ITEM 1A. RISK FACTORS
Our
business is subject to various risks, including those described below. You should consider the following risk factors, together
with all of the other information included in this report, which could materially adversely affect our proposed operations, our
business prospects, and financial condition, and the value of an investment in our business. There may be other factors that are
not mentioned here or of which we are not presently aware that could also affect our business operations and prospects.
Risks
Related to Our Business Operations and Capital Requirements
We
have incurred operating losses since inception, and we do not know if or when we will attain profitability.
Our
total operating losses for the fiscal years ended December 31, 2020 and 2019 were $26.4 million and $38.9 million, respectively,
and we had an accumulated deficit of $294.1 million as of December 31, 2020. Since inception, we have incurred significant operating
losses and have funded our operations primarily through sales of our equity securities and the equity securities of former subsidiaries,
receipt of research grants, royalties on product sales, license revenues, sales of research products, and revenues from subscription
fees and advertising revenue from database products of a former subsidiary. Substantially all of our losses have resulted from
expenses incurred in connection with our research and development programs and from general and administrative costs associated
with our operations. All of our product candidates will require substantial additional development time and resources before we
would be able to apply for or receive regulatory approvals. We expect to continue to incur losses for the foreseeable future,
and we anticipate these losses will increase substantially as we continue our development of, seek regulatory approval for and
potentially commercialize any of our product candidates and seek to identify, assess, acquire, in-license or develop additional
product candidates.
To
become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant
revenue. This will require us to be successful in a range of challenging activities, including completing clinical trials and
preclinical trials of our product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing
and selling any products for which we may obtain regulatory approval. In addition, we are attempting to develop new medical products
and technology. We may never succeed in these activities and, even if we do, may never generate revenues that are significant
enough to achieve profitability.
We
will continue to spend a substantial amount of our capital on research and development, but we might not succeed in developing
products and technologies that are useful in medicine.
We
are attempting to develop new medical products and technology. These new products and technologies might not prove to be safe
and efficacious in the human medical applications for which they are being developed. Our research and development activities
are costly, time consuming, and their results are uncertain. We incurred research and development expenses amounting to approximately
$12.3 million and $17.9 million during the fiscal years ended December 31, 2020 and 2019, respectively. If we successfully
develop a new technology or product, refinement of the new technology or product and definition of the practical applications
and limitations of the technology or product may take years and require large sums of money. Clinical trials of new therapeutic
products, particularly those products that are regulated as biologics, drugs, or devices, are very expensive and take years to
complete. We may not have the financial resources to fund clinical trials on our own and we may have to enter into licensing or
collaborative arrangements with others. Any such arrangements may be dilutive to our ownership or economic interest in the products
we develop, and we might have to accept royalty payments on product sales rather than receiving the gross revenues from product
sales. In addition, we may discontinue one or more of the research or product development programs. Our product and technology
development programs may be delayed or discontinued should adequate funding on acceptable terms not be available.
The
amount and pace of research and development work that we can do or sponsor, and our ability to commence and complete clinical
trials required to obtain regulatory approval to market our therapeutic and medical device products, depends upon the amount of
funds we have.
At
December 31, 2020, we had $41.6 million of cash, cash equivalents and marketable equity securities. There can be no assurance
that we will be able to raise additional funds on favorable terms or at all, or that any funds raised will be sufficient to permit
us to develop and market our products and technology, if and when approved. Our ability to raise additional funds may be adversely
impacted by deteriorating global economic conditions and the disruptions to and volatility in the credit and financial markets
in the United States and worldwide resulting from the ongoing COVID-19 pandemic. Unless we are able to generate sufficient revenue
or raise additional funds when needed, it is likely that we will be unable to continue our planned activities, even if we make
progress in our research and development projects. We may have to postpone or limit the pace of our research and development work
and planned clinical trials of our product candidates unless our cash resources increase through a growth in revenues, royalties,
license fees, equity financings or borrowings.
We
will need to issue additional equity or debt securities in order to raise additional capital needed to pay our operating expenses.
We
expect to continue to incur substantial research and product development expenses and will need to raise additional capital to
pay operating expenses until we are able to generate sufficient revenues from product sales, royalties and license fees. Our ability
to raise additional equity or debt capital will depend, not only on progress made in developing new products and technologies,
but also on access to capital and conditions in the capital markets. We believe that our cash, cash equivalents and marketable
securities as of December 31, 2020 will be sufficient to fund our planned operations for at least the next 12 months. We have
based these estimates on assumptions that may prove to be wrong, and we may use our capital resources sooner than we currently
expect. Our operating plans and other demands on our cash resources may change as a result of many factors currently unknown to
us, and we may need to seek additional funds sooner than planned. Any equity capital raise could result in the dilution of the
interests of shareholders or may otherwise limit our ability to finance further in the future, which may negatively impact our
business and operations. Any debt capital financing may involve covenants that restrict our operations, including limitations
on additional borrowing and on the use of our assets. If we raise capital through licensing arrangements, it may be necessary
to grant licenses on terms that are not favorable to us. There can be no assurance that we will be able to raise capital on favorable
terms, or at all, or at times and in amounts needed to successfully finance product development, clinical trials, and general
operations.
