arct-20f_20171231.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

 

 

REGISTRATION STATEMENT PURSUANT TO SECTIONS 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

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

For the Fiscal Year Ended December 31, 2017

OR

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

OR

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

 

For the fiscal year ended December 31, 2017

Commission file number: 001-35932

 

aRCTURUS THERAPEUTICS ltd.

(Exact name of Registrant as specified in its charter)

 

State of Israel

(Jurisdiction of incorporation or organization)

10628 Science Center Drive, Suite 250

San Diego, California

(Address of principal executive offices)

Mark R. Herbert

Interim President  

Arcturus Therapeutics Ltd.

10628 Science Center Drive, Suite 250

San Diego, California 92121

(858) 900-2660

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Ordinary Shares, par value of NIS 0.07

 

Nasdaq Global Market

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.

10,699,271 Ordinary Shares, par value NIS 0.07 per share

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes     No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    ☐ Yes      No

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

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

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

 

Large accelerated filer

 

Accelerated filer  

Non-accelerated filer

 

Emerging growth company

 

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

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  

 

International Financial Reporting Standards as issued

by the International Accounting Standards Board 

 

Other

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17     Item 18 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐ Yes      No

 

 

 


 

TABLE OF CONTENTS

 

Item Number

 

Title

 

Page

 

 

 

 

 

PART ONE 

 

 

Item 1.

 

Identity of directors, senior management and advisers

 

5

Item 2.

 

Offer statistics and expected timetable

 

5

Item 3.

 

Key information

 

5

Item 4.

 

Information on the company

 

33

Item 4A.

 

Unresolved staff comments

 

63

Item 5.

 

Operating and financial review and prospects

 

63

Item 6.

 

Directors, senior management and employees

 

73

Item 7.

 

Major shareholders and related party transactions

 

84

Item 8.

 

Financial Information

 

88

Item 9.

 

The offer and listing

 

90

Item 10.

 

Additional information

 

91

Item 11.

 

Quantitative and qualitative disclosures about market risk

 

104

Item 12.

 

Description of securities other than equity securities

 

104

 

 

 

 

 

PART TWO 

 

 

Item 13.

 

Defaults, dividend arrearages and delinquencies

 

105

Item 14.

 

Material modifications to the rights of security holders and use of proceeds

 

105

Item 15.

 

Controls and procedures

 

105

Item 16A.

 

Audit committee financial expert

 

105

Item 16B.

 

Code of ethics

 

106

Item 16C.

 

Principal accountant fees and services

 

106

Item 16D.

 

Exemptions from the listing standards for audit committees

 

106

Item 16E.

 

Purchases of equity securities by the issuer and affiliated purchasers

 

106

Item 16F.

 

Change in registrant's certifying accountant

 

106

Item 16G.

 

Corporate governance

 

107

Item 16H.

 

Mine safety disclosure

 

108

 

 

 

 

 

PART THREE

 

 

Item 17.

 

Financial statements

 

109

Item 18.

 

Financial statements

 

109

Item 19.

 

Exhibits

 

110

 

2


 

INTRODUCTION

Merger of Alcobra Ltd. and Arcturus Therapeutics, Inc.

On November 15, 2017, Alcobra Ltd. acquired Arcturus Therapeutics, Inc. pursuant to a merger between the companies (the “merger”). Prior to the merger, Alcobra Ltd.’s net assets consisted of cash, investments and nominal non-operating assets. Upon consummation of the merger, Alcobra Ltd. adopted the business plan of Arcturus Therapeutics, Inc. In connection with the merger, Alcobra Ltd. agreed to acquire all of the outstanding common stock of Arcturus Therapeutics, Inc. in exchange for the issuance of an aggregate 6,631,712 of Alcobra Ltd.’s Ordinary Shares, par value 0.07 NIS per share, after giving effect to a 1-for-7 reverse split effected immediately prior to the merger. As a result of the merger, Arcturus Therapeutics, Inc. became a wholly-owned subsidiary of Alcobra Ltd. While Alcobra Ltd. was the legal acquirer in the transaction, Arcturus Therapeutics, Inc. was deemed the accounting acquirer. Immediately after giving effect to the merger, on November 15, 2017, Alcobra Ltd. changed its name to Arcturus Therapeutics Ltd. Our current trading symbol is “ARCT.” Our principal executive offices are located in San Diego, California.

Unless otherwise indicated herein, all references in this Annual Report on Form 20-F to the “Company,” the “registrant,” “our company,” “we,” “our” and “Arcturus” refer in each case collectively (on a consolidated basis) to Arcturus Therapeutics Ltd. (formerly known as Alcobra Ltd.), an Israeli company, and its subsidiaries, Alcobra, Inc. and Arcturus Therapeutics, Inc., which are Delaware corporations. References to “U.S. dollars” and “$” are to currency of the United States of America, and references to “NIS” are to New Israeli Shekels. References to “Ordinary Shares” are to our Ordinary Shares, par value NIS 0.07 per share after the November 15, 2017 merger and $0.0001 prior to the merger.

We do not endorse or adopt any third-party research or forecast firms’ statements or reports referred to in this annual report and assume no responsibility for the contents or opinions represented in such statements or reports, nor for the updating of any information contained therein.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 20-F, or this annual report, and the documents incorporated by reference herein may contain “forward-looking statements” within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under Part I, Item 3.D, “Risk Factors” in this annual report. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise. These statements, which represent our current expectations or beliefs concerning various future events, may contain words such as “may,” “will,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate” or other words indicating future results, though not all forward-looking statements necessarily contain these identifying words. Such statements may include, but are not limited to, statements concerning the following:

 

the initiation, cost, timing, progress and results of, and our expected ability to undertake certain activities and accomplish certain goals with respect to, our research and development activities, preclinical studies and clinical trials;

 

our ability to obtain and maintain regulatory approval of our product candidates, and any related restrictions, limitations, and/or warnings in the label of an approved product candidate;

 

our ability to obtain and deploy funding for our operations;

 

our plans to research, develop and commercialize our product candidates;

 

our strategic alliance partners’ election to pursue development and commercialization of any programs or product candidates that are subject to our collaboration and license agreements with such partners;

 

our ability to attract collaborators with relevant development, regulatory and commercialization expertise;

 

future activities to be undertaken by our strategic alliance partners, collaborators and other third parties;

 

our ability to avoid, settle or be victorious at costly litigation with shareholders, former executives or others;

 

our ability to obtain and maintain intellectual property protection for our product candidates;

3


 

 

the size and growth potential of the markets for our product candidates, and our ability to serve those markets;

 

our ability to successfully commercialize, and our expectations regarding future therapeutic and commercial potential with respect to, our product candidates;

 

the rate and degree of market acceptance of our product candidates;

 

our ability to develop sales and marketing capabilities, whether alone or with potential future collaborators;

 

regulatory developments in the United States and foreign countries;

 

our ability to attract and retain experienced and seasoned scientific and management professionals to lead the Company;

 

the performance of our third-party suppliers and manufacturers;

 

the success of competing therapies that are or may become available;

 

our expectations regarding the time during which we will be a foreign private issuer;

 

our expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”); and

 

the accuracy of our estimates regarding future expenses, future revenues, capital requirements and need for additional financing.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or performance to differ materially from those projected. These statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. In addition, historic results of scientific research, preclinical and clinical trials do not guarantee that the conclusions of future research or trials would not suggest different conclusions or that historic results referred to herein would not be interpreted differently in light of additional research, preclinical and clinical trials results. The forward-looking statements contained in this annual report are subject to risks and uncertainties, including those discussed in our other filings with the Securities and Exchange Commission, or the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements.

4


 

PART I

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.

KEY INFORMATION

3.A.

