are classified as Level 2 inputs. There were no transfers between Levels 1, 2 or 3 for any of the periods presented. All of the investments held as of September 30, 2018 and December 31, 2017 had maturities of less than one year. There were no realized gains or losses on investments for the three and nine months ended September 30, 2018 and 2017.

5


Forty Seven Inc.

Notes to Condensed Financial Statements

 

The fair value and amortized cost of cash equivalents and available-for-sale securities by major security type as of September 30, 2018 and December 31, 2017 are presented in the following tables:

 

 

 

As of September 30, 2018

 

 

 

Fair Value

Hierarchy

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Market

Value

 

 

 

(In thousands)

 

Money market funds

 

Level 1

 

$

20,726

 

 

$

 

 

$

 

 

$

20,726

 

Commercial paper

 

Level 2

 

 

39,046

 

 

 

 

 

 

 

 

 

39,046

 

Corporate debt securities

 

Level 2

 

 

48,166

 

 

 

 

 

 

(20

)

 

 

48,146

 

Asset-backed securities

 

Level 2

 

 

23,542

 

 

 

 

 

 

(10

)

 

 

23,532

 

US government debt securities

 

Level 2

 

 

19,870

 

 

 

 

 

 

(2

)

 

 

19,868

 

Total cash equivalents and available-for-sale securities

 

 

 

$

151,350

 

 

$

 

 

$

(32

)

 

$

151,318

 

 

 

 

As of December 31, 2017

 

 

 

Fair Value

Hierarchy

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Market

Value

 

 

 

(In thousands)

 

Money market funds

 

Level 1

 

$

19,052

 

 

$

 

 

$

 

 

$

19,052

 

Commercial paper

 

Level 2

 

 

31,467

 

 

 

 

 

 

 

 

 

31,467

 

Corporate debt securities

 

Level 2

 

 

24,556

 

 

 

 

 

 

(35

)

 

 

24,521

 

Asset-backed securities

 

Level 2

 

 

7,717

 

 

 

 

 

 

(7

)

 

 

7,710

 

US government debt securities

 

Level 2

 

 

1,993

 

 

 

 

 

 

(2

)

 

 

1,991

 

Total cash equivalents and available-for-sale securities

 

 

 

$

84,785

 

 

$

 

 

$

(44

)

 

$

84,741

 

 

4.

Balance Sheet Components

Accrued Liabilities

Accrued liabilities consist of the following:

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

(In thousands)

 

Accrued research and development expenses

 

$

3,044

 

 

$

4,096

 

Accrued bonus

 

 

1,165

 

 

 

 

Lease-related liabilities, current

 

 

147

 

 

 

133

 

Other

 

 

1,144

 

 

 

579

 

Total accrued liabilities

 

$

5,500

 

 

$

4,808

 

 

5.

Research and License Agreements

Stanford License Agreement

In November 2015, the Company entered into a technology license agreement with The Board of Trustees of the Leland Stanford Junior University (“Stanford”) under which Stanford granted to the Company exclusive licenses under certain patents and other intellectual property rights relating to the Company’s current product candidates and non-exclusive licenses under certain other patents and intellectual property rights to develop, manufacture and commercialize products for use in certain licensed fields, the scope of which would include the application of the licensed intellectual property in oncology. With respect to these licenses, the Company could be required to pay Stanford up to $5.6 million in milestone payments based on the achievement of certain development and regulatory approval milestones. The first such milestone payment of $75,000 was paid to Stanford in February 2018 and included in research and development expense for the nine months ended September 30, 2018. In addition, the Company is required to pay Stanford a minimum annual fee and a royalty of single digit percentage on net sales of licensed products, reimburse patent-related expenses, share any non-royalty sublicensing income received related to the licensed technology, and pay a change of control fee.

6


Forty Seven Inc.

Notes to Condensed Financial Statements

 

California Institute of Regenerative Medicine (CIRM) Grants

In January 2017, the Company was awarded a research grant from CIRM. The CIRM grant stipulates various milestone-based payments to the Company with the total award of $10.2 million over a period of four years. As of September 30, 2018 and December 31, 2017, the Company had received $7.2 million and $3.8 million under the award.

In November 2017, the Company was awarded a second research grant from CIRM for a separate clinical trial study. The total amount of the research grant awarded was $5.0 million in various milestone-based payments over a period of five years. As of September 30, 2018 and December 31, 2017, the Company had received $1.6 million and $1.1 million under the award. Under the terms of the CIRM grants, the Company is obligated to pay royalties and licensing fees based on a low single digit royalty percentage on net sales of CIRM-funded product candidates or CIRM-funded technology. The Company has the option to decline any and all amounts awarded by CIRM. As an alternative to revenue sharing, the Company has the option to convert the award to a loan. No such election has been made as of the date of the issuance of these financial statements. In the event that the Company terminates a CIRM-funded clinical trial, it will be obligated to repay the remaining CIRM funds on hand.

Leukemia & Lymphoma Society Grant

In March 2017, the Company entered into an agreement with the Leukemia & Lymphoma Society, Inc. (“LLS”) and amended the agreement to include an additional study in June 2018. The LLS research grant stipulates various milestone-based payments with a total award of $4.2 million through December 2019. As of September 30, 2018 and December 31, 2017, the Company had received $3.9 million and $1.0 million under the award. The Company could be required in the future to pay amounts to LLS upon reaching certain development and regulatory approval milestones as well as a low single digit percentage royalty rate on net sales, up to a maximum of $15 million in total.

The Company recognizes research grants as a reduction of research and development expense when the eligible costs are incurred. For the three months ended September 30, 2018 and 2017, the Company recognized $2.2 million and $0.9 million as a reduction to research and development expenses for research grants. For the nine months ended September 30, 2018 and 2017, the Company recognized $5.6 million and $2.3 million as a reduction to research and development expenses for research grants.

