ITEM 1A. RISK FACTORS
An
investment in our common shares involves a high degree of risk. You should carefully consider the following risk factors, as well as
the other information in this Report, before deciding whether to purchase, hold or sell our common shares. The occurrence of any of the
following risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results
to differ materially from those contained in forward-looking statements we have made in this Report and those we may make from time to
time. You should consider all of the risk factors described when evaluating our business.
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, 2021 and 2020 were $49.2 million and $26.4 million, respectively, and
we had an accumulated deficit of $337.1 million as of December 31, 2021. 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.
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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 $33.9 million and $12.3 million
during the fiscal years ended December 31, 2021 and 2020, 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, 2021, we had $58.4 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
are dependent on our third-party collaboration with Roche to develop and commercialize OpRegen. If Roche is not successful in developing
and commercializing OpRegen and/or Roche terminates the collaboration, we will lose a significant source of potential revenue.
We
currently have a collaboration and license agreement with Roche, pursuant to which we license to Roche rights to develop and commercialize
our retinal pigment epithelium cell therapies, including OpRegen (the “Licensed Products”), for the treatment of ocular disorders,
including age-related macular degeneration with geographic atrophy. Roche is obligated to pay us milestone payments upon the achievement
of specified developmental, regulatory and commercialization milestones. In addition, Roche is obligated to pay us royalties upon sales
of the Licensed Products. All regulatory and commercial milestone payments, and royalty payments, are subject to the existence
of certain intellectual property rights that cover OpRegen at the time such payments would otherwise become due, and the royalties on
net sales of OpRegen are subject to financial offsets based on the existence of competing products.
We are relying on Roche to
develop and commercialize the Licensed Products, and if Roche is not able to develop and commercialize the Licensed Products, determines
not to continue to pursue development and commercialization of the Licensed Products, or determines to terminate the collaboration
at any time in its sole discretion, we will not receive any future milestone or royalty payments under the agreement which would
harm our business, business prospects, financial condition and results of operations.
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Roche may determine not
to pursue development and commercialization and/or terminate the collaboration for many reasons, including: delays in development, manufacture
or clinical supply of OpRegen; Roche may believe that data generated in clinical trials for OpRegen may be negative, inconclusive, or
do not otherwise demonstrate adequate efficacy or clinical benefit to warrant further development or commercialization; Roche may not
dedicate the resources necessary to carry OpRegen through clinical development; Roche may conclude that the commercial potential of OpRegen
does not meet its internal thresholds or yield a timely return on its investment in OpRegen; Roche may choose not to develop and commercialize
OpRegen in certain, or any, markets or for one or more indications, if at all; Roche may change the focus of its development or commercialization
efforts or prioritize other programs more highly and, accordingly, reduce the efforts and resources allocated to OpRegen; Roche may be
unable to obtain regulatory clearances or approvals to continue clinical development or commercialization of OpRegen in a timely manner,
or at all; the failure to develop a commercially viable formulation and/or manufacturing process for OpRegen; or the loss or impairment
of intellectual property rights related to OpRegen.
If Roche terminates the collaboration:
we would no longer have the right to receive any milestone payments or royalties thereunder; further development of OpRegen, if any,
would be significantly delayed or terminated; we would bear all risks and costs related to any further clinical development, manufacturing,
regulatory approval and commercialization OpRegen, if any; we might determine that the commercial potential of OpRegen does not warrant
further development of OpRegen; we would need to raise additional capital if we were to choose to pursue OpRegen development on our own,
or we would need to establish alternative collaborations with third parties, which might not be possible in a timely manner, or at all;
and if we were to choose to pursue OpRegen development independently, we would need to work collaboratively with Roche to transfer the
OpRegen program back to us, and such a transfer might take significant amounts of time, would be resource intensive and costly, and might
not be feasible. As a result, any loss or termination of rights under the collaboration will cause us to lose a significant source of
potential revenue, which would have a material and adverse effect on our company, financial condition and results of operations.
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, 2021 will
be sufficient to fund our planned operations for at least the next 12 months after the issuance of this Report. 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 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. The defendants are certain former members of Asterias’ board of directors and our company’s board of directors. 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 parties are currently engaged in discovery. A five-day trial before the Delaware Chancery Court
is currently scheduled for October 17-21, 2022.