Lawsuits
have been filed and other lawsuits may be filed against Lineage and certain members of the Lineage and Asterias Biotherapeutics,
Inc. (“Asterias”) boards of directors relating to our acquisition of Asterias (the “Asterias Merger”).
An adverse ruling in any such lawsuit may result in additional payments and costs.
A
putative class action lawsuit alleging breach of fiduciary duties in connection with the Asterias Merger is pending in the Delaware
Chancery Court. As of December 31, 2020, the defendants are certain former members of Asterias’ board of directors and Lineage.
The complaint alleges that the merger process was conflicted, that the consideration was inadequate, and that the proxy statement
filed by Asterias was misleading. The complaint seeks, among other things, certification of a class, rescission of the merger
or monetary damages, and attorneys’ fees and costs.
The
defendants specifically deny all allegations in the litigation and intend to defend it vigorously. However, any adverse ruling
in this case could result in additional payments. Additional lawsuits arising out of or relating to the merger agreement and/or
the merger may be filed in the future.
Changes
in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business,
cash flow, financial condition or results of operations.
New
income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could adversely
affect our business operations and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances
could be interpreted, changed, modified or applied adversely to us. For example, the 2017 Tax Act, enacted many significant changes
to the U.S. tax laws. Future guidance from the Internal Revenue Service and other tax authorities with respect to the 2017 Tax
Act may affect us, and certain aspects of the 2017 Tax Act could be repealed or modified in future legislation. For example, the
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Consolidated Appropriations Act, 2021
(CA) modified certain provisions of the 2017 Tax Act. In addition, it is uncertain if and to what extent various states will conform
to the 2017 Tax Act, the CARES Act, or any newly enacted federal tax legislation. Changes in corporate tax rates, the realization
of net deferred tax assets relating to our operations, the taxation of foreign earnings, and the deductibility of expenses under
the 2017 Tax Act or future reform legislation could have a material impact on the value of our deferred tax assets, could result
in significant one-time charges, and could increase our future U.S. tax expense.
Our
ability to use net operating losses and other tax attributes to offset future taxable income or taxes may be subject to limitations.
As
of December 31, 2020, we had net operating loss (“NOL”) carryforwards for U.S. federal and state tax purposes of approximately
$169.9 million and $118.6 million, respectively. Included in these amounts are NOLs acquired through the merger with Asterias
(see below). A portion of the federal and state NOL carryforwards will begin to expire, if not utilized, in varying amounts between
2027 and 2037. NOLs that expire unused will be unavailable to offset future income tax liabilities. Under federal income tax law,
federal NOLs incurred in tax years beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility
of such NOLs in tax years beginning after December 31, 2020, is limited to 80% of taxable income. It is uncertain if and to what
extent various states that we may operate in will conform to the federal tax law. In addition, under Sections 382 and 383 of the
Internal Revenue Code of 1986, as amended (the “IRC”), and corresponding provisions of state law, if a corporation
undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity
ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change
tax attributes to offset its post-change income or taxes may be limited. We may experience ownership changes in the future as
a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change occurs
and our ability to use our NOL carryforwards is materially limited, it would harm our future operating results by effectively
increasing our future tax obligations. In addition, at the state level, there may be periods during which the use of net operating
loss carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. For example,
in 2020 California enacted A.B. 85 which imposed limits on the usability of California state net operating losses and certain
tax credits in tax years beginning after 2019 and before 2023.
As
part of the merger with Asterias, we acquired various tax attribute carryforwards including federal and California NOLs of $52.8
million and $41.9 million, respectively, as well as California research and development credits of $2.4 million. As a result of
the merger, Asterias incurred an ownership change under Section 382 of the IRC, which places annual limits on the amount of these
NOLs that are available to offset income. Because of the annual limitation, the total amount of these NOLs is not immediately
available to offset future income. The California research and development credit of $2.4 million has no expiration date.
Taxing
authorities could reallocate our taxable income among our subsidiaries, which could increase our overall tax liability.
We
are organized in the United States, and currently have subsidiaries in Israel and Singapore. If we succeed in growing our business,
we expect to conduct increased operations through subsidiaries in various tax jurisdictions pursuant to transfer pricing arrangements
between us and our subsidiaries. If two or more affiliated companies are located in different countries, the tax laws or regulations
of each country generally will require that such arrangements be priced the same as those between unrelated companies dealing
at arm’s length and that appropriate documentation is maintained to support the value of such arrangements. Our transfer
pricing policies were formulated with the assistance of third-party experts. We are in the process of obtaining a formal transfer
pricing report. However, after we receive such report, we do not intend to amend our returns for prior years. Whether we obtain
a formal transfer pricing study with outside experts or not, our transfer pricing procedures will not be binding on applicable
tax authorities.