Selected financial data

As noted in the “Introduction” to this annual report above, from a legal perspective, pursuant to the merger, our company (formerly known as Alcobra Ltd.) acquired Arcturus Therapeutics, Inc. with Arcturus Therapeutics, Inc. surviving as our wholly-owned subsidiary. While Alcobra Ltd. was the legal acquirer in the transaction, Arcturus Therapeutics, Inc. was deemed the accounting acquirer. Prior to the merger, Alcobra Ltd.’s net assets consisted of cash, investments and nominal non-operating assets. Upon the closing of the merger, Alcobra Ltd. adopted the business plan of Arcturus Therapeutics, Inc. Our historical consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States and are presented in U.S. dollars. The selected historical consolidated financial information as of December 31, 2017, 2016 and 2015 and for the years ended December 31, 2017, 2016 and 2015 has been derived from, and should be read in conjunction with, the consolidated financial statements of Arcturus Therapeutics Ltd. and notes thereto appearing elsewhere in this annual report. The selected financial data as of December 31, 2014 and 2013 and for the year ended December 31, 2014 and the period February 6, 2013 to December 31, 2013 have been derived from the unaudited financial statements of Arcturus Therapeutics, Inc. not included in this annual report.

The information presented below is qualified by the more detailed historical consolidated financial statements set forth in this annual report, and should be read in conjunction with those consolidated financial statements, the notes thereto and the discussion under Item 5 – “Operating and Financial Review and Prospects” – included elsewhere in this annual report. Our historical results set forth herein are not necessarily indicative of our future results.

5


 

Consolidated Statement of Operations Data

(in thousands of U.S. dollars, except per share data)

 

 

 

For the year ended December 31,

 

 

For the period February 6 to

December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

(Unaudited)

 

 

2013

(Unaudited)

 

Revenue in conjunction with strategic alliances and collaborations

 

$

12,998

 

 

$

20,382

 

 

$

6,138

 

 

$

25

 

 

$

-

 

Research and development expenses, net

 

 

15,918

 

 

 

17,934

 

 

 

5,476

 

 

 

3,975

 

 

 

1,665

 

General and administrative expenses

 

 

7,572

 

 

 

3,448

 

 

 

2,574

 

 

 

2,027

 

 

 

892

 

Net loss from operations

 

 

(10,492

)

 

 

(1,000

)

 

 

(1,912

)

 

 

(5,977

)

 

 

(2,557

)

Net loss

 

 

(10,902

)

 

 

(1,571

)

 

 

(1,902

)

 

 

(6,018

)

 

 

(2,696

)

Net loss per share, basic and diluted

 

$

(3.53

)

 

$

(0.77

)

 

$

(0.94

)

 

$

(2.99

)

 

$

(2.50

)

Weighted average shares outstanding, basic and diluted

 

 

3,087

 

 

 

2,032

 

 

 

2,016

 

 

 

2,015

 

 

 

1,079

 

 

Consolidated Balance Sheet Data as of December 31,

(in thousands of U.S. dollars)

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

(Unaudited)

 

 

2013

(Unaudited)

 

Working capital

 

$

39,662

 

 

$

3,597

 

 

$

1,208

 

 

$

1,416

 

 

$

3,229

 

Total assets

 

$

52,024

 

 

$

13,736

 

 

$

14,947

 

 

$

2,895

 

 

$

3,522

 

Shareholders' equity (deficit)

 

$

33,794

 

 

$

1,577

 

 

$

(3,631

)

 

$

(1,845

)

 

$

3,329

 

 

3.B.

Capitalization and indebtedness

Not applicable.

3.C.

Reasons for the offer and use of proceeds

Not applicable.

3.D.

Risk factors

In conducting our business, we face many risks that may interfere with our business objectives. Some of these risks could materially and adversely affect our business, financial condition and results of operations. In particular, we are subject to various risks resulting from inherent unknowns and uncertainties in the drug development process, as well as changing economic, political, industry, regulatory, business and financial conditions. The risks and uncertainties described below are not the only ones we face.

You should carefully consider the following factors and other information in this annual report before you decide to invest in our Ordinary Shares. If any of the negative events referred to below occur, our business, financial condition and results of operations could suffer. In any such case, the trading price of our Ordinary Shares could decline, and you may lose all or part of your investment.

6


 

RISKS RELATED TO OUR FINANCIAL CONDITION AND NEED FOR ADDITIONAL CAPITAL

We have a limited operating history, have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future.

We are a preclinical nucleic acid medicines company with a limited operating history. Since inception, our operations have been primarily limited to acquiring and licensing intellectual property rights, developing our nucleic acid product platform, undertaking basic research around nucleic acid targets and conducting preclinical studies for our initial programs. We have not yet obtained regulatory approval for any product candidates. Consequently, any predictions about our future success or viability, or any evaluation of our business and prospects, may not be accurate.

We have incurred losses in each year since our inception. Our net losses were $10.9 million, $1.6 million and $1.9 million for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, we had an accumulated deficit of $23.1 million.

We have devoted most of our financial resources to research and development, including our preclinical development activities. To date, we have funded our operations primarily through upfront payments, research funding and milestones from strategic alliances and collaborations, and through the sale of equity and convertible securities. We expect to continue to incur substantial and increased expenses, losses and negative cash flows as we expand our development activities and advance our preclinical programs. If our product candidates are not successfully developed or commercialized, including because of a lack of capital, or if we do not generate enough revenue following marketing approval, we will not achieve profitability and our business may fail. Even if we or our strategic alliance partners successfully obtain regulatory approval to market a product candidate, our revenues will also depend upon the size of any markets in which our product candidates have received market approval, and our ability to achieve sufficient market acceptance and adequate market share for our products.

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses we incur may fluctuate significantly from quarter to quarter. We anticipate that our expenses will increase substantially if and as we:

 

continue our research and preclinical development of our product candidates, both independently and under our strategic alliance agreements;

 

seek to identify additional targets and product candidates;

 

acquire or in-license other products and technologies;

 

advance product candidates into clinical trials;

 

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

 

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

 

maintain, expand and protect our intellectual property portfolio;

 

hire additional clinical, regulatory, research, executive and administrative personnel;

 

create additional infrastructure to support our operations and our product development and planned future commercialization efforts; and

 

incur legal and other expenses in connection with legal proceedings, including our ongoing proxy contest.

7


 

We have never generated any revenue from product sales, have generated only limited revenue since inception, and may never be profitable.

Our ability to generate revenue and achieve profitability depends on our ability, alone or with strategic alliance partners, to successfully complete the development of, obtain the necessary regulatory approvals for and commercialize our product candidates. We do not anticipate generating revenues from sales of our products for the foreseeable future, if ever. Our ability to generate future revenues from product sales depends heavily on our success in:

 

completing our research and preclinical development of product candidates;

 

initiating and completing clinical trials for product candidates;

 

seeking and obtaining marketing approvals for product candidates that successfully complete clinical trials;

 

establishing and maintaining supply and manufacturing relationships with third parties;

 

launching and commercializing product candidates for which we obtain marketing approval, with an alliance partner or, if launched independently, successfully establishing a sales force, marketing and distribution infrastructure;

 

maintaining, protecting and expanding our intellectual property portfolio; and

 

attracting, hiring and retaining qualified personnel.

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to predict the timing or amount of increased expenses and when we will be able to achieve or maintain profitability, if ever. In addition, our expenses could increase beyond expectations if we are required by the Food and Drug Administration, or FDA, or other foreign regulatory agencies to perform studies and trials in addition to those that we currently anticipate.

Even if one or more of the product candidates that we independently develop is approved for commercial sale, we anticipate incurring significant costs associated with commercializing any approved product. Even if we are able to generate revenues from the sale of any approved products, we may not become profitable and may need to obtain additional funding to continue operations.

