ITEM 1A. RISK FACTORS
An
investment in our common stock is speculative and illiquid and involves a high degree of risk including the risk of a loss of
your entire investment. You should carefully consider the risks and uncertainties described below and the other information contained
in this report and our other reports filed with the Securities and Exchange Commission. The risks set forth below are not the
only ones facing us. Additional risks and uncertainties may exist that could also adversely affect our business, operations and
financial condition. If any of the following risks actually materialize, our business, financial condition and/or operations could
suffer. In such event, the value of our common stock could decline, and you could lose all or a substantial portion of the money
that you pay for our common stock.
Risk
Related to our Company and our Business
Risks
Related to Our Financial Position and Need for Capital
We
are a clinical stage pharmaceutical company with a limited operating history.
We are a clinical stage pharmaceutical company
with a limited operating history. We must complete clinical studies and other development activity and receive regulatory
approval of a New Drug Application, or NDA, before commercial sales of a product can commence. The likelihood of success of our
business plan must be considered in light of the problems, substantial expenses, difficulties, complications and delays frequently
encountered in connection with developing and expanding early-stage businesses and the regulatory and competitive environment
in which we operate. Pharmaceutical product development is a highly speculative undertaking, involves a substantial degree of
risk and is a capital-intensive business.
Accordingly,
you should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies
in the early stages of development, especially clinical pharmaceutical companies such as ours. Potential investors should carefully
consider the risks and uncertainties that a company with a limited operating history will face. In particular, potential investors
should consider that we cannot assure you that we will be able to:
● attract and retain an experienced management and advisory team;
● raise sufficient funds in the capital markets to effectuate our business plan.
If
we cannot successfully execute any one of the foregoing, our business may not succeed and your investment will be adversely affected.
We
have incurred operating losses in each year since our inception and expect to continue to incur substantial losses for the foreseeable
future. We may never become profitable or, if we achieve profitability, be able to sustain profitability.
We expect to incur substantial expenses without
corresponding revenues unless and until we are able to obtain regulatory approval and successfully commercialize any of our drug
candidates. To date, we have not generated any revenue from our drug candidates and we expect to incur significant expense to
complete our preclinical and clinical program for our drug candidates in the United States and elsewhere. We may never
be able to obtain regulatory approval for the marketing of our drug candidates in any indication in the United States or internationally.
Even if we are able to commercialize our drug candidates, there can be no assurance that we will generate significant revenues
or ever achieve profitability. Our net losses for the years ended December 31, 2020 and December 31, 2019 were approximately $111,269,000
and $71,454,000, respectively. As of December 31, 2020, we had an accumulated deficit of approximately $304.1 million.
We
may elect to pursue FDA approval for lenabasum in other indications and for other drug candidates, which will result in significant
additional research and development expenses. As a result, we expect to continue to incur substantial losses for the foreseeable
future, and these losses will increase. We are uncertain when or if we will be able to achieve or sustain profitability. If we
achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Failure to become and
remain profitable would impair our ability to sustain operations and adversely affect the price of our common stock and our ability
to raise capital.
Our
cash or cash equivalents will only fund our operations for a limited time and we will need to raise additional capital to support
our development and commercialization efforts.
We
are currently operating at a loss and expect our operating costs will increase significantly as we incur further costs related
to preclinical development and the clinical trials for our drug candidates. As of December 31, 2020, we held cash and cash equivalents
of approximately $85.4 million.
On
January 26, 2018, we entered into the Cystic Fibrosis Program Related Investment Agreement (the “Investment Agreement”)
with the Cystic Fibrosis Foundation, a non-profit drug discovery and development corporation, pursuant to which we received a
development award for up to $25 million in funding (the “2018 CFF Award”) to support a Phase 2b clinical trial (the
“Phase 2b Clinical Trial”) of lenabasum in patients with cystic fibrosis, of which we received $22.5 million to date.
The remainder of the 2018 CFF Award is payable to us incrementally upon the achievement of the remaining milestones related to
the progress of the Phase 2b Clinical Trial, as set forth in the Investment Agreement and we expect to receive the remainder before
the end of the first half of 2021.
On
January 3, 2019, we entered into a strategic collaboration with Kaken Pharmaceutical Co., Ltd. (“Kaken”) for the development
and commercialization in Japan of lenabasum for the treatment of SSc and DM. Under the terms of the agreement, Kaken receives
an exclusive license to commercialize and market lenabasum in Japan for SSc and DM. Kaken made an upfront payment to us of $27
million. We are eligible to receive in addition up to $173 million upon achievement of certain regulatory, development and sales
milestones as well as double-digit royalties.
On
July 28, 2020, we entered into a Loan and Security Agreement (the “Loan Agreement”) with our subsidiary, Corbus Pharmaceuticals,
Inc., as borrower, us, as guarantor, each lender party thereto (the “Lenders”), K2 HealthVentures LLC (“K2HV”),
an unrelated third party, as administrative agent for the Lenders, and Ankura Trust Company, LLC, an unrelated third party, as
collateral agent for the Lenders, pursuant to which K2HV may provide us with term loans in an aggregate principal amount of up
to a $50,000,000.