 

Merck Collaboration Agreement

In January 2018, the Company entered into a clinical trial collaboration and supply agreement with Ares Trading S.A, a subsidiary of Merck KGaA (“Merck”), to evaluate 5F9 combined with Merck’s cancer immunotherapy, avelumab, in a Phase 1b clinical trial in patients with ovarian cancer. Pursuant to the agreement, the parties will jointly pay for the cost of the study. As of September 30, 2018, the Company recorded a receivable of $1.0 million from Merck for reimbursement of research and development costs incurred.  Reimbursement under this collaboration agreement is recorded as a reduction to research and development expense. For the three and nine months ended September 30, 2018, the Company recognized $0.4 million and $1.0 million as a reduction to research and development expenses under this collaboration agreement.

 

BliNK Purchase Agreement

In June 2018, the Company entered into an asset purchase agreement with BliNK Biomedical SAS (“Blink”), under which Blink transferred its patents, intellectual property rights and know-how, and materials related to its CD47 antibody program to the Company. Under the agreement, the Company paid an initial upfront fee of $2.5 million in June 2018, including $0.5 million upon the completion of the transfer of intellectual property rights and know-how. An additional $0.5 million was paid in July 2018 upon completion of material transfers related to its CD47 antibody program to the Company. Additionally, the Company is required to make annual payments of $0.3 million to maintain the license and could be required to pay up to $43.0 million in milestone payments in aggregate based on the achievement of certain development and regulatory approval milestones. No such milestone payments have been made as of September 30, 2018. In addition, the Company could be required to pay Blink a royalty of single digit percentage on net sales of licensed products, which is subject to two buy-out provisions for a one-time payment that can be exercised by the Company prior to certain development milestones being achieved. During the three and nine months ended September 30, 2018, the Company recognized $0.5 million and $3.0 million in research and development expense related to the Blink asset purchase agreement.

7


Forty Seven Inc.

Notes to Condensed Financial Statements

 

Synthon License Agreement

In July 2018, the Company entered into a settlement and license agreement with Synthon Biopharmaceuticals B.V. (“Synthon”). Under the agreement, the Company agreed to discontinue its ongoing oppositions and challenges at the European Patent Office (“EPO”) and the U.S. Patent and Trademark Office (“USPTO”) directed towards certain patents licensed by Synthon from Stichting Sanquin Bloedvoorziening (“SSB”) that relate to the use of anti-CD47 products in combination with other antibodies to treat cancer. The Company also agreed to request the withdrawal of such proceedings with the USPTO and EPO. In return Synthon agreed to grant the Company a non-exclusive, worldwide sublicense to certain patents Synthon have licensed from SSB, including the SSB patents the Company is opposing at the USPTO and EPO to commercialize a single anti-CD47 product (such as 5F9 or an alternate anti-CD47 product) to treat cancer in combination with other antibodies.

In exchange, for these sublicenses and option rights, the Company agreed to pay Synthon an aggregate of up to approximately 40.0 million Euros (approximately $47 million US Dollar based on the exchange rate at July 16, 2018) comprising an upfront payment upon grant of sublicense and the achievement of future regulatory and commercial milestones which comprise the significant majority of the aggregate payments. If the Company exercises its option right, the Company will pay Synthon additional amounts upon the achievement of certain regulatory and commercial milestones related to such follow-on anti-CD47 product. In addition, the Company will be required to pay Synthon an annual license fee and a royalty of a tiered, low single digit percentage on net sales of any approved licensed products. The Company has the right to buy out its royalty obligations for each licensed product in full by paying Synthon specified lump sum amounts prior to the occurrence of certain defined events.

 

6.

Convertible Preferred Stock

On the completion of the IPO on July 2, 2018, all outstanding shares of convertible preferred stock were automatically converted into 16,215,896 shares of common stock and the related carrying value was reclassified to common stock and additional paid-in capital. Accordingly, there were no shares of convertible preferred stock outstanding as of September 30, 2018.

 

7.

Stock-Based Compensation

2015 and 2018 Equity Incentive Plans

In November 2015, the Company adopted the 2015 Equity Incentive Plan (“2015 Plan”). The 2015 Plan provides for the Company to sell or issue common stock or restricted common stock, or to grant incentive stock options or nonqualified stock options for the purchase of common stock, to employees, members of the board of directors and consultants of the Company under terms and provisions established by the board of directors. As of September 30, 2018, there were 3,322,805 shares of the Company’s common stock reserved for future issuance under the 2015 Plan upon the exercise of outstanding stock options.

In June 2018, the Company adopted the 2018 Equity Incentive Plan (“2018 Plan”), which became effective upon the execution of the underwriting agreement related to the IPO. As a result, the Company will not grant any additional awards under the 2015 Plan.  The terms of the 2015 Plan and applicable award agreements will continue to govern any outstanding awards thereunder. The Company has initially reserved 3,000,000 shares of common stock for issuance under the 2018 Plan.  In addition, the number of shares of common stock reserved for issuance under the 2018 Plan will automatically increase on the first day of January for a period of up to ten years, commencing on January 1, 2019, in an amount equal to 5% of the total number of shares of the Company’s capital stock outstanding on the last day of the preceding year, or a lesser number of shares determined by the Company’s board of directors. As of September 30, 2018, there were 2,977,650 shares available for future grants under the 2018 Plan.

 

8


Forty Seven Inc.