We may need to raise additional capital, which may not be available on acceptable terms, or at all.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. We expect our research and development expenses to substantially increase in connection with our ongoing activities, particularly as we advance our product candidates towards or through clinical trials. We may need to raise additional capital to support our operations and such funding may not be available to us on acceptable terms, or at all. As of December 31, 2017, we had unrestricted cash and cash equivalents and short-term investments of $48.6 million. We believe that our existing capital resources will be sufficient to fund our existing capital resources for at least twelve months from the filing of this Annual Report. We cannot provide assurances that our plans will not change or that changed circumstances will not result in the depletion of our capital resources more rapidly than we currently anticipate. For example, our preclinical trials may encounter technical or other difficulties. Additionally, our strategic alliance partners may not elect to pursue the development and commercialization of any of our product candidates that are subject to their respective strategic alliance agreements with us. Any of these events may increase our development costs more than we expect. In order to support our long term plans, we may need to raise additional capital or otherwise obtain funding through additional strategic alliances if we choose to initiate preclinical or clinical trials for new product candidates other than programs currently partnered. In any event, we will require additional capital to obtain regulatory approval for, and to commercialize, future product candidates.

8


 

Any additional fundraising efforts may divert our management from our day-to-day activities, which may adversely affect our ability to develop and commercialize future product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:

 

significantly delay, scale back or discontinue the development or commercialization of any future product candidates;

 

seek strategic alliances for research and development programs at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; or

 

relinquish or license on unfavorable terms, our rights to technologies or any future product candidates that we otherwise would seek to develop or commercialize ourselves.

If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing development and commercialization efforts, which will have a material adverse effect on our business, operating results and prospects.

RISKS RELATED TO THE DISCOVERY AND DEVELOPMENT OF PRODUCT CANDIDATES

Preclinical and clinical studies of our product candidates may not be successful. If we are unable to generate successful results from preclinical and clinical studies of our product candidates, or experience significant delays in doing so, our business may be materially harmed.

We have no products on the market and all of our product candidates are in preclinical development. In particular, none of our product candidates have ever been tested in a human subject. Our ability to achieve and sustain profitability depends on obtaining regulatory approvals for and, if approved, successfully commercializing our product candidates, either alone or with third parties. Before obtaining regulatory approval for the commercial distribution of our product candidates, we or an existing or future collaborator must conduct extensive preclinical tests and clinical trials to demonstrate the safety, purity and potency of our product candidates.

The success of our product candidates will depend on several factors, including the following:

 

successfully designing preclinical studies which may be predictive of clinical outcomes;

 

successful results from preclinical and clinical studies;

 

receipt of marketing approvals from applicable regulatory authorities;

 

obtaining and maintaining patent and trade secret protection for future product candidates;

 

establishing and maintaining manufacturing relationships with third parties or establishing our own manufacturing capability; and

 

successfully commercializing our products, if and when approved, whether alone or in collaboration with others.

If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully complete the development or commercialization of our product candidates, which would materially harm our business.

The approach we are taking to discover and develop drugs is novel and may never lead to marketable products.

We have concentrated our therapeutic product research and development efforts on nucleic acid technology, and our future success depends on the successful development of this technology and products based on our nucleic acid product platform. Except for Kynamro (mipomersen) and Spinraza (nusinersen), which are marketed by Biogen Inc., neither we, nor any other company, has received regulatory approval to market nucleic acid therapeutics. The scientific discoveries that form the basis for our efforts to discover and develop product candidates are relatively new. The scientific evidence to support the feasibility of developing product candidates based on these discoveries is both preliminary and limited. If we do not successfully develop and commercialize product candidates based upon our technological approach, we may not become profitable and the value of our Ordinary Shares may decline.

9


 

Further, our focus solely on nucleic acid technology for developing drugs as opposed to multiple, more proven technologies for drug development increases the risks associated with the ownership of our Ordinary Shares. If we are not successful in developing any product candidates using nucleic acid technology, we may be required to change the scope and direction of our product development activities. In that case, we may not be able to identify and implement successfully an alternative product development strategy.

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

The success of our business depends primarily upon our ability to identify, develop and commercialize nucleic acid medicines. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for a number of reasons, including:

 

our research methodology or that of our strategic alliance partners may be unsuccessful in identifying potential product candidates;

 

potential product candidates may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval; or

 

our strategic alliance partners may change their development profiles for potential product candidates or abandon a therapeutic area.

If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business and could potentially cause us to cease operations. Research programs to identify new product candidates require substantial technical, financial and human resources. We may focus our efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful.

If future clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of regulatory authorities or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.

Before obtaining marketing approval from regulatory authorities for the sale of product candidates, we or our strategic alliance partners must conduct extensive clinical trials to demonstrate the safety and efficacy of the product candidates in humans. Clinical trials are expensive, difficult to design and implement, can take many years to complete and are uncertain as to the outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for their products.

Events which may result in a delay or unsuccessful completion of clinical development include:

 

delays in reaching an agreement with the FDA or other regulatory authorities on final trial design;

 

imposition of a clinical hold of our clinical trial operations or trial sites by the FDA or other regulatory authorities;

 

delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites;

 

our inability to adhere to clinical trial requirements directly or with third parties such as CROs;

 

delays in obtaining required institutional review board approval at each clinical trial site;

 

delays in recruiting suitable patients to participate in a trial;

 

delays in the testing, validation, manufacturing and delivery of the product candidates to the clinical sites;

10


 

 

delays in having patients complete participation in a trial or return for post-treatment follow-up;

 

delays caused by patients dropping out of a trial due to protocol procedures or requirements, product side effects or disease progression;

 

clinical sites dropping out of a trial to the detriment of enrollment;

 

time required to add new clinical sites; or

 

delays by our contract manufacturers to produce and deliver sufficient supply of clinical trial materials.

If we or our strategic alliance partners are required to conduct additional clinical trials or other testing of any product candidates beyond those that are currently contemplated, are unable to successfully complete clinical trials of any such product candidates or other testing, or if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we or our strategic alliance partners may:

 

be delayed in obtaining marketing approval for our future product candidates;

 

not obtain marketing approval at all;

 

obtain approval for indications or patient populations that are not as broad as originally intended or desired;

 

obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;

 

be subject to additional post-marketing testing requirements; or

 

have the product removed from the market after obtaining marketing approval.

Our product development costs will also increase if we experience delays in testing or marketing approvals. We do not know whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do, which would impair our ability to successfully commercialize our product candidates and may harm our business and results of operations. Any inability to successfully complete preclinical and clinical development, whether independently or with our strategic alliance partners, could result in additional costs to us or impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties.

Any of our product candidates may cause undesirable side effects or have other properties impacting safely that could delay or prevent their regulatory approval or limit the scope of any approved label or market acceptance.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities. While we have not yet initiated clinical trials for any of our product candidates, it is likely that there may be side effects associated with their use. Results of our trials could reveal a high and unacceptable severity and prevalence of these or other side effects. In such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. Such side effects could also affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may materially and adversely affect our business, financial condition, results of operations and prospects.

Further, clinical trials by their nature test product candidates in only samples of the potential patient populations. With a limited number of patients and limited duration of exposure in such trials, rare and severe side effects of our product candidates may not be uncovered until a significantly larger number of patients are exposed to the product candidate.

11


 

If any of our future products, if and when approved for commercial sale, cause serious or unexpected side effects, a number of potentially significant negative consequences could result, including:

 

regulatory authorities may withdraw their approval of the product or impose restrictions on its distribution in the form of a modified risk evaluation and mitigation strategy;

 

regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;

 

we may be required to change the way the product is administered or conduct additional clinical trials;

 

we could be sued and held liable for harm caused to patients; or

 

our reputation may suffer.

Any of these events could prevent us or our partners from achieving or maintaining market acceptance of the affected product and could substantially increase the costs of commercializing our future products and impair our ability to generate revenues from the commercialization of these products either by us or by our strategic alliance partners.

Even if we complete the necessary preclinical studies and clinical trials, we cannot predict whether or when we will obtain regulatory approval to commercialize a product candidate and we cannot, therefore, predict the timing of any revenue from a future product.