On
August 7, 2020, we entered into an Open Market Sale AgreementSM (the “August 2020 Sale Agreement”) with
Jefferies LLC (“Jefferies”), as sales agent, pursuant to which we may issue and sell, from time to time, through Jefferies,
shares of our common stock. We will pay Jefferies a commission of 3.0% of the aggregate gross proceeds from each sale of common
stock and have agreed to provide Jefferies with customary indemnification and contribution rights. We have also agreed to reimburse
Jefferies for certain specified expenses. As of August 7, 2020, we were authorized to offer and sell up to $150 million of our
common stock pursuant to the August 2020 Sale Agreement. As of December 31, 2020 we have sold 15,546,151 shares of our common
stock for gross proceeds to us totaling $21,404,000, less issuance costs incurred of approximately $642,000.
We expect the cash and cash equivalents of
approximately $85.4 million at December 31, 2020, $58.9 million of proceeds raised from the August 2020 Sale Agreement
from January 1, 2021 through March 15, 2021, and the remaining $2.5 million of proceeds that we expect to receive under
the 2018 CFF Award before the end of the first half of 2021 to be sufficient to meet our operating and capital requirements
into 2024, based on planned expenditures.
We
may seek additional capital through a combination of private and public equity offerings, debt financings and strategic collaborations.
Debt financing, if obtained, may involve agreements that include covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our expenses and require that our assets secure such debt.
Equity
financing, if obtained, could result in dilution to our then existing stockholders and/or require such stockholders to waive certain
rights and preferences. If such financing is not available on satisfactory terms, or is not available at all, we may be required
to delay, scale back or eliminate the development of business opportunities and our operations and financial condition may be
materially adversely affected. We can provide no assurances that any additional sources of financing will be available to us on
favorable terms, if at all. In addition, if we are unable to secure sufficient capital to fund our operations, we may choose to
pursue, as an alternative, strategic collaborations that could require us to share commercial rights to our drug candidates with
third parties in ways that we currently do not intend or on terms that may not be favorable to us. If we choose to pursue additional
indications and/or geographies for our drug candidates or otherwise expand more rapidly than we presently anticipate we may also
need to raise additional capital sooner than expected.
Our
Loan and Security Agreement contains restrictive and financial covenants that may limit our operating flexibility.
Our
Loan Agreement with K2HV for up to $50,000,000 is secured by a lien covering substantially all of our personal property, excluding
intellectual property.
The
Loan Agreement contains customary representations, warranties and covenants. including restrictive covenants by the Company and
Borrower limiting additional indebtedness, liens, mergers and acquisitions, dispositions, investments, distributions, subordinated
debt, transactions with affiliates and fundamental changes. We therefore may not be able to engage in any of the foregoing types
of transactions unless we obtain the consent of K2 Health Ventures or prepay the outstanding amount under the Loan Agreement.
The Loan Agreement also contains certain financial covenants, including requirements to maintain unrestricted cash in the amount
of $10,000,000 or the amount of all principal loans outstanding if certain regulatory and developmental milestones do not occur.
The
restrictions and covenants in the Loan Agreement, as well as those contained in any future debt financing agreements that we may
enter into, may restrict our ability to finance our operations and engage in, expand or otherwise pursue our business activities
and strategies. Our ability to comply with these covenants and restrictions may be affected by events beyond our control, and
breaches of these covenants and restrictions could result in a default under the loan agreement and any future financing agreements
that we may enter into.
Risks
Related to Product Development, Regulatory Approval, Manufacturing and Commercialization
Our near-term success is substantially
dependent upon successful development of lenabasum, our first compound to enter clinical development, and our longer-term success
is dependent upon successful development of other compounds in our pipeline or that we may acquire. If we are unable to
generate revenues from lenabasum, or any other product candidates our ability to create stockholder value will be limited.
We
do not generate revenues from any FDA approved drug products. Our current business currently depends heavily on the successful
development, regulatory approval, and commercialization of lenabasum, which may never occur. Currently, our most advanced product
candidate is lenabasum, for which we have completed a Phase 3 double-blind, placebo-controlled study in systemic sclerosis and
a double-blind, placebo-controlled study Phase 2b study in cystic fibrosis, and have an ongoing double-blind, placebo-controlled
study Phase 3 study in DM. The Phase 3 study in systemic sclerosis and Phase 2 study in cystic fibrosis did not meet their primary
efficacy endpoints. There is no guarantee that our Phase 3 trial in DM will be successful or that, if positive, it would support
FDA approval of a New Drug Application for lenabasum for treatment of DM.
We are currently conducting pre-clinical
trials and testing for a number of CB1 inverse agonists and CB2 agonists. We note that most drug candidates never reach the
clinical development stage and even those that do have only a small chance of successfully completing clinical development and
gaining regulatory approval.
The
coronavirus COVID-19 pandemic or the widespread outbreak of any other communicable disease could materially and adversely affect
our business, financial condition and results of operations.
We face risks related to health epidemics
or outbreaks of communicable diseases, for example, the outbreak around the world of the highly transmissible and pathogenic
coronavirus, COVID-19. The outbreak of such communicable diseases, including COVID-19 and variants, could result in
a widespread health crisis that could adversely affect general commercial activity and the economies and financial markets of
many countries.
In December 2019, a novel strain of coronavirus,
COVID-19, was reported to have surfaced in Wuhan, China and on March 11, 2020 was declared a pandemic by the World Health Organization.