Lineage
believes the allegations in the action lack merit and intends to vigorously defend the claims asserted. It is impossible at this time
to assess whether the outcome of this proceeding will have a material adverse effect on Lineage’s results of operations, cash flows
or financial position. 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 Biden administration and Congress have proposed various
U.S. federal tax law changes, which if enacted could have a material impact on our business, cash flow, financial condition or results
of operations. In addition, it is uncertain if and to what extent various states will conform to the federal tax laws. Future tax 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, 2021, we had net operating loss (“NOL”) carryforwards for U.S. federal and state tax purposes of approximately
$155.6 million and $151.8 million, respectively. In addition, the Company has U.S. federal and California research and
development (R&D) credit carryforwards of $3.7 million and $5.8 million, respectively. Included in these amounts are NOLs and R&D
credits 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 2032 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, 2021, is limited to 80% of taxable income.
The federal R&D credits expire in varying amounts between 2021 and 2041, the California credits have no expiration date. 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.
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As
part of the merger with Asterias, we acquired various tax attribute carryforwards. As the merger triggered an ownership change, the acquired
net operating loss carryforwards and credit are subject to limitation under Section 382 of the Internal Revenue Service Code. Accordingly,
Lineage will only be able to utilize 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. 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.
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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.
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, 2021, we had an equity investment in OncoCyte, a U.S. publicly traded company. As of December 31, 2021, the value of
our investment in OncoCyte was approximately $2.4 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.
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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 healthcare 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 healthcare 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.
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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, the federal government, pursuant to a
presidential executive order, lifted certain restrictions on federal funding of research involving the use of hES cells, and in accordance
with the executive order, the 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 aSCRO. 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.
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We
expect that the commercial opportunity for some of our products may depend on our ability to obtain and maintain 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 Healthcare 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.
If
we are unable to establish or sustain coverage and adequate reimbursement for any product candidates from third-party payors, the adoption
of those products and sales revenue will be adversely affected, which, in turn, could adversely affect the ability to market or sell
those product candidates, if approved. Further, coverage policies and third-party payor reimbursement rates may change at any time. Therefore,
even if favorable coverage and reimbursement status is attained, less favorable coverage policies and reimbursement rates may be implemented
in the future.
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, FDA inspections were interrupted and restarted 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.
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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
have been executive, judicial and Congressional challenges to certain aspects 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. For example, on June 17, 2021, the United States Supreme Court dismissed a challenge on procedural grounds that argued the ACA
is unconstitutional in its entirety because the “individual mandate” was repealed by Congress. Thus, the ACA will remain
in effect in its current form. Moreover, prior to the United States Supreme Court ruling, on January 28, 2021, President Biden issued
an executive order that initiated a special enrollment period for purposes of obtaining health insurance coverage through the ACA marketplace,
which began February 15, 2021 and remained open through August 15, 2021. The executive order also instructed certain governmental agencies
to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid
demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining
access to health insurance coverage through Medicaid or the ACA. It is possible that the ACA will be subject to judicial or Congressional
challenges in the future. It is unclear how any such challenges, other litigation, and the healthcare reform measures of the Biden administration
will impact the ACA.
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In
addition, other legislative changes have been proposed and adopted since the ACA 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 2031, with the exception of a temporary suspension from
May 1, 2020 through March 31, 2022, unless additional Congressional action is taken. Under current legislation, the actual reduction
in Medicare payments will vary from 1% in 2022 to up to 3% in the final fiscal year of this sequester. 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. Additionally, Congress is considering additional health reform measures.
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 presidential executive orders, 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 used several means to propose or implement drug pricing reform, including through federal
budget proposals, executive orders and policy initiatives. For example, on July 24, 2020 and September 13, 2020, the Trump administration
announced several executive orders related to prescription drug pricing that attempted to implement several of the administration’s
proposals. As a result, the FDA concurrently released a final rule and guidance in September, 2020, providing pathways for states to
build and submit importation plans for drugs from Canada. Further, on November 20, 2020, the U.S. Department of Health & Human Services
(“HHS”) finalized a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to
plan sponsors under Medicare Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by
law. The implementation of the rule has been delayed by the Biden administration from January 1, 2022 to January 1, 2023 in response
to ongoing litigation. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a new
safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers, the implementation of which have
also been delayed by the Biden administration until January 1, 2023. 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. The Most Favored Nation regulations mandate participation by
identified Medicare Part B providers and will apply in all U.S. states and territories for a seven-year period beginning January 1, 2021,
and ending December 31, 2027. As a result of litigation challenging the Most Favored Nation model, on December 27, 2021, CMS published
a final rule that rescinds the Most Favored Nation model interim final rule. Further, in July 2021, the Biden administration released
an executive order that included multiple provisions aimed at prescription drugs. In response to President Biden’s executive order,
on September 9, 2021, the HHS released a Comprehensive Plan for Addressing High Drug Prices that outlines principles for drug pricing
reform. The plan sets out a variety of potential legislative policies that Congress could pursue as well as potential administrative
actions HHS can take to advance these principles. No legislation or administrative actions have been finalized to implement these principles.