Neither we nor our strategic alliance partners can commercialize a product until the appropriate regulatory authorities, such as the FDA, have reviewed and approved the product candidate. The regulatory agencies may not complete their review processes in a timely manner, or we may not be able to obtain regulatory approval. Additional delays may result if an FDA Advisory Committee recommends restrictions on approval or recommends non-approval. In addition, we or our strategic alliance partners may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory agency policy during the period of product development, clinical trials and the review process.

Even if we obtain regulatory approval for a product candidate, we will still face extensive regulatory requirements and our products may face future development and regulatory difficulties.

Even if we obtain regulatory approval in the United States, the FDA may still impose significant restrictions on the indicated uses or marketing of our product candidates, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance. The holder of an approved NDA is obligated to monitor and report adverse events, or AEs, and any failure of a product to meet the specifications in the NDA. The holder of an approved NDA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal and state laws.

In addition, drug product manufacturers and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current good manufacturing practices, or cGMP, and adherence to commitments made in the NDA. If we or a regulatory agency discovers previously unknown problems with a product such as AEs of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions relative to that product or the manufacturing facility, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.

If we or our partners fail to comply with applicable regulatory requirements following approval of any of our product candidates, a regulatory agency may:

 

issue a warning letter asserting that we are in violation of the law;

 

seek an injunction or impose civil or criminal penalties or monetary fines;

 

suspend or withdraw regulatory approval;

 

suspend any ongoing clinical trials;

12


 

 

refuse to approve a pending NDA or supplements to an NDA submitted by us;

 

seize product; or

 

refuse to allow us to enter into supply contracts, including government contracts.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize our future products and generate revenues.

We may use our financial and human resources to pursue a particular research program or product candidate and fail to capitalize on programs or product candidates that may be more profitable or for which there is a greater likelihood of success.

As a result of our limited financial and human resources, we will have to make strategic decisions as to which targets and product candidates to pursue and may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on research and development programs and product candidates for specific indications 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 strategic alliance, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate, or we may allocate internal resources to a product candidate in a therapeutic area in which it would have been more advantageous to enter into a partnering arrangement.

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.

Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials or other work-related injuries, this insurance may not provide adequate coverage against potential liabilities. In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

RISKS RELATED TO OUR RELIANCE ON THIRD PARTIES

We depend upon our third-party alliances for the development, manufacture and eventual commercialization of certain nucleic acid product candidates. If these third-party alliances are unsuccessful or are terminated, we may be unable to commercialize certain product candidates and we may be unable to generate revenues from our development programs.

We depend upon third party alliance partners for financial and scientific resources for the clinical development, manufacture and commercialization of certain of our nucleic acid product candidates. These alliances will likely provide us with limited control over the course of development of a nucleic acid product candidate, especially once a candidate has reached the stage of clinical development. For example, in our alliance with Ultragenyx, Ultragenyx has the option to obtain an exclusive worldwide license to develop, manufacture and commercialize product candidates upon the achievement of relevant endpoints in preclinical studies and clinical trials. However, Ultragenyx is not under any obligation to exercise these options to progress any of our nucleic acid product candidates. While Ultragenyx has development obligations with respect to programs that it may elect to pursue under our agreement, our ability to ultimately recognize revenue from this and future relationships will depend upon the ability and willingness of our alliance partners to successfully meet their respective responsibilities under our agreements with them. Our ability to recognize revenues from successful strategic alliances may be impaired by several factors including:

 

an alliance partner may shift its priorities and resources away from our programs due to a change in business strategies, or a merger, acquisition, sale or downsizing of its company or business unit;

13


 

 

an alliance partner may cease development in therapeutic areas which are the subject of our strategic alliances;

 

an alliance partner may change the success criteria for a particular program or potential product candidate thereby delaying or ceasing development of such program or candidate;

 

a significant delay in initiation of certain development activities by an alliance partner will also delay payment of milestones tied to such activities, thereby impacting our ability to fund our own activities;

 

an alliance partner could develop a product that competes, either directly or indirectly, with an alliance product;

 

an alliance partner with commercialization obligations may not commit sufficient financial or human resources to the marketing, distribution or sale of a product;

 

an alliance partner with manufacturing responsibilities may encounter regulatory, resource or quality issues and be unable to meet demand requirements;

 

an alliance partner may exercise its rights under the agreement to terminate a strategic alliance;

 

a dispute may arise between us and an alliance partner concerning the research, development or commercialization of a program or product candidate resulting in a delay in milestones, royalty payments or termination of a program and possibly resulting in costly litigation or arbitration which may divert management attention and resources; and

 

an alliance partner may use our proprietary information or intellectual property in such a way as to invite litigation from a third party or fail to maintain or prosecute intellectual property rights such that our rights in such property are jeopardized.

If any of our alliance partners do not elect to pursue the development and commercialization of our nucleic acid development candidates or if they terminate the strategic alliance, then, depending on the event:

 

product candidates subject to our alliances may be terminated or significantly delayed;

 

our cash expenditures could increase significantly if it is necessary for us to hire additional employees and allocate scarce resources to the development and commercialization of product candidates that were previously funded, or expected to be funded, by our alliance partners;

 

we would bear all of the risks and costs related to the further development and commercialization of product candidates that were previously the subject of our strategic alliance, including the reimbursement of third parties; and

 

in order to fund further development and commercialization, we may need to seek out and establish alternative strategic alliances with third-party partners; this may not be possible, or we may not be able to do so on terms which are acceptable to us, in which case it may be necessary for us to limit the size or scope of one or more of our programs or increase our expenditures and seek additional funding by other means.

Any of these events would have a material adverse effect on our results of operations and financial condition.

We rely on third parties to conduct some aspects of our compound formulation, research and preclinical studies, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such formulation, research or testing.

We do not expect to independently conduct all aspects of our drug discovery activities, compound formulation research or preclinical studies of product candidates. We currently rely and expect to continue to rely on third parties to conduct some aspects of our preclinical studies and formulation development.

Any of these third parties may terminate their engagements with us at any time. If we need to enter into alternative arrangements, it would delay our product development activities. Our reliance on these third parties for research and development activities will reduce our control over these activities but will not relieve us of our responsibilities. For example, for product candidates that we develop and commercialize on our own, we will remain responsible for ensuring that each of our IND-enabling studies and clinical trials are conducted in accordance with the study plan and protocols for the trial.

14


 

If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our studies in accordance with regulatory requirements or our stated study plans and protocols, we will not be able to complete, or may be delayed in completing, the necessary preclinical studies to enable us or our strategic alliance partners to select viable product candidates for IND submissions and will not be able to, or may be delayed in our efforts to, successfully develop and commercialize such product candidates.

We rely on third-party manufacturers to produce our preclinical product candidates, and we intend to rely on third parties to produce future clinical supplies of product candidates that we advance into clinical trials and commercial supplies of any approved product candidates.

Reliance on third-party manufacturers entails risks, including risks that we would not be subject to if we manufactured the product candidates ourselves, including:

 

the inability to meet any product specifications and quality requirements consistently;

 

a delay or inability to procure or expand sufficient manufacturing capacity;

 

manufacturing and product quality issues related to scale-up of manufacturing;

 

costs and validation of new equipment and facilities required for scale-up;

 

a failure to comply with cGMP and similar foreign standards;

 

the inability to negotiate manufacturing or supply agreements with third parties under commercially reasonable terms;

 

termination or nonrenewal of manufacturing agreements with third parties in a manner or at a time that is costly or damaging to us;

 

the reliance on a limited number of sources, and in some cases, single sources for raw materials, such that if we are unable to secure a sufficient supply of these product components, we will be unable to manufacture and sell future product candidates in a timely fashion, in sufficient quantities or under acceptable terms;

 

the lack of qualified backup suppliers for any raw materials that are currently purchased from a single source supplier;

 

operations of our third-party manufacturers or suppliers could be disrupted by conditions unrelated to our business or operations, including the bankruptcy of the manufacturer or supplier;

 

carrier disruptions or increased costs that are beyond our control; and

 

the failure to deliver products under specified storage conditions and in a timely manner.