The extent to which COVID-19 may impact our preclinical and clinical trial operations will depend on future developments, which
are highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, the severity of COVID-19,
including its variants, and the effectiveness of actions to contain and treat COVID-19, including the effectiveness of vaccines
and the ability of governments and healthcare providers to administer vaccines quickly and effectively
To limit the spread of COVID-19, governments
have taken various actions from time to time including the issuance of travel restrictions, complete or partial prohibitions of
non-essential activities, restrictions or shutdowns of non-essential businesses, stay-at-home orders and social distancing guidelines.
Such events may result in a period of business, supply and drug product manufacturing disruption, and in reduced operations, any
of which could materially affect our business, financial condition and results of operations.
Some of our business partners and manufacturing
operations, including production of our commercial and clinical active pharmaceutical ingredient of lenabasum, are conducted
internationally and may be impacted by the global spread of COVID-19. Although we have not experienced any material disruptions
to these manufacturing operations or any material delays in shipping our commercial and clinical active pharmaceutical ingredient
to our clinical trial sites to date, the continued impact resulting from the COVID-19 outbreak where we have operations, or
if the COVID-19 outbreak in these areas were to increase in severity, and the measures taken by the governments
of countries affected could adversely affect our business, financial condition or results of operations by limiting our ability
to manufacture or ship materials or forcing temporary closure of facilities that we rely upon.
The global spread of COVID-19 has created
significant volatility and uncertainty in global financial markets and may materially affect us economically and such conditions
continue to persist. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess
or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability
to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction
resulting from the spread of COVID-19 could materially affect our business and the value of our common shares.
The continued spread of COVID-19 globally,
and the resulting travel restrictions in place by governments to help stop the spread of COVID-19, could adversely impact
our clinical trial operations, including the ability of our patients, principal investigators and site staff to travel to our
clinical trial sites, and our ability to recruit and retain principal investigators and site staff who, as healthcare providers,
may have heightened exposure to COVID-19 if an outbreak occurs in their geography. We cannot predict whether clinical testing
sites will withdraw from participation in any of our studies temporarily or permanently. In addition, if the patients enrolled
in our clinical trials become infected with COVID-19, we may have more adverse events and deaths in our clinical trials as a result.
We may also face difficulties enrolling patients in our clinical trials if the patient populations that are eligible for our clinical
trials are impacted by the coronavirus disease. Vulnerable patients, including patients with autoimmune disorders like the patients
enrolled in our clinical trials, may be at a higher risk of contracting COVID-19 and may experience more severe symptoms from
the disease, adversely affecting our chances for regulatory approval or requiring further clinical studies.
The COVID-19 outbreak may also affect the
ability of our staff and the parties we work with to carry out our non-clinical, clinical, and drug development and manufacturing
activities. We rely on clinical sites, investigators and other study staff, consultants, independent contractors, contract
research organizations and other third-party service providers to assist us in managing, monitoring and otherwise carrying out
our nonclinical studies and clinical trials. We also rely on consultants, independent contractors, contract development
and manufacturing organizations, and other third-party service providers to assist us in managing, monitoring and otherwise
carrying out our API production, formulation, and drug manufacturing activities. COVID-19 may affect the ability of any
of these external people, organizations, or companies to devote sufficient time and resources to our programs or to travel
to perform work for us.
Potential negative impacts of the COVID-19
outbreak on the conduct of current or future clinical studies include delays in gaining feedback from regulatory agencies,
starting new clinical studies, and recruiting subjects to studies that are enrolling. Although we have implemented remote data
monitoring procedures for our clinical trials, the potential negative impacts also include inability to have study visits at study
sites, incomplete collection of safety and efficacy data, and higher rates of drop-out of subjects from ongoing studies, delays
in site entry of study data into the data base, delays in monitoring of study data because of restricted physical access to study
sites, delays in site responses to queries, delays in data-base lock, delays in data analyses, delays in time to top-line data,
and delays in completing study reports. New or worsening COVID-19 disruptions or restrictions could have the potential to further
negatively impact our non-clinical studies, clinical trials, and drug manufacturing activities.
As a result of the factors described above,
the expected timeline for data readouts of our drug manufacturing activities, non-clinical studies, clinical trials,
and certain regulatory filings may be negatively impacted, which would adversely affect our ability to obtain regulatory approval
for and to commercialize our product candidates, increase our operating expenses and have a material adverse effect on our financial
results.
If
we are not able to obtain any required regulatory approvals for our drug candidates, we will not be able to commercialize our
product candidates and our ability to generate revenue will be limited.
Our
clinical trials may be unsuccessful, which would materially harm our business. Even if our ongoing clinical trials are successful,
we will be required to conduct additional clinical trials to establish the safety and efficacy of our drug candidates, before
a New Drug Application, or NDA, can be filed with the FDA for marketing approval of any of our drug candidates.