If
tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arm’s length
transactions, they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer
prices, which could result in a higher tax liability to us. In addition, if the country from which the income is reallocated does
not agree with the reallocation, both countries could tax the same income, resulting in double taxation. If tax authorities were
to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess interest and penalties, it would
increase our tax liability, which could adversely affect our financial condition, results of operations and cash flows.
Our
business and operations could suffer in the event of system failures.
Despite
the implementation of security measures, our internal computer systems and those of our contractors and consultants are vulnerable
to damage from computer viruses, unauthorized access, natural disasters including earthquakes and tsunamis, terrorism, war, and
telecommunication and electrical failures. Such events could cause significant interruption of our operations and development
programs. For example, the loss of data for our product candidates could result in delays in our regulatory filings and development
efforts and significantly increase our costs. To the extent that any disruption or security breach was to result in a loss of
or damage to our data, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the
development of our product candidates could be delayed.
In
addition, our product candidates are manufactured by starting with cells that are stored in a cryopreserved master cell bank.
While we believe we have adequate backup should any cell bank be lost in a catastrophic event, we or our third-party suppliers
and manufacturers could lose multiple cell banks, which would severely affect our manufacturing activities. We cannot assure you
that any stability or other issues relating to the manufacture of any of our product candidates or products will not occur in
the future. Any delay or interruption in the supply of clinical trial supplies could delay the completion of planned clinical
trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require
us to commence new clinical trials at additional expense or terminate clinical trials completely. Any adverse developments affecting
clinical or commercial manufacturing of our product candidates or products may result in shipment delays, inventory shortages,
lot failures, product withdrawals or recalls or other interruptions in the supply of our product candidates or products. Accordingly,
failures or difficulties faced at any level of our supply chain could adversely affect our business and delay or impede the development
and commercialization of any of our product candidates or products and could have an adverse effect on our business, prospects,
financial condition and results of operations.
Significant
disruptions of information technology systems or data security breaches could adversely affect our business.
We
are increasingly dependent on information technology systems and infrastructure to operate our business. In the ordinary course
of our business, we collect, store, process and transmit large amounts of confidential information, including intellectual property,
proprietary business information and personal information. It is critical that we do so in a secure manner to maintain the confidentiality,
integrity and availability of such information. We have also outsourced some of our operations (including parts of our information
technology infrastructure) to a number of third-party vendors who may have, or could gain, access to our confidential information.
In addition, many of those third parties, in turn, subcontract or outsource some of their responsibilities to third parties.
Our
information technology systems are large and complex and store large amounts of confidential information. The size and complexity
of these systems make them potentially vulnerable to service interruptions or to security breaches from inadvertent or intentional
actions by our employees, third party vendors and/or business partners, or from cyber-attacks by malicious third parties. Attacks
of this nature are increasing in frequency, persistence, sophistication and intensity, and are being conducted by sophisticated
and organized groups and individuals with a wide range of motives (including, but not limited to, industrial espionage) and expertise,
including organized criminal groups, “hacktivists,” nation states and others. In addition to the extraction of important
information, such attacks could include the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering
and other means to affect service reliability and threaten the confidentiality, integrity and availability of our information.
Although the aggregate impact on our operations and financial condition has not been material to date, we have been the target
of events of this nature and expect them to continue.
Significant
disruptions of our, our third party vendors’ and/or business partners’ information technology systems or security
breaches could adversely affect our business operations and/or result in the loss, misappropriation, and/or unauthorized access,
use or disclosure of, or the prevention of access to, confidential information (including trade secrets or other intellectual
property, proprietary business information and personal information), and could result in financial, legal, business and reputational
harm to us. Any such event that leads to unauthorized access, use or disclosure of personal information, including personal information
regarding our patients or employees, could harm our reputation, compel us to comply with federal and/or state breach notification
laws and foreign law equivalents, subject us to mandatory corrective action, require us to verify the correctness of database
contents and otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information,
which could disrupt our business, result in increased costs or loss of revenue, and/or result in significant legal and financial
exposure. In addition, security breaches and other inappropriate access can be difficult to detect, and any delay in identifying
them may further harm us. Moreover, the prevalent use of mobile devices to access confidential information increases the risk
of security breaches. While we have implemented security measures to protect our information technology systems and infrastructure,
there can be no assurance that such measures will prevent service interruptions or security breaches that could adversely affect
our business. In addition, failure to maintain effective internal accounting controls related to security breaches and cybersecurity
in general could impact our ability to produce timely and accurate financial statements and subject us to regulatory scrutiny.
Our
business could be adversely affected if we lose the services of the key personnel upon whom we depend or if we fail to attract
senior management and key scientific personnel.