Any of these events could lead to clinical study delays or failure to obtain regulatory approval, or impact our ability to successfully commercialize future products. Some of these events could be the basis for FDA action, including injunction, recall, seizure or total or partial suspension of production.

We rely on limited sources of supply for the drug substance of product candidates and any disruption in the chain of supply may cause a delay in developing and commercializing these product candidates.

We have established manufacturing relationships with a limited number of suppliers to manufacture raw materials and the drug substance used to create our product candidates. The availability of such suppliers to manufacture raw materials for our product candidates may be limited. Further, each supplier may require licenses to manufacture such components if such processes are not owned by the supplier or in the public domain. As part of any marketing approval, a manufacturer and its processes are required to be qualified by the FDA prior to commercialization. If supply from the approved vendor is interrupted, there could be a significant disruption in commercial supply. An alternative vendor would need to be qualified through an NDA supplement which could result in further delay. The FDA or other regulatory agencies outside of the United States may also require additional studies if a new supplier is relied upon for commercial production. Switching vendors may involve substantial costs and is likely to result in a delay in our desired clinical and commercial timelines.

15


 

In addition, if our alliance partners elect to pursue the development and commercialization of certain programs, we will lose control over the manufacturing of the product candidate subject to the agreement. Also, we will not be able to ensure that the product candidates will be manufactured under the correct conditions to permit the product candidates to be used in such clinical trials.

These factors could cause the delay of clinical trials, regulatory submissions, required approvals or commercialization of our product candidates, cause us to incur higher costs and prevent us from commercializing our products successfully. Furthermore, if our suppliers fail to deliver the required commercial quantities of active pharmaceutical ingredients on a timely basis and at commercially reasonable prices, and we are unable to secure one or more replacement suppliers capable of production in a timely manner at a substantially equivalent cost, our clinical trials may be delayed or we could lose potential revenue.

Manufacturing issues may arise that could increase product and regulatory approval costs or delay commercialization.

As we scale-up manufacturing of product candidates and conduct required stability testing, product, packaging, equipment and process-related issues may require refinement or resolution in order to proceed with any clinical trials and obtain regulatory approval for commercial marketing. We may identify significant impurities, which could result in increased scrutiny by the regulatory agencies, delays in clinical programs and regulatory approval, increases in our operating expenses, or failure to obtain or maintain approval for product candidates or any approved products.

We intend to rely on third parties to conduct, supervise and monitor our clinical trials, and if those third parties perform in an unsatisfactory manner, it may harm our business.

We or our strategic alliance partners intend to rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials. While we will have agreements governing their activities, we and our strategic alliance partners have limited influence over their actual performance. We will control only certain aspects of our CROs’ activities. Nevertheless, we or our strategic alliance partners will be responsible for ensuring that each of our clinical trials are conducted in accordance with the applicable protocol, legal, regulatory and scientific standards and our reliance on the CROs will not relieve us of our regulatory responsibilities.

We, our alliance partners and our CROs will be required to comply with the FDA’s or other regulatory agency’s good clinical practices, or GCPs, for conducting, recording and reporting the results of IND-enabling studies and clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of future clinical trial participants are protected. The FDA and non-U.S. regulatory agencies enforce these GCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. If we or our future CROs fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or applicable non-U.S. regulatory agency may require us to perform additional clinical trials before approving any marketing applications for the relevant jurisdiction. Upon inspection, the FDA or applicable non-U.S. regulatory agency may determine that our future clinical trials did not comply with GCPs. In addition, our future clinical trials will require a sufficiently large number of test subjects to evaluate the safety and effectiveness of a potential drug product. Accordingly, if our future CROs fail to comply with these regulations or fail to recruit a sufficient number of patients, we may be required to repeat such clinical trials, which would delay the regulatory approval process.

Our future CROs will not be our employees, and we will not be able to control whether or not they devote sufficient time and resources to our future clinical and nonclinical programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials, or other drug development activities which could harm our competitive position. If our future CROs do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for any other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize our product candidates. As a result, our financial results and the commercial prospects for such products and any product candidates that we develop would be harmed, our costs could increase, and our ability to generate revenues could be delayed.

We intend to rely on other third parties to store and distribute drug products for any clinical trials that we may conduct. Any performance failure on the part of our distributors could delay clinical development or marketing approval of our product candidates or commercialization of our products, if approved, producing additional losses and depriving us of potential product revenue.

16


 

RISKS RELATED TO OUR INTELLECTUAL PROPERTY

If we are unable to obtain or protect intellectual property rights related to our future products and product candidates, we may not be able to compete effectively in our markets.

Our success depends in part on our ability to obtain and maintain patents and other forms of intellectual property rights, including in-licenses of intellectual property rights of others, for our product candidates, methods used to develop and manufacture our product candidates and methods for treating patients using our product candidates, as well as our ability to preserve our trade secrets, to prevent third parties from infringing upon our proprietary rights and to operate without infringing upon the proprietary rights of others. As of April 1, 2018, we are the sole owner of 140 patents and pending patent applications including 16 U.S. patents, 25 pending U.S. patent applications, 40 foreign patents and 59 pending foreign patent applications. The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. The patent applications that we own or in-license may fail to result in patents with claims that cover the products in the United States or in other countries. There is no assurance that all of the potentially relevant prior art relating to our patents and patent applications has been found; such prior art can invalidate a patent or prevent a patent from issuing based on a pending patent application. Even if patents do successfully issue, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed or invalidated. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property or prevent others from designing around our claims.

If the patent applications we hold or have in-licensed with respect to our programs or product candidates fail to issue or if their breadth or strength of protection is threatened, it could dissuade companies from collaborating with us to develop product candidates, and threaten our ability to commercialize, future products. We cannot offer any assurances about which, if any, patents will issue or whether any issued patents will be found invalid and unenforceable or will be threatened by third parties. A patent may be challenged through one or more of several administrative proceedings including post-grant challenges, re-examination or opposition before the U.S. PTO or foreign patent offices. For example, re-examination of, or oppositions to, patents owned by or licensed to us have previously been initiated, and while we believe these concluded proceedings did not result in a commercially relevant impact on the individual patents, any successful challenge of patents or any other patents owned by or licensed to us could deprive us of rights necessary for the successful commercialization of any product candidates that we or our strategic alliance partners may develop.

Since patent applications in the United States and most other countries are confidential for a period of time after filing, and some remain so until issued, we cannot be certain that we were the first to file any patent application related to a product candidate. Furthermore, in certain situations, if we and one or more third parties have filed patent applications in the United States and claiming the same subject matter, an administrative proceeding, known as an interference, can be initiated to determine which applicant is entitled to the patent on that subject matter. Such an interference proceeding provoked by third parties or brought by us may be necessary to determine the priority of inventions with respect to our patents or patent applications, or those of our alliance partners or licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of a patent or patent application in such a proceeding may not be successful and, even if successful, may result in substantial costs and distract our management and other employees.

In addition, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after it is filed. Various extensions may be available however the life of a patent, and the protection it affords, is limited. Once the patent life has expired for a product, we may be open to competition from generic medications. Further, if we encounter delays in regulatory approvals, the period of time during which we could market a product candidate under patent protection could be reduced.

In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our drug discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. Although each of our employees agrees to assign their inventions to us through an employee inventions agreement, and all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements have been duly executed or that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. In addition, others may independently discover our trade secrets and proprietary information. For example, the FDA, as part of its Transparency Initiative, is currently considering whether to make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all.

17


 

Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the non-patented intellectual property related to our technologies to third parties, and there is no guarantee that we will have any such enforceable trade secret protection, we may not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition.

Third-party claims of intellectual property infringement may prevent or delay our development and commercialization efforts.

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we and our strategic alliance partners are pursuing development candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may be subject to claims of infringement of the patent rights of third parties.

Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our product candidates. Because patent applications can take many years to issue, there may be currently pending patent applications which may later result in patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of any of our product candidates, any molecules formed during the manufacturing process or any final product itself, the holders of any such patents may be able to block our ability to commercialize such product candidate unless we obtained a license under the applicable patents, or until such patents expire. Similarly, if any third-party patents were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination therapy, the holders of any such patents may be able to block our ability to develop and commercialize the applicable product candidate unless we obtained a license or until such patent expires. In either case, such a license may not be available on commercially reasonable terms or at all.

Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure.

If we fail to obtain licenses or comply with our obligations in these agreements under which we license intellectual property rights from third parties or otherwise experience disruptions to our business relationships with our licensors, we could lose license rights that are important to our business.

We are a party to intellectual property license agreements that are important to our business and expect to enter into additional license agreements in the future. Our existing license agreements impose, and we expect that future license agreements will impose, various obligations on us. See the description of the Protiva agreement in Item 4.B. below under “Other Material Agreements.”

We may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates, and we have done so from time to time. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize one or more of our product candidates, which could harm our business significantly. We cannot provide any assurances that third-party patents do not exist which might be enforced against our future products, resulting in either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation to third parties.

18


 

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

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

Our defense in a lawsuit may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent, alone or with our licensees, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

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

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

We employ individuals who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of our employees’ former employers or other third parties. We may also be subject to claims that former employers or other third parties have an ownership interest in our patents. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees.

RISKS RELATED TO COMMERCIALIZATION OF PRODUCT CANDIDATES

The commercial success of our programs that are part of our strategic alliance agreements will depend in large part on the development and marketing efforts of our alliance partners. If our alliance partners are unable or unwilling to perform in accordance with the terms of our agreements, our potential to generate future revenue from these programs would be significantly reduced and our business would be materially and adversely harmed.

If or when our strategic alliance partners elect to further pursue the development and commercialization of any of the product candidates that are subject to its strategic alliance agreement with us, we will have limited influence and/or control over their approaches to development and commercialization. If strategic alliance partners do not perform in the manner that we expect or fail to fulfill their responsibilities in a timely manner, or at all, the clinical development, regulatory approval and commercialization efforts related to product candidates we have licensed to such strategic alliance partners could be delayed or terminated. If we terminate any of our strategic alliances or any program thereunder, we may have the right to assume the responsibility at our own expense for the development of the applicable product candidates. Assuming sole responsibility for further development will increase our expenditures, and may mean we will need to limit the size and scope of one or more of our programs, seek additional funding and/or choose to stop work altogether on one or more of the affected product candidates. This could result in a limited potential to generate future revenue from such product candidates and our business could be materially and adversely affected.

We face significant competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete effectively.

The biotechnology and pharmaceutical industries are intensely competitive. We have competitors both in the United States and internationally, including major multinational pharmaceutical companies, biotechnology companies and universities and other research institutions. Our competitors may have substantially greater financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis, drug products that are more effective or less costly than any product candidate that we may develop.

19


 

All of our programs are preclinical and targeted toward indications for which there are product candidates in clinical development. We will face competition from other drugs currently approved or that may be approved in the future for the same therapeutic indications. For example, both Synlogic and Ultragenyx are currently conducting clinical trials with therapies to treat for ornithine transcarbamylase, or OTC, deficiency. Currently approved therapies for these patients include the small molecule nitrogen scavengers sodium benzoate, sodium phenylacetate, and sodium phenylbutyrate, and glycerol phenylbutyrate (brand name Ravicti®). Our ability to compete successfully will depend largely on our ability to leverage our experience in drug discovery and development to:

 

discover and develop therapeutics that are superior to other products in the market;

 

attract qualified scientific, product development and commercial personnel;

 

obtain patent and/or other proprietary protection for our nucleic acid product platform and future product candidates;

 

obtain required regulatory approvals; and

 

successfully collaborate with pharmaceutical companies in the discovery, development and commercialization of new therapeutics.

The availability of our competitors’ products could limit the demand, and the price we are able to charge, for any products that we may develop and commercialize. We will not achieve our business plan if the acceptance of any of these products is inhibited by price competition or the reluctance of physicians to switch from existing drug products to our products, or if physicians switch to other new drug products or choose to reserve our future products for use in limited circumstances. The inability to compete with existing or subsequently introduced drug products would have a material adverse impact on our business, financial condition and prospects.

Established pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make our product candidates less competitive. In addition, any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome price competition and to be commercially successful. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or discovering, developing and commercializing product candidates before we do, which would have a material adverse impact on our business.

The commercial success of our product candidates will depend upon the acceptance of these product candidates by the medical community, including physicians, patients and healthcare payors.

The degree of market acceptance of any product candidates will depend on a number of factors, including:

 

demonstration of clinical safety and efficacy compared to other products;

 

the relative convenience, ease of administration and acceptance by physicians, patients and healthcare payors;

 

the prevalence and severity of any AEs;

 

limitations or warnings contained in the FDA-approved label for such products;

 

availability of alternative treatments;

 

pricing and cost-effectiveness;

 

the effectiveness of our or any collaborators’ sales and marketing strategies;

 

our ability to obtain hospital formulary approval;

 

our ability to obtain and maintain sufficient third-party coverage and adequate reimbursement; and

 

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

20


 

Unless other formulations are developed in the future, we expect our compounds to be formulated in an injectable form. Injectable medications may be disfavored by patients or their physicians in the event drugs which are easy to administer, such as oral medications, are available. If a product is approved, but does not achieve an adequate level of acceptance by physicians, patients and healthcare payors, we may not generate sufficient revenues from such product and we may not become or remain profitable. Such increased competition may decrease any future potential revenue for future product candidates due to increasing pressure for lower pricing and higher discounts in the commercialization of our product.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may be unable to generate any revenues.

We currently do not have an organization for the sales, marketing and distribution of pharmaceutical products and the cost of establishing and maintaining such an organization may exceed the cost-effectiveness of doing so. In order to market any products that may be approved, we must build our sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. With respect to certain of our current programs as well as future programs, we may rely completely on an alliance partner for sales and marketing. In addition, we intend to enter into strategic alliances with third parties to commercialize other product candidates, including in markets outside of the United States or for other large markets that are beyond our resources. Although we intend to establish a sales organization if we are able to obtain approval to market any product candidates for niche markets in the United States, we will also consider the option to enter into strategic alliances for future product candidates in the United States if commercialization requirements exceed our available resources. This will reduce the revenue generated from the sales of these products.

Our current and any future strategic alliance partners may not dedicate sufficient resources to the commercialization of our product candidates or may otherwise fail in their commercialization due to factors beyond our control. If we are unable to establish effective alliances to enable the sale of our product candidates to healthcare professionals and in geographical regions, including the United States, that will not be covered by our own marketing and sales force, or if our potential future strategic alliance partners do not successfully commercialize the product candidates, our ability to generate revenues from product sales will be adversely affected.

If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able to generate sufficient product revenue and may not become profitable. We will be competing with many companies that currently have extensive and well-funded marketing and sales operations. Without an internal team or the support of a third party to perform marketing and sales functions, we may be unable to compete successfully against these more established companies.

If we obtain approval to commercialize any approved products outside of the United States, a variety of risks associated with international operations could materially adversely affect our business.

If we obtain approval to commercialize any approved products outside of the United States, we expect that we will be subject to additional risks related to entering into international business relationships, including:

 

different regulatory requirements for drug approvals in foreign countries;

 

differing payor reimbursement regimes, governmental payors or patient self-pay systems and price controls;

 

reduced protection for intellectual property rights;

 

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

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

 

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

 

foreign taxes, including withholding of payroll taxes;

 

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

 

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

21


 

 

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

 

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

Coverage and adequate reimbursement may not be available for our product candidates, which could make it difficult for us to sell products profitably.