Clinical
testing is expensive, is difficult to design and implement, can take many years to complete and is uncertain as to outcome. Success
in early phases of pre-clinical and clinical trials does not ensure that later clinical trials will be successful, and interim
results of a clinical trial do not necessarily predict final results. A failure of one or more of our clinical trials can occur
at any stage of testing. We may experience numerous unforeseen events during, or as a result of, the clinical trial process that
could delay or prevent our ability to receive regulatory approval or commercialize our drug candidates. The research, testing,
manufacturing, labeling, packaging, storage, approval, sale, marketing, advertising and promotion, pricing, export, import and
distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States
and other countries, which regulations differ from country to country. We are not permitted to market any of our drug candidates
as prescription pharmaceutical products in the United States until we receive approval of an NDA from the FDA or in foreign markets
until we receive the requisite approval from comparable regulatory authorities in such countries. In the United States, the FDA
generally requires the completion of clinical trials of each drug to establish its safety and efficacy and extensive pharmaceutical
development to ensure its quality before an NDA is approved. Regulatory authorities in other jurisdictions impose similar requirements.
Of the large number of drugs in development, only a small percentage result in the submission of an NDA to the FDA and even fewer
are eventually approved for commercialization. We have never submitted an NDA to the FDA or any comparable applications to other
regulatory authorities. If our development efforts for our drug candidates, including regulatory approval, are not successful
for our planned indications, or if adequate demand for our drug candidates is not generated, our business will be harmed.
Receipt
of necessary regulatory approval is subject to a number of risks, including the following:
Failure
to obtain regulatory approval for any of our drug candidates for the foregoing or any other reasons will prevent us from commercializing
such product candidate as a prescription product, and our ability to generate revenue will be materially impaired. We cannot guarantee
that regulators will agree with the endpoints that we have chosen to use in our clinical trials, our assessment of the results
of our clinical trials or that such trials will be considered by regulators to have shown safety or efficacy of our product candidates.
The FDA, EMA and other regulators have substantial discretion in the approval process and may refuse to accept any application
or may decide that our data is insufficient for approval and require additional clinical trials, or pre-clinical or other studies.
In addition, varying interpretations of the data obtained from pre-clinical and clinical testing could delay, limit or prevent
regulatory approval of a product candidate.
We
have only limited experience in filing the applications necessary to gain regulatory approvals and expect to rely on consultants
and third party contract research organizations, or CROs, with expertise in this area to assist us in this process. Securing FDA
approval requires the submission of pre-clinical, clinical and/or pharmacokinetic data, information about product manufacturing
processes and inspection of facilities and supporting information to the FDA for each therapeutic indication to establish a product
candidate’s safety and efficacy for each indication. Our drug candidates may prove to have undesirable or unintended side
effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial
use with respect to one or all intended indications.
The
process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially
based upon, among other things, the type, complexity and novelty of the product candidates involved, the jurisdiction in which
regulatory approval is sought and the substantial discretion of regulatory authorities. Changes in the regulatory approval policy
during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review
for a submitted product application may cause delays in the approval or rejection of an application. Regulatory approval obtained
in one jurisdiction does not necessarily mean that a product candidate will receive regulatory approval in all jurisdictions in
which we may seek approval, but the failure to obtain approval in one jurisdiction may negatively impact our ability to seek approval
in a different jurisdiction. Failure to obtain regulatory marketing approval for any of our drug candidates in any indication
will prevent us from commercializing such product candidates, and our ability to generate revenue will be materially impaired.
Clinical
drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials
may not be predictive of future trial results.
Clinical testing is expensive and can take
many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process.
Our drug candidates are in various stages of preclinical and clinical testing. Preclinical tests are performed at an early
stage of a product's development and provide information about a drug candidate's safety and effectiveness on laboratory animals.
Preclinical tests can last years. If a product passes its preclinical tests satisfactorily and we determine that further development
is warranted, we would file an IND application for the product with the FDA, and if the FDA gives its approval, we would begin
Phase 1 clinical tests. If Phase 1 test results are satisfactory and the FDA gives its approval, we can begin Phase 2
clinical tests. If Phase 2 test results are satisfactory and the FDA gives its approval, we can begin Phase 3 pivotal
studies. Once clinical testing is completed and a BLA or NDA is filed with the FDA, it may take more than a year to receive FDA
approval.
The results of pre-clinical studies and early
clinical trials may not be predictive of the results of later-stage clinical trials. We cannot assure you that the FDA will view
the results as we do or that any future trials of our drug candidates will achieve positive results. Product candidates in later
stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through pre-clinical
studies and initial clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in
advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials.
Any future clinical trial results for our drug candidates may not be successful.
In all cases, we must show that a drug
candidate is both safe and effective before the FDA, or drug approval agencies of other countries where we intend to sell the
product, will approve it for sale. Our research and testing programs must comply with drug approval requirements both in the United
States and in other countries, since we are developing our drug candidates with the intention to, or could later decide to, commercialize
them both in the U.S. and abroad. A product may fail for safety or effectiveness at any stage of the testing process. A major
risk we face is the possibility that none of our products under development will come through the testing process to final approval
for sale, with the result that we cannot derive any commercial revenue from them after investing significant amounts of capital
in multiple stages of preclinical and clinical testing. In addition, a number of factors could contribute to a lack of favorable
safety and efficacy results for our drug candidates. For example, our trials could result in increased variability due
to varying site characteristics, such as local standards of care, differences in evaluation period and surgical technique, and
due to varying patient characteristics, including demographic factors and health status.
Even
if we receive regulatory approval for our drug candidates, we still may not be able to successfully commercialize any of our products,
and the revenue that we generate from sales, if any, may be limited.