Notes to Condensed Financial Statements

 

The following summarizes option activity for the nine months ended September 30, 2018:

 

 

 

Shares

Issuable

Under

Options

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contract

Term

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

(In years)

 

 

(In thousands)

 

Balance, December 31, 2017

 

 

2,102,528

 

 

$

4.47

 

 

 

9.43

 

 

$

1,672

 

Options granted

 

 

1,335,138

 

 

 

8.94

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(32,736

)

 

 

5.06

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

(59,775

)

 

 

4.97

 

 

 

 

 

 

 

 

 

Balance outstanding September 30, 2018

 

 

3,345,155

 

 

 

6.24

 

 

 

9.04

 

 

 

29,030

 

Exercisable, September 30, 2018

 

 

2,051,733

 

 

 

5.99

 

 

 

8.98

 

 

 

18,312

 

Vested and expected to vest, September 30, 2018

 

 

3,345,155

 

 

 

6.24

 

 

 

9.04

 

 

 

29,030

 

 

Total stock-based compensation was as follows:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

 

(In thousands)

 

Research and development

 

$

477

 

 

$

51

 

 

$

774

 

 

$

116

 

General and administrative

 

 

794

 

 

 

160

 

 

 

1,544

 

 

 

297

 

Total

 

$

1,271

 

 

$

211

 

 

$

2,318

 

 

$

413

 

 

Restricted Stock

As of September 30, 2018 and December 31, 2017, there was $157,000 and $255,000 recorded in other long-term liabilities related to shares held by employees and directors that were subject to repurchase.

A summary of restricted stock activity follows:

 

 

 

Number of

Restricted

Shares

Outstanding

 

Unvested shares—December 31, 2017

 

 

156,988

 

Early exercised options

 

 

11,418

 

Restricted shares vested

 

 

(66,129

)

Repurchased by the Company

 

 

(41,935

)

Unvested shares—September 30, 2018

 

 

60,342

 

 

Employees Share Purchase Plan (ESPP)

 

In June 2018, the Company adopted the 2018 Employee Stock Purchase Plan (“ESPP”), which became effective upon the execution of the underwriting agreement related to the IPO. The Company has initially reserved 450,000 shares of common stock for purchase under the ESPP. The initial offering period began June 27, 2018 and will end on August 15, 2020 with purchase dates of February 25, 2019, August 15, 2019, February 15, 2020, and August 15, 2020. Each subsequent offering will be approximately 24 months long and will consist of four purchase periods with purchase dates occurring on February 15 and August 15 of each year. On each purchase date, ESPP participants will purchase shares of common stock at a price per share equal to 85% of the lesser of (1) the fair market value per share of the common stock on the offering date or (2) the fair market value of the common stock on the purchase date.

 

9


Forty Seven Inc.

Notes to Condensed Financial Statements

 

8.

Net Loss Per Share

 The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share for the periods presented due to their anti-dilutive effect:

 

 

 

As of September 30,

 

 

 

2018

 

 

2017

 

Convertible preferred stock

 

 

 

 

 

8,626,388

 

Stock options to purchase common stock

 

 

3,345,155

 

 

 

1,326,319

 

Restricted stock subject to future vesting

 

 

60,342

 

 

 

182,795

 

Shares committed under ESPP

 

 

18,728

 

 

 

 

Total

 

 

3,424,225

 

 

 

10,135,502

 

 

 

9.

Income Taxes

 

In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. The Tax Act, among other changes, lowers the Company’s federal tax rate from 34% to 21%. Based on provisions of the Tax Act, the Company remeasured its deferred tax assets and liabilities as of December 31, 2017 to reflect the lower statutory tax rate. However, since the Company established a valuation allowance to offset its deferred tax assets, there was no impact to the effective tax rate, as any changes to deferred taxes would be offset by the valuation allowance. The deferred tax remeasurement is provisional and is subject to revision as the Company completes its analysis of the Tax Act, collects and prepares necessary data and interprets any additional guidance issued by standard-setting bodies. The Company currently anticipates finalizing and recording any resulting adjustments related to the tax effects of the Tax Act in the fourth quarter of 2018.

 

 

 

10


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion of our financial condition and results of operations in conjunction with our condensed financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our final prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933, as amended, dated June 27, 2018 (the “Prospectus”). In addition to historical financial information, this discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part II, Item 1A below. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “should,” “will” or the negative of these terms or other similar expressions.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

Overview

 

We are a clinical-stage immuno-oncology company focused on developing novel checkpoint therapies to activate macrophages in the fight against cancer. We founded Forty Seven based on the insight that blocking CD47, a key signaling molecule that is overexpressed on cancer cells, renders tumors susceptible to macrophages. By harnessing macrophages, we believe that our lead product candidate, 5F9, dosed as a monotherapy or in combination with marketed cancer therapies, can transform the treatment of cancer. 5F9 has demonstrated promising activity in five Phase 1b/2 clinical trials in which we have treated over 250 relapsed or refractory cancer patients with solid or hematologic tumors. We hold worldwide rights to all of our product candidates.

 

We focus our efforts on targeting the CD47 pathway as a way to engage macrophages primarily in fighting tumors. Macrophages function as first responders, swallowing foreign and abnormal cells, including cancer cells, and mobilizing other components of the immune system including T cells and antibodies. Cancer cells use CD47, a “don’t eat me” signal, in order to evade detection by the immune system and subsequent destruction by macrophages. Overexpression of CD47 is common to nearly all types of tumors and is also correlated with poor prognosis in multiple cancers including acute myelogenous leukemia, or AML, colorectal cancer, or CRC, gastric cancer, lung cancer, Non-Hodgkin’s lymphoma, or NHL, and ovarian cancer. Despite the central role of macrophages as cell-eating scavengers and first responders, the pharmaceutical industry is only beginning to bring this key group of cells into the fight against cancer.