We
believe that our continued success depends to a significant extent upon our efforts and ability to retain highly qualified personnel,
including our Chief Executive Officer, Brian Culley. All of our officers and other employees are at-will employees and may terminate
their employment with us at any time with no advance notice. The loss of the services of Mr. Culley or other members of our senior
management could have a material adverse effect on us. Further, the replacement of any of such individuals likely would involve
significant time and costs and may significantly delay or prevent the achievement of our business and clinical objectives and
would harm our business.
In
addition, we could experience difficulties attracting qualified employees in the future. For example, competition for qualified
personnel in the biotechnology and medical device field is intense due to the limited number of individuals who possess the skills
and experience required by our industry. We will need to hire additional personnel, including experienced sales representatives,
as we expand our clinical development and commercial activities. We may not be able to attract quality personnel on acceptable
terms, or at all. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have
been improperly solicited or that they have divulged proprietary or other confidential information or that their former employers
own their research output.
The
value of our investments in public companies fluctuates based on their respective stock prices and could be negatively affected
by business, regulatory and other risks applicable to them.
As
of December 31, 2020, we had an equity investment in OncoCyte, a U.S. publicly traded company. As of December 31, 2020, the value
of our investment in OncoCyte was approximately $8.7 million based on its closing stock price as of that date. If OncoCyte were
to have delays in clinical trials or commercialization activities or otherwise realize the specific business, regulatory and other
risks applicable to them, the value of its common stock and the valuation of our investment could be negatively affected. If OncoCyte
were to fail and ultimately cease operations, we may lose the entire value of our investment. In addition, the value of our marketable
equity securities may be significantly and adversely impacted by deteriorating global economic conditions and the disruptions
to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic.
Failure
of our internal control over financial reporting could harm our business and financial results.
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Because of its
inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement
of our financial statements would be prevented or detected. Our growth and entry into new products, technologies and markets will
place significant additional pressure on our system of internal control over financial reporting. Any failure to maintain an effective
system of internal control over financial reporting could limit our ability to report our financial results accurately and timely
or to detect and prevent fraud. Operating our business through subsidiaries, some of which are located in foreign countries, also
adds to the complexity of our internal control over financial reporting and adds to the risk of a system failure, an undetected
improper use or expenditure of funds or other resources by a subsidiary, or a failure to properly report a transaction or financial
results of a subsidiary. We allocate certain expenses among Lineage itself and one or more of our subsidiaries, which creates
a risk that the allocations we make may not accurately reflect the benefit of an expenditure or use of financial or other resources
by Lineage as the parent company and the subsidiaries among which the allocations are made. An inaccurate allocation may impact
our consolidated financial results, particularly in the case of subsidiaries that we do not wholly own since our financial statements
include adjustments to reflect the minority ownership interests in our subsidiaries held by others.
If
we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements
of Section 404 of the Sarbanes-Oxley Act in a timely manner or assert that our internal control over financial reporting is effective,
or if our independent registered public accounting firm is unable to express an opinion or expresses a qualified or adverse opinion
about the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness
of our financial reports and the market price of our common shares could be negatively affected. In addition, we could become
subject to investigations by the NYSE American, the Securities and Exchange Commission, and other regulatory authorities, which
could require additional financial and management resources.
We
received a loan under the Paycheck Protection Program of the CARES Act, and all or a portion of the loan may not be forgivable.
In
April 2020, we received a loan for $523,305 from Axos Bank under the Paycheck Protection Program (“PPP”) contained
within the new CARES Act. The PPP loan has a term of two years, is unsecured, and is guaranteed by the U.S. Small Business Administration
(SBA). The loan carries a fixed interest rate of one percent per annum, with the first six months of interest deferred. Under
the CARES Act and Paycheck Protection Program Flexibility Act, we are eligible to apply for forgiveness of all loan proceeds used
to pay payroll costs, rent, utilities and other qualifying expenses during the 24-week period following receipt of the loan, provided
that we maintain our number of employees and compensation within certain parameters during such period. Not more than 40% of the
forgiven amount may be for non-payroll costs. If the conditions outlined in the PPP loan program are adhered to by us, all or
part of such loan could be forgiven. However, we cannot provide any assurance that any amount of the PPP loan will ultimately
be forgiven by the SBA. Any forgiven amounts will not be included in our taxable income. We applied for full forgiveness of the
PPP loan on September 30, 2020.
Risks
Related to Government Regulation
We
may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, including anti-kickback and false
claims laws, transparency laws, and health information privacy and security laws. If we are unable to comply, or have not fully
complied, with such laws, we could face substantial penalties.
Our
current and future operations may be subject to various federal and state fraud and abuse laws, including, without limitation,
the federal Anti-Kickback Statute, the federal False Claims Act, and healthcare professional transparency laws and regulations.
These laws may impact, among other things, our research activities and our proposed sales, marketing, and education programs.