If
approved for marketing, the commercial success of our drug candidates will depend upon their acceptance by the medical community,
including physicians, patients and health care payors. The degree of market acceptance of our drug candidates will depend on a
number of factors, including:
■ demonstration of clinical safety and efficacy;
■ relative convenience, pill burden and ease of administration;
■ the prevalence and severity of any adverse effects;
■ pricing and cost-effectiveness;
■ limitations or warnings contained in FDA-approved labeling;
If
any of our drug candidates are approved, but do not achieve an adequate level of acceptance by physicians, health care payors
and patients, we may not generate sufficient revenue and we may not be able to achieve or sustain profitability. Our efforts to
educate the medical community and third-party payors on the benefits of our drug candidates may require significant resources
and may never be successful.
In
addition, even if we obtain regulatory approvals, the timing or scope of any approvals may prohibit or reduce our ability to commercialize
our drug candidates successfully. For example, if the approval process takes too long, we may miss market opportunities and give
other companies the ability to develop competing products or establish market dominance. Any regulatory approval we ultimately
obtain may be limited or subject to restrictions or post-approval commitments that render our drug candidates not commercially
viable. For example, regulatory authorities may approve our drug candidates for fewer or more limited indications than we request,
may not approve the prices we intend to charge for our drug candidates, may grant approval contingent on the performance of costly
post-marketing clinical trials, or may approve our drug candidates with labels that do not include the labeling claims necessary
or desirable for the successful commercialization of a particular indication. Further, the FDA or comparable foreign regulatory
authorities may place conditions on approvals, such as risk management plans and a Risk Evaluation and Mitigation Strategy, or
REMS, to assure the safe use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposed
REMS; the FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician
communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk
minimization tools. The FDA may also require a REMS for an approved product when new safety information emerges. Any of these
limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of our
drug candidates. Moreover, product approvals may be withdrawn for non-compliance with regulatory standards or if problems occur
following the initial marketing of the product. Any of the foregoing scenarios could materially harm the commercial success of
our drug candidates.
Even
if we obtain marketing approval for our drug candidates, we will be subject to ongoing obligations and continued regulatory review,
which may result in significant additional expense. Additionally, our drug candidates could be subject to labeling and other restrictions
and withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience
unanticipated problems with our drug candidates.
Even
if we obtain United States regulatory approval of our drug candidates for an indication, the FDA may still impose significant
restrictions on their indicated uses or marketing or the conditions of approval, or impose ongoing requirements for potentially
costly and time-consuming post-approval studies, including Phase 4 clinical trials, and post-market surveillance to monitor safety
and efficacy. Our drug candidates will also be subject to ongoing regulatory requirements governing the manufacturing, labeling,
packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of adverse events and
other post-market information. These requirements include registration with the FDA, continued compliance with current Good Clinical
Practices regulations, or cGCPs, for any clinical trials that we conduct post-approval, continued compliance with the CSA and
ongoing review by the DEA. In addition, manufacturers of drug products and their facilities are subject to continual review and
periodic inspections by the FDA and other regulatory authorities for compliance with current Good Manufacturing Practices, or
cGMP, requirements relating to quality control, quality assurance and corresponding maintenance of records and documents.
With
respect to sales and marketing activities by us or any future partner, advertising and promotional materials must comply with
FDA rules in addition to other applicable federal, state and local laws in the United States and similar legal requirements in
other countries. In the United States, the distribution of product samples to physicians must comply with the requirements of
the U.S. Prescription Drug Marketing Act. Application holders must obtain FDA approval for product and manufacturing changes,
depending on the nature of the change. We may also be subject, directly or indirectly through our customers and partners, to various
fraud and abuse laws, including, without limitation, the U.S. Anti-Kickback Statute, U.S. False Claims Act, and similar state
laws, which impact, among other things, our proposed sales, marketing, and scientific/educational grant programs. If we participate
in the U.S. Medicaid Drug Rebate Program, the Federal Supply Schedule of the U.S. Department of Veterans Affairs, or other government
drug programs, we will be subject to complex laws and regulations regarding reporting and payment obligations. All of these activities
are also potentially subject to U.S. federal and state consumer protection and unfair competition laws. Similar requirements exist
in many of these areas in other countries.
In
addition, if any of our drug candidates are approved for an indication, our product labeling, advertising and promotion would
be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that
may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA
as reflected in the product’s approved labeling. If we receive marketing approval for any of our drug candidates, physicians
may nevertheless legally prescribe such products to their patients in a manner that is inconsistent with the approved label. However,
if we are found to have promoted such off-label uses, we may become subject to significant liability and government fines. The
federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined
several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees of
permanent injunctions under which specified promotional conduct is changed or curtailed.
If
we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity
or frequency or problems with the facility where the product is manufactured, or if we or our manufacturers fail to comply with
applicable regulatory requirements, we may be subject to the following administrative or judicial sanctions:
■ issuance of warning letters or untitled letters;
■ suspension of any ongoing clinical trials;
The
occurrence of any event or penalty described above may inhibit our ability to commercialize our drug candidates and generate revenue.
Adverse regulatory action, whether pre- or post-approval, can also potentially lead to product liability claims and increase our
product liability exposure.