 

Since our inception in 2014, we have devoted most of our resources to identifying and developing 5F9, advancing our preclinical programs, conducting clinical trials and providing general and administrative support for these operations. We have not recorded revenue from product sales or collaboration activities, or any other source. We have funded our operations to date primarily from the issuance and sale of our preferred stock and the receipt of government and private grants. We are eligible to receive up to $19.4 million in grants from the California Institute for Regenerative Medicine, or CIRM, and the Leukemia and Lymphoma Society, or LLS, of which $12.7 million has been received through September 30, 2018.

 

On June 27, 2018, our Registration Statements on Form S-1 (File No. 333-225390 and 333-225933) relating to our initial public offering, or IPO, were declared effective by the Securities Exchange Commission, or SEC. Pursuant to the Registration Statements, we issued and sold an aggregate of 8,090,250 shares of common stock (inclusive of 1,055,250 shares pursuant to the underwriters’ over-allotment option) at a price of $16.00 per share for aggregate cash proceeds of $116.3 million, net of underwriting discounts and commissions and estimated offering costs. The sale and issuance of 7,035,000 shares in the IPO closed on July 2, 2018 and the sale and issuance of an additional 1,055,250 shares pursuant to the underwriters’ over-allotment option closed on July 27, 2018. Upon the closing of the IPO on July 2, 2018, all outstanding shares of convertible preferred stock automatically converted into 16,215,896 shares of common stock. Subsequent to the closing of the IPO, there were no shares of preferred stock outstanding.

 

We have incurred net losses in each year since inception. Our net losses were $44.9 million and $19.5 million for 2017 and 2016, respectively. Our net loss was $53.2 million and $32.6 million for the nine months ended September 30, 2018 and 2017, respectively and $21.7 million and $10.8 million for the three months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, we had an accumulated deficit of $122.6 million. Substantially all of our net 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 continue to incur significant expenses and increasing operating losses over at least the next several years. We expect our expenses will increase substantially in connection with our ongoing activities, as we:

 

advance product candidates through clinical trials;

 

pursue regulatory approval of product candidates;

11


 

 

operate as a public company;

 

continue our preclinical programs and clinical development efforts;

 

continue research activities for the discovery of new product candidates; and

 

manufacture supplies for our preclinical studies and clinical trials.

 

Components of Results of Operations

 

Research and Development Expenses

 

Research and development expenses consist primarily of costs incurred for the development of our lead product candidate, 5F9, which include:

 

 

expenses incurred under agreements with third-party contract organizations, investigative clinical trial sites that conduct research and development activities on our behalf, and consultants;

 

costs related to production of clinical materials, including fees paid to contract manufacturers;

 

laboratory and vendor expenses related to the execution of preclinical and clinical trials;

 

employee-related expenses, which include salaries, benefits and stock-based compensation; and

 

facilities and other expenses, which include expenses for rent and maintenance of facilities, depreciation and amortization expense and other supplies.

 

We expense all research and development costs in the periods in which they are incurred. 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, collaborators and third-party service providers. The costs of intangible assets that are purchased from others for a particular research and development project and that have no alternative future uses are considered research and development costs and are expensed when incurred. Nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and capitalized. The capitalized amounts are then expensed as the related goods are delivered and as services are performed.

 

The largest component of our operating expenses has historically been our investment in research and development activities related to the clinical development of our lead product candidate, 5F9. We recognize the funds from research and development grants as a reduction of research and development expense when the related eligible research costs are incurred. Research and development grants received during 2017 and as of September 30, 2018 totaled $5.9 million and $12.7 million, respectively.

 

We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, as our product candidates advance into later stages of development, and as we begin to conduct larger clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of personnel-related costs, facilities costs, depreciation and amortization expenses and professional services expenses, including legal, human resources, audit and accounting services. Personnel-related costs consist of salaries, benefits and stock-based compensation. Facilities costs consist of rent and maintenance of facilities. We expect our general and administrative expenses to increase for the foreseeable future due to anticipated increases in headcount to advance our product candidates and as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, the Nasdaq Global Market, additional insurance expenses, investor relations activities and other administrative and professional services.

 

Interest and Other Income, Net

 

Interest and other income, net consists of interest earned on our cash equivalents and short-term investments and foreign currency transaction gains and losses incurred during the period.

12


 

 

Results of Operations

 

Three Months Ended September 30, 2018 and 2017

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Increase/ (Decrease)

 

 

 

(In thousands)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

17,984

 

 

$

8,842

 

 

$

9,142

 

General administrative

 

 

4,383

 

 

 

2,051

 

 

 

2,332

 

Total operating expenses

 

 

22,367

 

 

 

10,893

 

 

 

11,474

 

Loss from operations

 

 

(22,367

)

 

 

(10,893

)

 

 

(11,474

)

Interest and other income, net

 

 

708

 

 

 

60

 

 

 

648

 

Net loss

 

$

(21,659

)

 

$

(10,833

)

 

$

(10,826

)

 

 

Research and Development Expenses

 

Research and development expenses increased by $9.1 million, or 103%, to $18.0 million for the three months ended September 30, 2018 from $8.8 million for the three months ended September 30, 2017. The increase was primarily due to a $2.8 million increase in third-party costs related to advancing our current clinical programs focused on CRC and NHL with our lead product candidate, 5F9, and associated contract manufacturing costs, partially offset by a $1.7 million reduction of expenses related to increased grant and cost share funding recognized under the CIRM and LLS grants and the Merck collaboration during the three months ended September 30, 2018. There was also a non-recurring $6.3 million increase in license fees incurred under the Blink asset purchase and Synthon license agreements. In addition, there was a $0.9 million increase in our other preclinical and discovery programs costs as we expanded our immuno-oncology efforts and a $0.8 million increase in personnel-related costs, including stock-based compensation.