In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct
our business. The laws that may affect our ability to operate include:
Because
of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available, it is possible
that some of our business activities could be subject to challenge under one or more of such laws. In addition, recent health
care reform legislation has strengthened these laws.
If
our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply,
we may be subject to significant penalties, including administrative, civil and criminal penalties, damages, fines, disgorgement,
exclusion from participation in government health care programs, such as Medicare and Medicaid, integrity oversight and reporting
obligations, imprisonment, and the curtailment or restructuring of our operations, any of which could adversely affect our ability
to operate our business and our results of operations.
If
we do not receive regulatory approvals, we will not be permitted to sell our therapeutic and medical device products.
The
therapeutic and medical device products that we and our subsidiaries develop cannot be sold until the FDA and corresponding foreign
regulatory authorities approve the products for medical use. The need to obtain regulatory approval to market a new product means
that:
● A product that is approved may be subject to restrictions on use.
● The FDA can recall or withdraw approval of a product, if it deems necessary.
● We will face similar regulatory issues in foreign countries.
Government-imposed
bans or restrictions and religious, moral, and ethical concerns about the use of hES cells could prevent us from developing and
successfully marketing stem cell products.
Government-imposed
bans or restrictions on the use of embryos or hES cells in research and development in the United States and abroad could generally
constrain stem cell research, thereby limiting the market and demand for our products. During March 2009, President Obama lifted
certain restrictions on federal funding of research involving the use of hES cells, and in accordance with President Obama’s
Executive Order, the National Institutes of Health (“NIH”) has adopted guidelines for determining the eligibility
of hES cell lines for use in federally funded research. The central focus of the guidelines is to assure that hES cells used in
federally funded research were derived from human embryos that were created for reproductive purposes, were no longer needed for
this purpose, and were voluntarily donated for research purposes with the informed written consent of the donors. The hES cells
that were derived from embryos created for research purposes rather than reproductive purposes, and other hES cells that were
not derived in compliance with the guidelines, are not eligible for use in federally funded research. California law requires
that stem cell research be conducted under the oversight of a stem cell review oversight committee (“SCRO”). Many
kinds of stem cell research, including the derivation of new hES cell lines, may only be conducted in California with the prior
written approval of the SCRO. A SCRO could prohibit or impose restrictions on the research that we plan to do. The use of hES
cells may give rise to religious, moral, and ethical issues. These considerations could lead to more restrictive government regulations
or could generally constrain stem cell research, thereby limiting the market and demand for our products.
We
expect that the commercial opportunity for some of our products may depend on our ability to obtain reimbursement and continued
coverage from various payors, including government entities and insurance companies.
If
these third-party payors do not consider our products to be cost-effective compared to other therapies, they may not cover our
products as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products
on a profitable basis.
For
example, in the United States, healthcare providers are reimbursed for covered services and products they deliver through Medicare,
Medicaid and other government healthcare programs, as well as through private payers. No uniform policy for coverage and reimbursement
exists in the United States, and coverage and reimbursement can differ significantly from payor to payor. Decisions regarding
whether to cover any of our product candidates, if approved, the extent of coverage and amount of reimbursement to be provided
are made on a plan-by-plan basis. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting
their own reimbursement rates, but also have their own methods and approval process apart from Medicare determinations. As a result,
the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and
clinical support for the use of our product candidates to each payor separately, with no assurance that coverage and adequate
reimbursement will be applied consistently or obtained in the first instance. We may be required to provide specified rebates
or discounts on the products we sell to certain government funded programs, including Medicare and Medicaid, and those rebates
or discounts have increased over time. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act (collectively, the “ACA”), enacted in 2010, increased many of the mandatory discounts and rebates
and imposed a new branded prescription pharmaceutical manufacturers and importers fee payable each year by certain manufacturers.
We
face similar issues outside of the United States. In some non-U.S. jurisdictions, the proposed pricing for a drug must be approved
before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example,
the EU provides options for its member states to restrict the range of medicinal products for which their national health insurance
systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific
price for the medicinal product, or it may instead adopt a system of direct or indirect controls on the profitability of the company
placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement
limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically,
products launched in the EU do not follow price structures of the United States and generally tend to be significantly lower.
Disruptions
at the FDA and other government agencies caused by funding shortages or global health concerns could negatively impact our business.
The
ability of the FDA to review and approve proposed clinical trials or new product candidates can be affected by a variety of factors,
including, but not limited to, government budget and funding levels, ability to hire and retain key personnel and accept the payment
of user fees, statutory, regulatory, and policy changes, and other events that may otherwise affect the FDA’s ability to
perform routine functions. Average review times at the agency have fluctuated in recent years as a result. In addition, government
funding of other government agencies that fund research and development activities is subject to the political process, which
is inherently fluid and unpredictable.
Disruptions
at the FDA and other agencies may also slow the time necessary for new product candidates to be reviewed and/or approved by necessary
government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days
beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA,
have had to furlough critical FDA employees and stop critical activities.