The
collaboration and license agreement, or the Collaboration Agreement, with Kaken Pharmaceuticals Co., Ltd., or Kaken, is important
to our business. If we or Kaken fail to adequately perform under the Collaboration Agreement, or if we or Kaken terminate the
Collaboration Agreement, the development and commercialization of lenabasum for the treatment of SSc and DM in Japan would be
delayed or terminated and our business would be adversely affected.
On
January 3, 2019, we entered into the Collaboration Agreement with Kaken, pursuant to which we granted to Kaken an exclusive license
to commercialize and market lenabasum for the prevention and treatment of DM and SSc in Japan. Our ability to generate revenue
under the Collaboration Agreement will depend in large part on our success in further clinical development of lenabasum and Kaken’s
success in achieving regulatory approval for, and commercializing lenabasum, in Japan. Such efforts are subject to significant
uncertainty. We have no control over the resources, time and effort that Kaken may devote to the commercialization of lenabasum.
Any of several events or factors could have a material adverse effect on our ability to generate revenue from Kaken’s commercialization
of lenabasum in Japan. For example, Kaken:
In
addition, pursuant to the Collaboration Agreement, we and Kaken have agreed to negotiate in good faith to enter into a supply
agreement and a quality agreement. There can be no assurance that we will be able to reach mutually agreeable terms on such agreements
with Kaken, and the absence of agreement on such terms would prevent us from gaining the expected benefit of the Collaboration
Agreement.
Further,
we and Kaken agreed to provide mutual indemnification against losses in connection with third-party claims arising out of breaches
of or inaccuracies in the Collaboration Agreement, gross negligence or willful misconduct, and the development or commercialization
of lenabasum pursuant to the Collaboration Agreement. Conflicts may arise in connection with these indemnification obligations.
After
a specified period of time, Kaken may unilaterally terminate the Collaboration Agreement on 180 days’ prior written notice
without any reason and without any further commitment. Kaken may also terminate in the event of certain safety concerns and clinical
failures, and either we or Kaken may terminate in the case of the other party’s material breach or insolvency. Termination
of the Collaboration Agreement could cause significant delays in our product candidate development and commercialization efforts,
which could prevent us from commercializing lenabasum without first expanding our internal capabilities or entering into another
agreement with a third party. Any suitable alternative collaboration or license agreement would take considerable time to negotiate
and could also be on less favorable terms to us.
We
have entered into, and may in the future enter into, collaboration agreements for the licensing, development and ultimate commercialization
of some of our drug candidates. In such cases, we will depend greatly on our third-party collaborators to license, develop and
commercialize such drug candidates, and they may not meet our expectations.
We
may enter into further co-development and commercialization partnerships for our drug candidates where appropriate. The process
of identifying collaborators and negotiating collaboration agreements for the licensing, development and ultimate commercialization
of some of our drug candidates may cause delays and increased costs. We may not be able to enter into collaboration agreements
on terms favorable to us or at all. Furthermore, some of those agreements may give substantial responsibility over our drug candidates
to the collaborator. Some collaborators may be unable or unwilling to devote sufficient resources to develop our drug candidates
as their agreements require. They often face business risks similar to ours, and this could interfere with their efforts. Also,
collaborators may choose to devote their resources to products that compete with ours. If a collaborator does not successfully
develop any one of our products, we will need to find another collaborator to do so. The success of our search for a new collaborator
will depend on our legal right to do so at the time and whether the product remains commercially viable.
If
we enter into collaboration agreements for one or more of our drug candidates, the success of such drug candidates will depend
in great part upon our and our collaborators’ success in promoting them as superior to other treatment alternatives. We
believe that our drug candidates can be proven to offer disease treatment with notable advantages over drugs in terms of patient
compliance and effectiveness. However, there can be no assurance that we will be able to prove these advantages or that the advantages
will be sufficient to support the successful commercialization of our drug candidates.
We
currently have a limited sales and marketing organization. If we are unable to secure a sales and marketing partner or establish
satisfactory sales and marketing capabilities, we may not successfully commercialize our drug candidates.
At present, we have a team of three employees
in the commercial organization in order to commercialize products that are approved for commercial sales in the United States.
We must either collaborate with third parties that have such commercial infrastructure or continue to develop our own sales
and marketing infrastructure. If we are not successful in entering into appropriate collaboration arrangements, or recruiting
sales and marketing personnel or in building a sales and marketing infrastructure, we will have difficulty successfully commercializing
our drug candidates, which would adversely affect our business, operating results and financial condition.
We
may not be able to enter into collaboration agreements on terms acceptable to us or at all. In addition, even if we enter into
such relationships, we may have limited or no control over the sales, marketing and distribution activities of these third parties.
Our future revenues may depend heavily on the success of the efforts of these third parties. If we elect to establish a sales
and marketing infrastructure we may not realize a positive return on this investment. In addition, we will have to compete with
established and well-funded pharmaceutical and biotechnology companies to recruit, hire, train and retain sales and marketing
personnel. Factors that may inhibit our efforts to commercialize our drug candidates without strategic partners or licensees include:
We
face competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete
effectively.
The
biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change.