Additionally, based on a recent executive order, the Biden administration expressed its intent to pursue certain policy initiatives to
reduce drug prices. 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 in response to the COVID-19 pandemic.
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If
we fail to comply with the extensive legal and regulatory requirements affecting the healthcare 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, future advertising and
promotion, product distribution, adverse event reporting and product risk management. Our current and future interactions in the U.S.
or abroad with physicians and other healthcare providers that may prescribe or purchase our products once commercialized 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 healthcare companies. Healthcare companies are facing heightened scrutiny of their relationships with healthcare
providers from anti-corruption enforcement officials. In addition, healthcare 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 healthcare 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 healthcare
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.
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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:
● delays in obtaining required IRB approval at each clinical trial site;
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● 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
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:
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In
September 2021, we provided updates to the fully enrolled 24 patient Phase 1/2a open-label trial for OpRegen. Data presented showed that
restoration of retinal tissue previously reported in three patients had been maintained for up to nine months in the two most recent
restoration patients and for up to 33 months in the first case of restoration. These three patients exhibited optical coherence tomography
(OCT) evidence of newly integrated RPE cells, and layers of retinal tissue (i.e., outer plexiform, outer nuclear layer, ellipsoid
zone) in areas that previously showed no presence of these structures at baseline. All three of these patient’s visual acuities
increased above baseline levels within 6 months post-transplant. Overall, the best corrected visual acuity of the better vision Cohort
4 patients has improved or remained stable in 8/12 (67%) OpRegen treated eyes while decreasing in 9/12 (75%) of their respective fellow
eyes. All of these patients are being closely monitored for additional evidence of clinical benefit.
Specifically,
additional data presented showed that as patients continued to progress into post-operative follow-up, eyes receiving OpRegen trended
toward improvement in visual acuity, a secondary objective under the study, while their untreated eyes typically lost visual acuity,
as expected with this progressive disease. As additional patients have reached longer periods post-treatment, differences in visual acuity
between treated and untreated eyes across Cohort 4 patients became statistically significant beginning at month 9 (P = 0.0085), as well
as months 12 (P = 0.0220) and 15 (P = 0.0273) as determined via 2-sided Wilcoxon Signed Rank (using NCSS, LLC statistical software).
These results, when combined with the OCT findings, suggest that both a structural and functional benefit is possible with OpRegen therapy.
The totality of these findings supports the view that atrophic AMD is not an irreversible degenerative condition. OpRegen has been well
tolerated with no unexpected adverse events, and evidence of durable engraftment of OpRegen RPE cells have extended to more than five
years post-transplant in earliest treated patients. 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. Several 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.
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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 subacute 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 it 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.
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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 healthcare
providers and others in the medical community.
Even
if a product candidate obtains regulatory approval, its commercial success will depend in part on physicians, patients, third-party payors,
other healthcare providers and others in the medical community accepting our product candidates as medically useful, cost-effective,
and safe. Any product we bring to the market may not gain market acceptance by such parties. The degree of market acceptance of any of
our products will depend on several factors, including without limitation:
● the prevalence and severity of the disease and any side effects;
● the convenience and ease of administration;
● the cost of treatment, particularly as additive to existing treatments;
● the marketing, sales and distribution support for the products;
Even if a product displays a favorable
efficacy and safety profile upon approval, market acceptance of the product will be uncertain. Efforts to educate the medical community
and third-party payors on the benefits of the products may require significant investment and resources and may never succeed. If our
products fail to achieve an adequate level of acceptance by physicians, patients, third-party payors, other healthcare providers and others
in the medical community, we will not be able to generate sufficient revenue to become or remain profitable.
If
the market opportunities for our product candidates are smaller than we believe and estimate they are, we may not meet our revenue expectations
and our business may suffer.
Our
projections of the number of potential users in the markets we are attempting to address are based on our beliefs and estimates. Our
estimates have been derived from a variety of sources, including market research and publications and scientific literature estimating
the total number of potential patients and currently approved or used therapies. Our estimates are also based on assumptions regarding
the potential size of the market assuming broad regulatory approval or potential usage by physicians beyond the approved label. Any of
our estimates may prove to be incorrect. The scope of approval and potential use of any product candidate may be significantly narrower,
and the number of patients may turn out to be lower than expected. Competitive products or approaches may be approved or come into use
and the potentially addressable patient population for each of our product candidates may be limited or may not be amenable to treatment