Separately,
in response to the global COVID-19 pandemic, in March 2020, the FDA announced its intention to postpone most foreign inspections
of manufacturing facilities and temporarily postponed routine surveillance inspections of domestic manufacturing facilities.
In July 2020 domestic inspections restarted only on a risk-based basis. Regulatory authorities outside the United States
may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown
occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular
inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory
authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
The
ACA and future changes to that law may adversely affect our business.
As
a result of the adoption of the ACA, in the United States, substantial changes have been made to the system for paying for healthcare
in the United States. Among the ACA’s provisions of importance to our industry are that it:
● expanded the entities eligible for discounts under the Public Health program;
● created a licensure framework for follow on biologic products.
There
remain judicial and Congressional challenges to certain aspects of the ACA, as well as efforts by the Trump administration to
repeal or replace certain aspects of the ACA. Since January 2017, President Trump signed Executive Orders and other directives
designed to delay the implementation of certain provisions of the ACA. Concurrently, Congress has considered legislation that
would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, it
has enacted laws that modify certain provisions of the ACA such as removing penalties, starting January 1, 2019, for not complying
with the ACA’s individual mandate to carry health insurance, and eliminating the implementation of certain ACA-mandated
fees. On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because the
“individual mandate” was repealed by Congress as part of the 2017 Tax Act. Additionally, on December 18, 2019, the
U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and
remanded the case back to the District Court to determine whether the remaining provisions of the ACA are invalid as well. The
U.S. Supreme Court is currently reviewing the case, although it is uncertain when or how the Supreme Court will rule. It is unclear
how such litigation and other efforts to repeal and replace the ACA will impact the ACA and our business.
In
addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. For example, the
Budget Control Act of 2011, includes reductions to Medicare payments to providers of 2% per fiscal year, which went into effect
on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2030, with the exception
of a temporary suspension from May 1, 2020 through March 31, 2021, unless additional Congressional action is taken. On January
2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to
several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments
to providers from three to five years.
Further,
there has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising
cost of prescription drugs and biologics. Such scrutiny has resulted in several recent congressional inquiries and proposed and
enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the
relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for
products. At the federal level, the Trump administration’s budget proposal for fiscal year 2021 includes a $135 billion
allowance to support legislative proposals seeking to reduce drug prices, increase competition, lower out-of-pocket drug costs
for patients, and increase patient access to lower-cost generic and biosimilar drugs. On March 10, 2020, the Trump administration
sent “principles” for drug pricing to Congress, calling for legislation that would, among other things, cap Medicare
Part D beneficiary out-of-pocket pharmacy expenses, provide an option to cap Medicare Part D beneficiary monthly out-of-pocket
expenses, and place limits on pharmaceutical price increases. In addition, the Trump administration previously released a “Blueprint”
to lower drug prices and reduce out of pocket costs of drugs that contained proposals to increase drug manufacturer competition,
increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their
products, and reduce the out-of-pocket costs of drug products paid by consumers. HHS has solicited feedback on some of these measures
and has implemented others under its existing authority. For example, in May 2019, CMS issued a final rule to allow Medicare Advantage
plans the option to use step therapy for Part B drugs beginning January 1, 2020. This final rule codified CMS’s policy change
that was effective January 1, 2019. Further, on November 20, 2020, HHS finalized a regulation removing safe harbor protection
for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit
managers, unless the price reduction is required by law. The rule also creates a new safe harbor for price reductions reflected
at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers.
The likelihood of implementation of any of the other Trump administration reform initiatives is uncertain, particularly in light
of the new presidential administration. On November 20, 2020, CMS issued an interim final rule implementing President Trump’s
Most Favored Nation executive order, which would tie Medicare Part B payments for certain physician-administered drugs to the
lowest price paid in other economically advanced countries, effective January 1, 2021. On December 28, 2020, the United States
District Court in Northern California issued a nationwide preliminary injunction against implementation of the interim final rule.
The likelihood of implementation of any of the other Trump administration reform initiatives is uncertain, particularly in light
of the new presidential administration. At the state level, legislatures have increasingly passed legislation and implemented
regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts,
restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to
encourage importation from other countries and bulk purchasing.
In
addition, it is possible that additional governmental action is taken to address the COVID-19 pandemic.
If
we fail to comply with the extensive legal and regulatory requirements affecting the health care industry, we could face increased
costs, penalties and a loss of business.