We have competitors in a number of jurisdictions, many of which have substantially greater name recognition, commercial infrastructures
and financial, technical and personnel resources than we have. Established competitors may invest heavily to quickly discover
and develop novel compounds that could make our drug candidates obsolete or uneconomical. Any new product that competes with an
approved product may need to demonstrate compelling advantages in efficacy, cost, convenience, tolerability and safety to be commercially
successful. Other competitive factors, including generic competition, could force us to lower prices or could result in reduced
sales. In addition, new products developed by others could emerge as competitors to our drug candidates. If we are not able to
compete effectively against our current and future competitors, our business will not grow and our financial condition and operations
will suffer.
Recently
enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our
drug candidates and affect the prices we may obtain.
In
the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed
changes regarding the healthcare system that could prevent or delay marketing approval for our drug candidates, restrict or regulate
post-approval activities and affect our ability to profitably sell our drug candidates. Legislative and regulatory proposals have
been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We do
not know whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will
be changed, or what the impact of such changes on the marketing approvals of our drug candidates, if any, may be. In addition,
increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval,
as well as subject us to more stringent product labeling and post-marketing testing and other requirements.
In
the United States, under the Medicare Modernization Act, or MMA, Medicare Part D provides coverage to the elderly and disabled
for outpatient prescription drugs by approving and subsidizing prescription drug plans offered by private insurers. The MMA also
authorizes Medicare Part D prescription drug plans to use formularies where they can limit the number of drugs that will be covered
in any therapeutic class. The Part D plans use their formulary leverage to negotiate rebates and other price concessions from
drug manufacturers. Also under the MMA, Medicare Part B provides coverage to the elderly and disabled for physician-administered
drugs on the basis of the drug’s average sales price, a price that is calculated according to regulatory requirements and
that the manufacturer reports to Medicare quarterly.
Both
Congress and the Centers for Medicare & Medicaid Services (CMS), the agency that administers the Medicare program, from time
to time consider legislation, regulations, or other initiatives to reduce drug costs under Medicare Parts B and D. For example,
under the 2010 Affordable Care Act, drug manufacturers are required to provide a 50% discount on prescriptions for branded drugs
filled while the beneficiary is in the Medicare Part D coverage gap, also known as the “donut hole.” There have been
legislative proposals to repeal the “non-interference” provision of the MMA to allow CMS to leverage the Medicare
market share to negotiate larger Part D rebates. Further cost reduction efforts could decrease the coverage and price that we
receive for our drug candidates and could seriously harm our business. Private payors often follow Medicare coverage policy and
payment limitations in setting their own reimbursement rates, and any reduction in reimbursement under the Medicare program may
result in a similar reduction in payments from private payors.
The
2010 Affordable Care Act is intended to broaden access to health insurance and reduce or constrain the growth of healthcare spending.
Further, the Affordable Care Act imposes a significant annual fee on companies that manufacture or import branded prescription
drug products. It also increased the amount of the rebates drug manufacturers must pay to state Medicaid programs, required that
Medicaid rebates be paid on managed Medicaid utilization, and increased the additional rebate on “line extensions”
(such as extended release formulations) of solid oral dosage forms of branded products. The law also contains substantial provisions
affecting fraud and abuse compliance and transparency, which may require us to modify our business practices with healthcare practitioners,
and incur substantial costs to ensure compliance.
In
addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. For example,
the Budget Control Act of 2011 included, among other things, provisions that have led to 2% across-the-board reductions in Medicare
payment amounts. Several states have adopted or are considering adopting laws that require pharmaceutical companies to provide
notice prior to raising prices and to justify price increases. We expect that additional healthcare reform measures will be adopted
in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services,
and in turn could significantly reduce the projected value of certain development projects and reduce our profitability.
Our
future growth depends, in part, on our ability to enter into and succeed in markets outside of the United States, where we may
choose to rely on third party collaborations and will be subject to additional regulatory and commercial burdens, risks and other
uncertainties.
Our
future profitability will depend, in part, on our ability to gain approval of and commercialize our drug candidates in non-U.S.
markets. In some or all of these non-U.S. markets, we intend to enter into licensing and contractual collaborations with third
parties, such as Kaken, to handle some or all of the tasks and responsibilities necessary to succeed. Our activities in non-U.S.
markets are subject to additional risks and uncertainties, including:
■ obtaining favorable pricing and reimbursement;
■ import or export licensing requirements;
■ longer accounts receivable collection times;
■ longer lead times for shipping;
■ language barriers for technical training;
■ reduced protection of intellectual property rights in some foreign countries;
■ foreign currency exchange rate fluctuations; and
International
sales of our drug candidates could also be adversely affected by the imposition of governmental controls, political and economic
instability, and trade restrictions and changes in tariffs, any of which may adversely affect our results of operations.
If
we market our drug candidates in a manner that violates healthcare fraud and abuse laws, or if we violate government price reporting
laws, we may be subject to civil or criminal penalties.