The following tables summarize the period-over-period changes in research and development expenses for the periods indicated:

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Increase

(Decrease)

 

 

 

(In thousands)

 

Product-specific costs:

 

 

 

 

 

 

 

 

 

 

 

 

5F9

 

$

9,791

 

 

$

6,993

 

 

$

2,798

 

Grant funding and cost share reimbursement

 

 

(2,587

)

 

 

(860

)

 

 

(1,727

)

Non product-specific costs:

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

477

 

 

 

51

 

 

 

426

 

Personnel-related

 

 

1,956

 

 

 

1,580

 

 

 

376

 

Other preclinical programs

 

 

2,023

 

 

 

1,078

 

 

 

945

 

License fees

 

 

6,324

 

 

 

 

 

 

6,324

 

Total research and development expenses

 

$

17,984

 

 

$

8,842

 

 

$

9,142

 

 

General and Administrative Expenses

General and administrative expenses increased by $2.3 million, or 114%, to $4.4 million for the three months ended September 30, 2018 from $2.1 million for the three months ended September 30, 2017. The increase was primarily due to a $1.2 million increase in personnel-related costs driven by an increase in headcount, a $0.7 million increase in accounting and consulting expenses incurred in connection with operating as a public company, and a $0.2 million increase in directors and officers insurance expense.

Interest and Other Income, Net

Interest and other income, net increased by $0.6 million to $0.7 million for the three months ended September 30, 2018 from $0.1 million for the three months ended September 30, 2017. The increase was primarily due to interest income earned from the investment of the net proceeds from our IPO in July 2018.

13


 

Nine Months Ended September 30, 2018 and 2017

 

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Increase/ (Decrease)

 

 

 

(In thousands)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

42,733

 

 

$

27,212

 

 

$

15,521

 

General administrative

 

 

11,588

 

 

 

5,509

 

 

 

6,079

 

Total operating expenses

 

 

54,321

 

 

 

32,721

 

 

 

21,600

 

Loss from operations

 

 

(54,321

)

 

 

(32,721

)

 

 

(21,600

)

Interest and other income, net

 

 

1,165

 

 

 

153

 

 

 

1,012

 

Net loss

 

$

(53,156

)

 

$

(32,568

)

 

$

(20,588

)

 

 

Research and Development Expenses

 

Research and development expenses increased by $15.5 million, or 57%, to $42.7 million for the nine months ended September 30, 2018 from $27.2 million for the nine months ended September 30, 2017. The increase was primarily due to a $9.6 million increase in third-party costs related to advancing our current clinical programs focused on CRC and NHL with our lead product candidate, 5F9, and associated contract manufacturing costs, partially offset by a $4.3 million reduction in expenses related to increased grant and cost share funding recognized under the CIRM and LLS grants and the Merck collaboration during the nine months ended September 30, 2018. There was also a non-recurring $8.8 million increase in license fees incurred under the Blink asset purchase and Synthon license agreements. In addition, there was a $2.3 million increase in personnel-related costs, including stock-based compensation, driven by increased headcount, partially offset by a $0.9 million decrease in our other preclinical and discovery programs costs.

The following tables summarize the period-over-period changes in research and development expenses for the periods indicated:

 

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Increase (Decrease)

 

 

 

(In thousands)

 

Product-specific costs:

 

 

 

 

 

 

 

 

 

 

 

 

5F9

 

$

29,354

 

 

$

19,786

 

 

$

9,568

 

Grant funding and cost share reimbursement

 

 

(6,549

)

 

 

(2,282

)

 

 

(4,267

)

Non product-specific costs:

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

774

 

 

 

116

 

 

 

658

 

Personnel-related

 

 

6,092

 

 

 

4,444

 

 

 

1,648

 

Other preclinical programs

 

 

4,238

 

 

 

5,148

 

 

 

(910

)

License fees

 

 

8,824

 

 

 

 

 

 

8,824

 

Total research and development expenses

 

$

42,733

 

 

$

27,212

 

 

$

15,521

 

 

General and Administrative Expenses

General and administrative expenses increased by $6.1 million, or 110%, to $11.6 million for the nine months ended September 30, 2018 from $5.5 million for the nine months ended September 30, 2017. The increase was primarily due to a $3.1 million increase in personnel-related costs driven by an increase in headcount, a $1.9 million increase in accounting and consulting expenses incurred in connection with becoming a public company, a $0.2 million increase in directors and officers insurance expense, and a $0.2 million increase in rent expense.

Interest and Other Income, Net

Interest and other income, net increased by $1.0 million to $1.2 million for the nine months ended September 30, 2018 from $0.2 million for the nine months ended September 30, 2017. The increase was primarily due to interest income earned from the investment of the net proceeds from our IPO in July 2018 and our preferred stock financings completed during 2017.

14


 

Liquidity, Capital Resources and Plan of Operations

 

To date, we have incurred significant net losses and negative cash flows from operations. Prior to our IPO, our operations have been financed primarily by net proceeds from the sale and issuance of our preferred stock. As of September 30, 2018, we had $154.0 million in cash, cash equivalents and short-term investments. In connection with our IPO, we issued and sold an aggregate of 8,090,250 shares of common stock (inclusive of 1,055,250 shares of common stock from the exercise of the over-allotment option granted to the underwriters) at a price of $16.00 per share. We received proceeds of $116.3 million, net of underwriting discounts and commissions and estimated offering costs.

 

Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures related to our lead product candidate, 5F9, preclinical and discovery programs, and to a lesser extent, general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.

 

Based upon our current operating plan, we believe that with our existing capital resources will enable us to fund our operating expenses and capital expenditure requirements into 2020. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. We will continue to require additional financing to advance our current product candidates through clinical development, to develop, acquire or in-license other potential product candidates and to fund operations for the foreseeable future. We will continue to seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms, or at all. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies.

 

Further, our operating plans may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development activities. We currently have no credit facility or committed sources of capital. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated product development programs.