Our
activities, and the activities of our collaborators, distributors and other third-party providers, are subject to extensive government
regulation and oversight both in the U.S. and in foreign jurisdictions. The FDA and comparable agencies in other jurisdictions
will directly regulate many of our most critical business activities, including the conduct of preclinical and clinical studies,
product manufacturing, advertising and promotion, product distribution, adverse event reporting and product risk management. Our
interactions in the U.S. or abroad with physicians and other health care providers that may prescribe or purchase our products
are also subject to government regulation designed to prevent fraud and abuse in the sale and use of the products and place greater
restrictions on the marketing practices of health care companies. Health care companies are facing heightened scrutiny of their
relationships with health care providers from anti-corruption enforcement officials. In addition, health care companies have been
the target of lawsuits and investigations alleging violations of government regulation, including claims asserting submission
of incorrect pricing information, impermissible off-label promotion of pharmaceutical products, payments intended to influence
the referral of health care business, submission of false claims for government reimbursement, antitrust violations or violations
related to environmental matters. Risks relating to compliance with laws and regulations may be heightened as we bring products
to the market globally.
Regulations
governing the health care industry are subject to change, with possibly retroactive effect, including:
Violations
of governmental regulation may be punishable by criminal and civil sanctions against us, including fines and civil monetary penalties
and exclusion from participation in government programs, including Medicare and Medicaid, as well as against executives overseeing
our business. In addition to penalties for violation of laws and regulations, we could be required to repay amounts we received
from government payors or pay additional rebates and interest if we are found to have miscalculated the pricing information we
have submitted to the government. We cannot ensure that our compliance controls, policies and procedures will in every instance
protect us from acts committed by our employees, collaborators, partners or third-party providers that would violate the laws
or regulations of the jurisdictions in which we operate. Whether or not we have complied with the law, an investigation into alleged
unlawful conduct could increase our expenses, damage our reputation, divert management time and attention and adversely affect
our business.
Even
if we receive approval for our products, we may be subject to extensive regulatory obligations in order to commercialize our products.
Even
after initial FDA or foreign regulatory agency approval has been obtained, further studies may be required to provide additional
data on safety or to gain approval for the use of a product as a treatment for clinical indications other than those initially
targeted. Use of a product during testing and after marketing could reveal side effects that could delay, impede, or prevent marketing
approval, result in a regulatory agency-ordered product recall, or in regulatory agency-imposed limitations on permissible uses
or in withdrawal of approval. For example, if the FDA or foreign regulatory agency becomes aware of new safety information after
approval of a product, it may require us to conduct further clinical trials to assess a known or potential serious risk and to
assure that the benefit of the product outweigh the risks. If we are required to conduct such a post-approval study, periodic
status reports must be submitted to the FDA or foreign regulatory agency. Failure to conduct such post-approval studies in a timely
manner may result in substantial civil or criminal penalties. Data resulting from these clinical trials may result in expansions
or restrictions to the labeled indications for which a product has already been approved. Any of these requirements or actions
may negatively impact our business or operations.
If
we are deemed to be an investment company, we may have to institute burdensome compliance requirements and our activities may
be restricted.
An
entity that, among other things, is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business
of investing, reinvesting, owning, trading or holding certain types of securities would be deemed an investment company under
the Investment Company Act of 1940, as amended (the “1940 Act”). Based on the securities we hold, including our equity
ownership in publicly traded companies, we may not meet the requirements for an exemption promulgated under the 1940 Act. If we
are deemed to be an investment company under the 1940 Act, we would be subject to additional limitations on operating our business,
including limitations on the issuance of securities, which may make it difficult for us to raise capital.
Risks
Related to Our Clinical Development and Commercial Operations
Clinical
studies are costly, time consuming and are subject to risks that could delay or prevent commercialization of our current or future
product candidates.
We
cannot guarantee that any clinical studies will be conducted as planned or completed on schedule, if at all. A failure of one
or more clinical studies can occur at any stage of development. Events that may prevent successful or timely completion of clinical
development include but are not limited to:
● unavailability of clinical trial supplies;
● the cost of clinical studies of our product candidates; and
Any
inability to successfully complete clinical development and obtain regulatory approval could result in additional costs to us
or impair our ability to generate revenue. Clinical trial delays could also shorten any periods during which our products have
patent protection and may allow competitors to develop and bring products to market before we do and may harm our business and
results of operations.
Clinical
and preclinical drug development involves a lengthy and expensive process with an uncertain outcome. The results of early preclinical
trials and clinical trials of our product candidates are not necessarily predictive of future results. Our product candidates
may not have favorable results in later clinical trials, if any, or receive regulatory approval on a timely basis, if at all.
Clinical
and preclinical drug development is expensive and can take many years to complete, and its outcome is inherently uncertain. Our
clinical trials may not be conducted as planned or completed on schedule, if at all, and failure can occur at any time during
the preclinical trial or clinical trial process. All of our product candidates will require substantial additional development,
and no assurances can be given that the development of any of our product candidates will ultimately be successful. Although we
may from time to time disclose results from preclinical testing or preliminary data or interim results from our clinical studies
of our product candidates, and earlier clinical studies, including clinical studies with similar product candidates, these are
not necessarily predictive of future results, including clinical trial results. The historical failure rate for product candidates
in our industry is high.