The
FDA enforces laws and regulations which require that the promotion of pharmaceutical products be consistent with the approved
prescribing information. While physicians may prescribe an approved product for a so-called “off label” use, it is
unlawful for a pharmaceutical company to promote its products in a manner that is inconsistent with its approved label and any
company which engages in such conduct may be subject to significant liability. Similarly, industry codes in the European Union
and other foreign jurisdictions prohibit companies from engaging in off-label promotion and regulatory agencies in various countries
enforce violations of the code with civil penalties. While we intend to ensure that our promotional materials are consistent with
our label, regulatory agencies may disagree with our assessment and may issue untitled letters, warning letters or may institute
other civil or criminal enforcement proceedings. In addition to FDA restrictions on marketing of pharmaceutical products, several
other types of state and federal healthcare fraud and abuse laws have been applied in recent years to restrict certain marketing
practices in the pharmaceutical industry. These laws include the U.S. Anti-Kickback Statute, U.S. False Claims Act and similar
state laws. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business
activities could be subject to challenge under one or more of these laws.
The
U.S. Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration
to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item
or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted
broadly to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary
managers on the other. Although there are several statutory exemptions and regulatory safe harbors protecting certain common activities
from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce
prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our
practices may not, in all cases, meet all of the criteria for safe harbor protection from anti-kickback liability. Moreover, recent
health care reform legislation has strengthened these laws. For example, the Health Care Reform Law, among other things, amends
the intent requirement of the U.S. Anti-Kickback Statute and criminal health care fraud statutes; a person or entity no longer
needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Health Care Reform Law provides
that the government may assert that a claim including items or services resulting from a violation of the U.S. Anti-Kickback Statute
constitutes a false or fraudulent claim for purposes of the U.S. False Claims Act. Federal false claims laws prohibit any person
from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making,
or causing to be made, a false statement to get a false claim paid.
Over
the past few years, pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of alleged
promotional and marketing activities, such as: allegedly providing free trips, free goods, sham consulting fees and grants and
other monetary benefits to prescribers; reporting to pricing services inflated average wholesale prices that were then used by
federal programs to set reimbursement rates; engaging in off-label promotion that caused claims to be submitted to Medicare or
Medicaid for non-covered, off-label uses; and submitting inflated best price information to the Medicaid Rebate Program to reduce
liability for Medicaid rebates. Most states also have statutes or regulations similar to the U.S. Anti-Kickback Statute and the
U.S. False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states,
apply regardless of the payor. Sanctions under these federal and state laws may include substantial civil monetary penalties,
exclusion of a manufacturer’s products from reimbursement under government programs, substantial criminal fines and imprisonment.
We
are, and will be, completely dependent on third parties to manufacture our drug candidates, and our commercialization of our drug
candidates could be halted, delayed or made less profitable if those third parties fail to obtain manufacturing approval from
the FDA or comparable foreign regulatory authorities, fail to provide us with sufficient quantities of our drug candidates or
fail to do so at acceptable quality levels or prices.
We
do not currently have, nor do we plan to acquire, the capability or infrastructure to manufacture the active pharmaceutical ingredients
of our drug candidates, or the finished drug products, for use in our clinical trials or for commercial product, if any. As a
result, we will be obligated to rely on contract manufacturers if and when our drug candidates are approved for commercialization.
We
currently rely on a single foreign supplier for manufacturing the starting chemical intermediates and finished bulk drug product
for lenabasum. We also rely on a single foreign supplier for the manufacturing of the finished lenabasum capsules. The facilities
used by our two contract manufacturers to manufacture lenabasum must be approved by the FDA pursuant to inspections that will
be conducted after we submit our NDAs to the FDA. We do not control the manufacturing processes of, and are completely dependent
on, our two contract manufacturing partners for compliance with cGMPs for manufacture of all active drug substances and finished
drug products. These cGMP regulations cover all aspects of the manufacturing, testing, quality control and record keeping relating
to our drug candidates. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications
and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain regulatory approval
for their manufacturing facilities. If the FDA or a comparable foreign regulatory authority does not approve these facilities
for the manufacture of lenabasum or our other product candidates or if it withdraws any such approval in the future, we may need
to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval
for or market our drug candidates, if approved.
Our
contract manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign
agencies for compliance with cGMPs and similar regulatory requirements. We will not have control over our contract manufacturers’
compliance with these regulations and standards. Failure by any of our contract manufacturers to comply with applicable regulations
could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure to grant approval to market
our drug candidates, delays, suspensions or withdrawals of approvals, operating restrictions and criminal prosecutions, any of
which could significantly and adversely affect our business. In addition, we will not have control over the ability of our contract
manufacturers to maintain adequate quality control, quality assurance and qualified personnel. Failure by our contract manufacturers
to comply with or maintain any of these standards could adversely affect our ability to develop, obtain regulatory approval for
or market our drug candidates.
If
for any reason, these third parties are unable or unwilling to perform, we may not be able to terminate our agreements with them,
and we may not be able to locate alternative manufacturers or formulators or enter into favorable agreements with them and we
cannot be certain that any such third parties will have the manufacturing capacity to meet future requirements. If these manufacturers
or any alternate manufacturer of finished drug product experiences any significant difficulties in its respective manufacturing
processes for our active pharmaceutical ingredient, or API, or our finished products or should cease doing business with us, we
could experience significant interruptions in the supply of our drug candidates or may not be able to create a supply of our drug
candidates at all. Were we to encounter manufacturing issues, our ability to produce a sufficient supply of our drug candidates
might be negatively affected. Our inability to coordinate the efforts of our third party manufacturing partners, or the lack of
capacity available at our third party manufacturing partners, could impair our ability to supply our drug candidates at required