 

If we need to raise additional capital to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our clinical trials, research and development programs or commercialization efforts. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings and collaborations or licensing arrangements. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to raise capital, we will need to delay, reduce or terminate planned activities to reduce costs. Doing so will likely harm our ability to execute our business plans.

 

Cash Flows

 

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

 

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Cash used in operating activities

 

$

(50,918

)

 

$

(27,008

)

Cash used in investing activities

 

 

(66,699

)

 

 

(10,068

)

Cash provided by financing activities

 

 

116,626

 

 

 

40,624

 

Net (decrease) increase in cash and cash

   equivalents

 

$

(991

)

 

$

3,548

 

 

 

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Operating Activities

 

During the nine months ended September 30, 2018, cash used in operating activities of $50.9 million was attributable to a net loss of $53.2 million and a net change of $0.1 million in net operating assets and liabilities, partially offset by a net change of $2.3 million in non-cash charges. The non-cash charges consisted primarily of stock-based compensation of $2.3 million. The change in operating assets and liabilities was primarily due to a $2.2 million increase in in prepaid expense and other current assets driven by additional prepayments made for research and development activities and other receivables, offset by a $0.7 million increase in accounts payable and accrued liabilities resulting from an increase in accrued bonus and the timing of payments, and a $1.4 million increase in deferred grant funding due to research grant award payments received.

 

During the nine months ended September 30, 2017, cash used in operating activities of $27.0 million was attributable to a net loss of $32.6 million, partially offset by a net change of $4.9 million in net operating assets and liabilities, and $0.7 million in non-cash charges, which consisted of depreciation and amortization and stock-based compensation. The change in operating assets and liabilities was primarily due to a $2.5 million increase in deferred grant funding due to research grant award payments received, a $1.5 million increase accrued liabilities resulting primarily from increases in our research and development activities, and a $1.1 million decrease in prepaid expenses and other current assets resulting from the timing of prepayments made for research and development activities. This was partially offset by a $0.2 million decrease in accounts payable due to timing of payments.

 

Investing Activities

 

During the nine months ended September 30, 2018, cash used in investing activities was $66.7 million related to the purchase of short-term investments of $138.1 million, partially offset by the maturity of investments of $71.5 million.

 

During the nine months ended September 30, 2017, cash used for investing activities was $10.1 million related primarily to the purchase of short-term investments of $27.0 million, partially offset by the maturity of investments of $17.0 million.

 

Financing Activities

 

During the nine months ended September 30, 2018, cash provided by financing activities was $116.6 million related primarily to the net proceeds received from the initial public offering.

During the nine months ended September 30, 2017, cash provided by financing activities was $40.6 million related to the net proceeds from the issuance of preferred stock.

 

Contractual Obligations and Commitments

 

There have been no material changes to our contractual obligations as of September 30, 2018, as compared to those disclosed in the Prospectus as of December 31, 2017, except as discussed below.

 

Asset Purchase Agreement

In June 2018, we entered into an asset purchase agreement with BliNK Biomedical SAS, or BliNK, pursuant to which we acquired all of BliNK’s assets relating to its research and development program for antibodies directed against CD47. These assets predominately consist of certain patents and patent applications of BliNK and BliNK’s opposition at the EPO against the third-party patent European Patent No. EP 2 282 772 as an acquired business asset. We paid BliNK an initial upfront payment of $2.0 million and an additional $1.0 million upon the completion of certain agreed activities by BliNK relating to the transfer of the assets to us. For each product incorporating a program antibody that satisfies certain clinical and commercial milestones in the United States, the European Union and Japan, we will be required to make milestone payments of up to $43.0 million. Until we receive marketing approval for the first product, or for so long as we continue development of product candidates related to the acquired intellectual property, we will pay BliNK a minimum annual fee of $0.3 million. In addition, we will pay BliNK a royalty of a tiered single digit percentage on net sales of any approved products. We have the right to buy out our royalty obligations in full by paying BliNK an agreed lump sum amount prior to the occurrence of certain defined events.

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License Agreement

In July 2018, we entered into a settlement and license agreement with Synthon Biopharmaceuticals B.V., or Synthon. Under the agreement, we agreed to discontinue our ongoing oppositions and challenges at the European Patent Office, or EPO, and the U.S. Patent and Trademark Office, or USPTO, directed towards certain patents licensed by Synthon from Stichting Sanquin Bloedvoorziening, or SSB, that relate to the use of anti-CD47 products in combination with other antibodies to treat cancer. We also agreed to request the withdrawal of such proceedings with the USPTO and EPO. In return Synthon agreed to grant us a non-exclusive, worldwide sublicense to certain patents they have licensed from SSB, including the SSB patents we are opposing at the USPTO and EPO to commercialize a single anti-CD47 product (such as 5F9 or an alternate anti-CD47 product) to treat cancer in combination with other antibodies.

In December 2016 and April 2017, we filed third party observations in an opposition proceeding in the EPO with respect to European Patent No. EP 2 282 772 and in January 2018, petitioned for inter partes review of U.S. Patent No. 9,352,037 in the USPTO, each of which is related to the treatment of cancer with an anti-CD47 antibody or an anti-SIRPα antibody in combination with certain other antibodies. The opposition proceeding was rejected by the EPO and the original opponent appealed the decision. On June 4, 2018, we acquired the opposition against this European patent from the original opponent. Pursuant to the agreement, we and Synthon have each agreed to release the other party (and we have agreed to release SSB) from all claims and liabilities relating to the USPTO and EPO proceedings.