The
results of our current and future clinical trials may differ from results achieved in earlier preclinical and clinical studies
for a variety of reasons, including:
In
particular, data presented from the Phase 1/2a open-label trial showed that both the surgical procedure and the OpRegen cells
were generally well tolerated, with no treatment-related systemic serious adverse events reported to date in the first nine patients.
The best corrected visual acuity of these patients remained relatively stable. In addition, the imaging of patients 8 and 9 suggested
early signs of structural improvement within the retina. However, we do not know how OpRegen will perform in future clinical trials.
It
is not uncommon to observe results in clinical trials that are unexpected based on preclinical trials and early clinical trials,
and many product candidates fail in clinical trials despite very promising early results. Moreover, preclinical and clinical data
may be susceptible to varying interpretations and analyses. A number of companies in the biotechnology industry have suffered
significant setbacks in clinical development even after achieving promising results in earlier studies.
Further,
as a result of the COVID-19 pandemic, if patients drop out of our clinical trials, miss scheduled doses or follow-up visits or
otherwise fail to follow clinical trial protocols, or if our clinical trials are otherwise disrupted due to COVID-19 or actions
taken to slow its spread, the integrity of data from our clinical trials may be compromised or not accepted by the FDA or other
regulatory authorities, which would represent a significant setback for the applicable program.
Even
if our current and planned clinical trials are successful, we will need to conduct additional clinical trials, which may include
registrational trials, trials in additional patient populations or under different treatment conditions, and trials using different
manufacturing protocols, processes, materials or facilities or under different manufacturing conditions, before we are able to
seek approvals for our product candidates from the FDA and regulatory authorities outside the United States to market and sell
these product candidates. Our failure to meet the requirements to support marketing approval for our product candidates in our
ongoing and future clinical trials would substantially harm our business and prospects. For the foregoing reasons, our ongoing
and planned clinical trials may not be successful, which could have a material adverse effect on our business, financial condition
and results of operations.
Interim,
topline and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient
data become available and are subject to audit and verification procedures that could result in material changes in the final
data.
From
time to time, we may publicly disclose preliminary or topline data from our clinical trials, which is based on a preliminary analysis
of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive
review of the data related to the particular trial. We also make assumptions, estimations, calculations and conclusions as part
of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result,
the topline results that we report may differ from future results of the same studies, or different conclusions or considerations
may qualify such results, once additional data have been received and fully evaluated. Topline data also remain subject to audit
and verification procedures that may result in the final data being materially different from the preliminary data we previously
published. As a result, topline data should be viewed with caution until the final data are available. From time to time, we may
also disclose interim data from our clinical trials. Interim data from clinical trials that we may complete are subject to the
risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become
available. Adverse differences between preliminary or interim data and final data could significantly harm our business prospects.
Further,
others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses
or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability
or commercialization of the particular product candidate or product and our company in general. In addition, the information we
choose to publicly disclose regarding a particular trial is based on what is typically extensive information, and you or others
may not agree with what we determine is the material or otherwise appropriate information to include in our disclosure, and any
information we determine not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views,
activities or otherwise regarding a particular product candidate or our business. If the topline data that we report differ from
actual results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval
for, and commercialize, our product candidates may be harmed, which could harm our business, operating results, prospects or financial
condition.
Because
we have multiple cell therapy programs in clinical development, we may expend our limited resources to pursue a particular product
candidate and fail to capitalize on product candidates that may be more profitable or for which there is a greater likelihood
of success.
We
have three cell therapy programs in clinical development. OpRegen is currently in a Phase 1/2a multicenter clinical trial for
the treatment of dry AMD, OPC-1 is currently in a Phase 1/2a clinical trial for acute spinal cord injuries, and VAC2 is in a Phase
1 clinical trial in non-small cell lung cancer. As a result of these and other future clinical trials for these product candidates
or any of our future product candidates may make our decision as to which product candidates to focus on more difficult and we
may forgo or delay pursuit of opportunities with other product candidates that could have had greater commercial potential or
likelihood of success.
Our
resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities.
Our spending on current and future research and development programs and product candidates may not yield any commercially viable
products. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may
relinquish valuable rights to that product candidate through future collaborations, licenses and other similar arrangements in
cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product
candidate.
Additionally,
we may pursue additional in-licenses or acquisitions of development-stage assets or programs, which entails additional risk to
us. Identifying, selecting and acquiring promising product candidates requires substantial technical, financial and human resources
expertise. Efforts to do so may not result in the actual acquisition or license of a particular product candidate, potentially
resulting in a diversion of our management’s time and the expenditure of our resources with no resulting benefit. For example,
if we are unable to identify programs that ultimately result in approved products, we may spend material amounts of our capital
and other resources evaluating, acquiring and developing products that ultimately do not provide a return on our investment.
The
commercial success of any of our current or future product candidates will depend upon the degree of market acceptance by physicians,
patients, third-party payors, other health care providers and others in the medical community.