Market acceptance and sales of any product candidates that we develop will depend on coverage and reimbursement policies and may be affected by future healthcare reform measures. Government authorities and third-party payors, such as private health insurers, government payors and health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. We cannot be sure that coverage and adequate reimbursement will be available for any future product candidates. Also, inadequate reimbursement amounts may reduce the demand for, or the price of, our future products. Further, one payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage for the product. If reimbursement is not available, or is available only at limited levels, we may not be able to successfully commercialize product candidates that we develop.

In addition, we cannot be certain if and when we will obtain formulary approval to allow us to sell any products that we may develop and commercialize into our target markets. Obtaining formulary approval from hospitals and from payors can be an expensive and time-consuming process. Failure to obtain timely formulary approval will limit our commercial success.

There have been a number of legislative and regulatory proposals to change the healthcare system in the United States and in some foreign jurisdictions that could affect our ability to sell products profitably. These legislative and/or regulatory changes may negatively impact the reimbursement for drug products, following approval. The availability of numerous generic treatments may also substantially reduce the likelihood of reimbursement for our future products. The potential application of user fees to generic drug products may expedite the approval of additional generic drug treatments. We expect to experience pricing pressures in connection with the sale of any products that we develop, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes. If we fail to successfully secure and maintain reimbursement coverage for our future products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our future products and our business will be harmed.

In addition, 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 U.S. and generally tend to be priced significantly lower.

RISKS RELATED TO OUR BUSINESS OPERATIONS AND INDUSTRY

Our future success depends on our ability to attract and retain key executives and to attract, retain and motivate qualified personnel.

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

22


 

We may need to expand our organization and may experience difficulties in managing this growth, which could disrupt our operations.

As of December 31, 2017 we had 60 employees. In the future we may expand our employee base to increase our managerial, scientific, operational, commercial, financial and other resources and to hire more consultants and contractors. Future growth would impose significant additional responsibilities on our management, including the need to identify, recruit, maintain, motivate and integrate additional employees, consultants and contractors. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. Moreover, if our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenues could be reduced, and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize product candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with the regulations of the FDA and non-U.S. regulators, provide accurate information to the FDA and non-U.S. regulators, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation. We have adopted a code of conduct, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, fines, possible exclusion from Medicare, Medicaid and other government healthcare programs, additional reporting requirements and/or oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance, disgorgement, imprisonment, and contractual damages.

We may reincorporate in the U.S. and such reincorporation may result in disruptions to our business or otherwise materially harm our results of operations or financial condition.  In addition, such reincorporation may result in taxes imposed on us or on our shareholders.

Arcturus Therapeutics Ltd. is incorporated in Israel, while all of our offices, assets, management, board members and most of our business partners are located in the United States. Accordingly, we may seek to reincorporate in Delaware or another jurisdiction in the United States, while maintaining our Nasdaq listing. Such reincorporation may require a significant amount of time, cost and focus from management and other employees, which may divert attention from our research and commercial activities. If any reincorporation activities we undertake in the future fail to achieve some or all of the expected benefits therefrom, our business, results of operations and financial condition could be materially and adversely affected.

In addition, a reincorporation of the company will be subject to all corporate approvals, which may include an approval of our shareholders, and, such reincorporation may result in certain shareholders recognizing taxable income in the jurisdiction in which such shareholders are tax residents or in, in certain cases, in which their members or partners are resident. Shareholders may be subject to withholding taxes or other taxes with respect to their ownership of the company after the reincorporation. If a plan to reincorporate the company is adopted and executed, we do not intend to make any cash distributions to shareholders to pay such taxes. A reincorporation of the company may also result in income recognition by, and tax liability for, the company. Such a tax liability could reduce our ability to fund our research and development activities or otherwise fund our business.

23


 

Certain current and future relationships with customers and third-party payors as well as certain of our business operations may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims 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 criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

If we obtain FDA approval for any of our product candidates and begin commercializing those products in the United States, our operations may be directly, or indirectly through our customers, further subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act. These laws may impact, among other things, our proposed sales, marketing and education programs. In addition, we may be subject to patient privacy regulation by the federal government and by the U.S. states and foreign jurisdictions in which we conduct our business. The healthcare laws and regulations that may affect our ability to operate include:

 

the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, either the referral of an individual, or the purchase or recommendation of an item or service for which payment may be made under a federal healthcare program, such as the Medicare and Medicaid programs;

 

federal civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment to the federal government, including Medicare or Medicaid, that are false or fraudulent;

 

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created additional federal criminal statutes that prohibit, among other things, executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;

 

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their implementing regulations, which imposes certain requirements on certain types of individuals and entities, such as healthcare providers, health plans and healthcare clearing houses, known as “covered entities,” as well as their “business associates”, independent contractors or agents of covered entities that receive or obtain individually identifiable health information in connection with providing a service on behalf of a covered entity, relating to the privacy, security and transmission of individually identifiable health information;

 

the federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to payments or other transfers of value made to physicians, and further requires applicable manufacturers and applicable group purchasing organizations to report annually to CMS ownership and investment interests held by physicians and their immediate family members; and

 

state and foreign law equivalents of each of the above federal laws, such as: anti-kickback and false claims laws which may apply to items or services reimbursed by any third party payor, including commercial insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government; state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; state and local laws that require the registration of pharmaceutical sales representatives; and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

In addition, the European Union, or EU, has established its own data security and privacy legal framework, including but not limited to Directive 95/46/EC, or the Data Protection Directive. The Data Protection Directive will be replaced starting in May 2018 with the recently adopted European General Data Protection Regulation, or GDPR, which contains new provisions specifically directed at the processing of health information, higher sanctions and extra-territoriality measures intended to bring non-EU companies under the regulation. We anticipate that over time we may expand our business operations to include additional operations in the EU, including potentially conducting preclinical and clinical trials. With such expansion, we would be subject to increased governmental regulation in the EU countries in which we might operate, including the GDPR.  

24


 

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, civil, criminal and administrative penalties, damages, fines, possible exclusion from Medicare, Medicaid and other government healthcare programs, additional reporting requirements and/or oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance, disgorgement, imprisonment, contractual damages, reputational harm, diminished profits and future earnings, and curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

Recent and future healthcare legislation may further impact our business operations.

The United States and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the ACA, was enacted, which made a number of substantial changes in the way healthcare is financed by both governmental and private insurers. Since its passage, there have been judicial and Congressional challenges to certain aspects of the ACA, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the ACA. Since January 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by 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, two bills affecting the implementation of certain taxes under the ACA have been signed into law. On December 22, 2017, President Trump signed into law H.R. 1, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” informally titled the Tax Cuts and Jobs Act, which significantly revises the U.S. Internal Revenue Code of 1986, as amended (the Code). The Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Additionally, on January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amends the ACA, effective January 1, 2019, to increase from 50 percent to 70 percent the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.” As a result, there is significant uncertainty regarding future healthcare reform and its impact on our operations.

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 2019 contains further drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. While any proposed measures will require authorization through additional legislation to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological 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, to encourage importation from other countries and bulk purchasing.

We expect that healthcare reform measures that may be adopted in the future may result in more rigorous coverage criteria and lower reimbursement, and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government-funded programs may result in a similar reduction in payments from private payors.

25


 

We cannot predict what healthcare reform initiatives may be adopted in the future. Further federal, state and foreign legislative and regulatory developments are likely, and we expect ongoing initiatives to increase pressure on drug pricing. Such reforms could have an adverse effect on anticipated revenues from product candidates that we may successfully develop and for which we may obtain regulatory approval and may affect our overall financial condition and ability to develop product candidates.

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

The use of our product candidates in future clinical trials and the sale of any products for which we obtain marketing approval exposes us to the risk of product liability claims. Product liability claims might be brought against us by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our products. For example, unanticipated adverse effects could result from the use of our future products or product candidates which may result in a potential product liability claim. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs. In addition, regardless of merit or eventual outcome, product liability claims may result in:

 

impairment of our business reputation;

 

withdrawal of clinical trial participants;

 

costs due to related litigation;

 

distraction of management’s attention from our primary business;

 

substantial monetary awards to patients or other claimants;

 

the inability to commercialize our product candidates; and

 

decreased demand for our product candidates, if approved for commercial sale.