The sublicense grant was subject to specified conditions, which have now been met. These conditions included our withdrawal of the proceedings opposing the above-mentioned SSB U. S. and European patents and the termination of these proceedings by the USPTO and the EPO. The effectiveness of the release of claims by Synthon and us are subject to (i) SSB agreeing to release us from all claims and liabilities under the USPTO and EPO proceedings and (ii) SSB agreeing to grant us a direct license to the sublicensed patents in the event the license between SSB and Synthon is terminated.

Our sublicense includes the right to further sublicense the applicable patent rights to our collaborators, corporate partners and service providers and covers one named product, which is 5F9. In addition, we have the right to replace 5F9 with a different anti-CD47 product in the event of a development failure of 5F9. We will also have an option to expand our rights to cover a follow-on anti-CD47 product in exchange for a specified option exercise fee. Synthon retains the right to use the licensed patents and to grant other third parties the right to do so.

In exchange, for these sublicenses and option rights, we agreed to pay Synthon an aggregate of up to approximately 40.0 million Euros comprising an upfront payment upon grant of sublicense and the achievement of future regulatory and commercial milestones which comprise the significant majority of the aggregate payments. If we exercise our option right, we will pay Synthon additional amounts upon the achievement of certain regulatory and commercial milestones related to such follow-on anti-CD47 product. In addition, we will be required to pay Synthon an annual license fee and a royalty of a tiered, low single digit percentage on net sales of any approved licensed products. We have the right to buy out our royalty obligations for each licensed product in full by paying Synthon specified lump sum amounts prior to the occurrence of certain defined events.

 

Off-Balance Sheet Arrangements

 

During 2017 and the nine months ended September 30, 2018, we did not have any off-balance sheet arrangements as defined in Item 303 of Regulation S-K.

 

Critical Accounting Policies

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe that the assumptions and estimates associated with accrued research and development expenditures and stock-based compensation have the most significant impact on our condensed financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

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There have been no significant changes in our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in the section titled “Management’s Discussion and Analysis of Financial Condition and Operations” included in the Prospectus, except for the determination of the fair value of our common stock, which is used in estimating the fair value of stock-based awards at grant date. Prior to the IPO, our common stock was not publicly traded, therefore we estimated the fair value of our common stock as discussed in the Prospectus. Following our IPO, the closing sale price per share of our common stock as reported on the Nasdaq Global Select Market on the date of grant is used to determine the exercise price per share of our share-based awards to purchase common stock.

Recent Accounting Pronouncements

 

Please refer to Note 2 to our unaudited condensed consolidated financial statements appearing under Part 1, Item 1 for a discussion of new accounting standards updates that may impact us.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risks in the ordinary course of our business. These risks primarily relate to interest rate and currency exchange rate fluctuations.

Interest Rate Risk

Our cash, cash equivalents and short-term investments of $154.0 million and $88.1 million as of September 30, 2018 and December 31, 2017, consist of bank deposits, money market funds and available-for-sale securities. Such interest-earning instruments carry a degree of interest rate risk; however, historical fluctuations in interest income have not been significant for us. Due to the short-term maturities of our cash equivalents and marketable securities, and the low risk profile of our marketable securities, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents and marketable securities.

Foreign Currency Risk

Our expenses are generally denominated in U.S. dollars. However, we have entered into a limited number of contracts with licensors and vendors for research and development services with payments denominated in foreign currencies, including the British Pound and Euro. We are subject to foreign currency transaction gains or losses on our contracts denominated in foreign currencies. To date, foreign currency transaction gains and losses have not been material to our financial statements and we have not had a formal hedging program with respect to foreign currency. A 10% increase or decrease in current exchange rates would not have a material effect on our financial results.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Remediation Efforts of Previously Reported Material Weakness

During the audit of our financial statements for the year ended December 31, 2016, a material weakness was identified in our internal control over financial reporting. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls. The material weakness that was identified related to the accounting for complex transactions and the timing of expense recognition for research and development expenses.

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We have implemented measures designed to improve our disclosure controls and procedures and internal control over financial reporting to address the underlying causes of this material weakness, including hiring key accounting personnel, engaging technical accounting consulting resources, establishing more formal controls for the review and documentation of the accounting for complex non-routine transactions, establishing more formal policies and procedures related to the accounting for our procurement and vendor payment process, and creating a formal month-end close process.

Our management believes that these and other actions taken to remediate this material weakness have been fully implemented as of September 30, 2018 and that the previously reported material weakness had been remediated. However, we cannot assure you that the measures we have taken to date, and are continuing to implement, or any measures we may take in the future, will be sufficient to identify or prevent future material weaknesses. We, and our independent registered public accounting firm, were not required to perform an evaluation of our internal control over financial reporting as of December 31, 2017 in accordance with the provisions of the Sarbanes-Oxley Act, and will not be required to attest formally to the effectiveness of our internal controls over financial reporting until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an “emerging growth company” as defined in the JOBS Act. Accordingly, we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses. Material weaknesses may still exist when we report on the effectiveness of our internal control over financial reporting as required by reporting requirements under Section 404 of the Sarbanes-Oxley Act. If other material weaknesses or other deficiencies occur, or currently exist, our ability to accurately and timely report our financial position could be impaired, which could result in a misstatement of our financial statements that would not be prevented or detected on a timely basis.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

 

 

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PART II-OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in legal proceedings relating to claims arising from the ordinary course of business. Our management believes that there are currently no claims or actions pending against us, the ultimate disposition of which could have a material adverse effect on our results of operations, financial condition or cash flows.

Item 1A. Risk Factors

RISK FACTORS

Our business involves significant risks, some of which are described below. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the related notes. If any of the following risks actually occur, it could harm our business, prospects, operating results and financial condition and future prospects. In such event, the market price of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. This Quarterly Report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this Quarterly Report.

Risks Related to Our Financial Position and Need for Additional Capital

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

We are an immuno-oncology company with a limited operating history. Since inception in 2014, we have not generated any revenue and have incurred significant operating losses. Our net loss was $19.5 million, $44.9 million and $53.2 million for 2016, 2017 and the nine months ended September 30, 2018, respectively. As of September 30, 2018, we had an accumulated deficit of $122.6 million. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. Since inception, we have devoted substantially all of our efforts to research and preclinical and clinical development of our product candidates, as well as to building out our management team and infrastructure. It could be several years, if ever, before we have a commercialized drug. The net losses we incur may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially if, and as, we:

 

continue to advance our research and clinical and preclinical development of our product candidates;

 

scale up manufacturing to provide adequate drug substance for clinical trials and commercialization;

 

initiate further clinical trials for our product candidates;

 

seek to identify additional product candidates;

 

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

 

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

 

maintain, expand, protect and enforce our intellectual property portfolio and obtain licenses to third-party intellectual property;

 

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

 

incur additional legal, accounting and other expenses in operating our business, including the additional costs associated with operating as a public company.

In addition, because of the numerous risks and uncertainties associated with pharmaceutical products and development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. Our expenses could increase and profitability could be further delayed if we decide to or are required by the FDA or other regulatory authorities such as the European Medicines Agency, or EMA, or the U.K. Medicines & Healthcare Products Regulatory Agency, or MHRA, to perform studies or trials in addition to those currently expected, or if there are any delays in the development, or in the

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completion of any planned or future preclinical studies or clinical trials of our current and future product candidates. Even if we complete the development and regulatory processes described above, we anticipate incurring significant costs associated with launching and commercializing our current and future product candidates.

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

We will need substantial funding to pursue our business objectives. If we are unable to raise capital when needed or on terms favorable to us, we could be forced to delay, reduce or terminate our product development, other operations or commercialization efforts.

Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and begin selling any approved products. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue to develop our product candidates. Our expenses could increase beyond our current expectations if the FDA requires us to perform clinical trials and other studies in addition to those that we currently anticipate. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or terminate our research and development programs or future commercialization efforts.

As of September 30, 2018, we had cash, cash equivalents and short-term investments of $154.0 million. Based upon our current operating plan, we believe that our existing cash, cash equivalents and short-term investments will enable us to fund our cash and capital expenditure requirements through at least the next 12 months. This estimate is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we expect. Changes may occur beyond our control that would cause us to consume our available capital before that time, including changes in and progress of our development activities and changes in regulation. Our future capital requirements will depend on many factors, including:

 

the scope, rate of progress, results and costs of drug discovery, preclinical development, laboratory testing and clinical trials for our product candidates;

 

the number and development requirements of other product candidates that we may pursue, and other indications for our current product candidates that we may pursue;

 

the costs, timing and outcome of regulatory review of our product candidates;

 

the scope and costs of manufacturing development and commercial manufacturing activities;

 

the cost associated with commercializing any approved product candidates;

 

the cost and timing of developing our ability to establish sales and marketing capabilities, if any;

 

the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights, defending intellectual property-related claims and obtaining licenses to third-party intellectual property;

 

the timing and amount of milestone and royalty payments we are required to make under our license agreements;

 

our ability to establish and maintain collaborations on favorable terms, if at all; and

 

the extent to which we acquire or in-license other product candidates and technologies and associated intellectual property.

We will require additional capital to complete our planned clinical development programs for our current product candidates to obtain regulatory approval. Any additional capital raising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our current and future product candidates, if approved.

In addition, we cannot guarantee that future financing will be available on a timely basis, in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities by us, whether equity or debt, or the market perception that such issuances are likely to occur, could cause the market price of our common stock to decline. If we are unable to obtain funding on a timely basis on acceptable terms, we may be required to delay, reduce or terminate one or more of our research and development programs or the commercialization of any product candidates that may be approved.

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Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish proprietary rights.

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

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

Risks Related to the Development of Our Product Candidates

We depend primarily on the success of our lead product candidate, 5F9, which is in clinical development and which has not completed a pivotal trial. If we do not obtain regulatory approval for and successfully commercialize our lead product candidate in one or more indications or we experience significant delays in doing so, we may never generate any revenue or become profitable.

We do not have any products that have received regulatory approval and may never be able to develop marketable product candidates. We expect that a substantial portion of our efforts and expenses over the next several years will be devoted to the development of our lead product candidate, 5F9, in our six ongoing clinical trials, including trials in monotherapy and in combination with anti-cancer antibodies such as rituximab and cetuximab. As a result, our business currently depends heavily on the successful development, regulatory approval and, if approved, commercialization of 5F9 in one or more of these indications. We cannot be certain that 5F9 will receive regulatory approval or will be successfully commercialized even if it receives regulatory approval. The research, testing, manufacturing, safety, efficacy, labeling, approval, sale, marketing and distribution of 5F9 is, and will remain, subject to comprehensive regulation by the FDA and similar foreign regulatory authorities. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through preclinical studies and clinical trials that the product candidate is safe and effective for use in each 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. Failure to obtain regulatory approval for our product candidates in the United States will prevent us from commercializing and marketing our product candidates. The success of 5F9 and any other product candidates will depend on several additional factors, including:

 

completing clinical trials that demonstrate their efficacy and safety;

 

receiving marketing approvals from applicable regulatory authorities;

 

completing any post-marketing studies required by applicable regulatory authorities;

 

establishing commercial manufacturing capabilities;

 

launching commercial sales, marketing and distribution operations;

 

the prevalence and severity of adverse events experienced with our product candidates;

 

acceptance of our product candidates by patients, the medical community and third-party payors;

 

a continued acceptable safety profile following approval;

 

obtaining and maintaining healthcare coverage and adequate reimbursement for our product candidates;

 

competing effectively with other therapies, including with respect to the sales and marketing of our product candidates, if approved; and