We plan to obtain product liability insurance relating to the use of our therapeutics in future clinical trials. However, such insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and in the future we may not be able to obtain or maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If and when we obtain marketing approval for product candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we may be unable to obtain product liability insurance on commercially reasonable terms or in adequate amounts. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated adverse effects. A successful product liability claim or series of claims brought against us could cause our share price to decline and, if judgments exceed our insurance coverage, could adversely affect our results of operations and business.

Cyber security risks and the failure to maintain the confidentiality, integrity, and availability of our computer hardware, software, and Internet applications and related tools and functions could result in damage to our reputation and/or subject us to costs, fines or lawsuits.

Our business requires manipulating, analyzing and storing large amounts of data. In addition, we rely on a global enterprise software system to operate and manage our business. We also maintain personally identifiable information about our employees. Our business therefore depends on the continuous, effective, reliable, and secure operation of our computer hardware, software, networks, Internet servers, and related infrastructure. To the extent that our hardware or software malfunctions or access to our data by internal research personnel is interrupted, our business could suffer. The integrity and protection of our employee and company data is critical to our business and employees have a high expectation that we will adequately protect their personal information. The regulatory environment governing information, security and privacy laws is increasingly demanding and continues to evolve. Maintaining compliance with applicable security and privacy regulations may increase our operating costs. Although our computer and communications hardware is protected through physical and software safeguards, it is still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, software viruses, and similar events. These events could lead to the unauthorized access, disclosure and use of non-public information. The techniques used by criminal elements to attack computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. As a result, we may not be able to address these techniques proactively or implement adequate preventative measures. If our computer systems are

26


 

compromised, we could be subject to fines, damages, litigation and enforcement actions, and we could lose trade secrets, the occurrence of which could harm our business. In addition, any sustained disruption in internet access provided by other companies could harm our business.

Business interruptions could delay us in the process of developing our future products.

Our headquarters are located in San Diego County. We are vulnerable to natural disasters such as earthquakes and wild fires, as well as other events that could disrupt our operations. We do not carry insurance for earthquakes or other natural disasters and we may not carry sufficient business interruption insurance to compensate us for losses that may occur. Any losses or damages we incur could have a material adverse effect on our business operations.

RISKS RELATED TO OUR ORDINARY SHARES

The market price of our Ordinary Shares may be highly volatile.

Since our merger on November 15, 2017 through May 9, 2018, our closing share price as reported on The Nasdaq Global Market (“Nasdaq”), has ranged from $4.91 to $10.22. The trading price of our Ordinary Shares is likely to continue to be volatile.

Our share price could be subject to wide fluctuations in response to a variety of factors, including the following:

 

adverse results or delays in preclinical studies or clinical trials;

 

inability to obtain additional funding;

 

ongoing litigation or adverse rulings in relation to our proxy and shareholder litigation and litigation with our former chief executive officer and other former executives;

 

any delay in filing an IND or NDA for any of our product candidates and any adverse development or perceived adverse development with respect to the FDA’s review of that IND or NDA;

 

failure to maintain our existing strategic alliances or enter into new alliances;

 

failure of our strategic alliance partners to elect to develop and commercialize product candidates under our alliance agreements or the termination of any programs under our alliance agreements;

 

failure by us or our licensors and strategic alliance partners to prosecute, maintain or enforce our intellectual property rights;

 

failure to successfully develop and commercialize our product candidates;

 

changes in laws or regulations applicable to our preclinical and clinical development activities, product candidates or future products;

 

inability to obtain adequate product supply for our product candidates or the inability to do so at acceptable prices;

 

adverse regulatory decisions;

 

introduction of new products, services or technologies by our competitors;

 

failure to meet or exceed financial projections we may provide to the public;

 

failure to meet or exceed the estimates and projections of the investment community;

 

the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;

27


 

 

announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us, our strategic alliance partners or our competitors;

 

disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

 

additions or departures of key scientific or management personnel;

 

significant lawsuits, including patent or licensing matters;

 

changes in the market valuations of similar companies;

 

sales of our Ordinary Shares by us or our shareholders in the future; and

 

trading volume of our Ordinary Shares.

In addition, companies trading in the stock market in general, and Nasdaq in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our Ordinary Shares, regardless of our actual operating performance.

We are an “emerging growth company,” and the reduced reporting requirements applicable to emerging growth companies could make our Ordinary Shares less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act. As an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and delaying adopting new or revised accounting standards until such time as those standards apply to private companies. We expect that we will be an emerging growth company until December 31, 2018, although circumstances could cause us to lose that status earlier. We cannot predict if investors will find our Ordinary Shares less attractive because we may rely on these exemptions. If some investors find our Ordinary Shares less attractive as a result, there may be a less active trading market for our Ordinary Shares and our share price may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. We have elected to use this extended transition period. As a result of this election, our timeline to comply with these standards will in many cases be delayed as compared to other public companies that are not eligible to take advantage of this election or have not made this election. Therefore, our financial statements may not be comparable to those of companies that comply with the public company effective dates for these standards.

In addition, if we cease to be an emerging growth company, we will no longer be able to use the extended transition period for complying with new or revised accounting standards. As a result, changes in rules of U.S. generally accepted accounting principles or their interpretation, the adoption of new guidance or the application of existing guidance to changes in our business could significantly affect our financial position and results of operations.

The requirements of being a publicly traded company may strain our resources and divert management’s attention.

As a publicly traded company, we have incurred, and will continue to incur, significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and Nasdaq have imposed various requirements on public companies. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as “say on pay” and proxy access. As an “emerging growth company” we are permitted to implement many of these requirements over a longer period and up to five years from the pricing of our initial public offering. We have taken advantage of this new legislation but cannot guarantee that we will not be required to implement these requirements sooner than budgeted or planned and thereby incur unexpected expenses. Shareholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in

28


 

which we operate our business in ways we cannot currently anticipate. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain our current levels of such coverage. In addition, most of our personnel consists of the Arcturus Therapeutics, Inc. employees prior to the merger, some of whom may not have previously managed and operated a public company.  These employees will need to devote substantial time to gaining expertise regarding operations as a public company and compliance with applicable laws and regulations including the costs associated with the filing requirements under Section 16 of the Exchange Act.

Changes or modifications in financial accounting standards, including those related to revenue recognition, may harm our results of operations.

From time to time, the Financial Accounting Standards Board, or FASB, either alone or jointly with other organizations, promulgates new accounting principles that could have an adverse impact on our financial position, results of operations or reported cash flows. In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue when promised goods or services to customers. The standard requires a company to recognize revenue to depict the transfer of goods or services to customers in the amount that reflects the consideration it expects to be entitled to receive in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018, and January 1, 2019 for private companies. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued additional ASUs which clarified certain aspects of the new guidance. Since we are an “emerging growth company" and opt to defer the adoption of new or revised accounting standards until such time as those standards apply to private companies, we will adopt the new standard for the year beginning January 1, 2019. We have not yet finalized our assessment of the impact of the new standard on our results of operations, internal controls and disclosures. Any difficulties in implementing this standard, or in adopting or implementing any other new accounting standard, and to update or modify our internal controls as needed on a timely basis, could result in our failure to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us. Finally, if we were to change our critical accounting estimates, including those related to the recognition of collaboration revenue, our operating results could be significantly affected.

Sales of a substantial number of our Ordinary Shares in the public market by our existing shareholders could cause our share price to fall.

If our existing shareholders sell, or indicate an intention to sell, substantial amounts of those Ordinary Shares in the public market, the trading price of our Ordinary Shares could decline. In particular, the former shareholders, warrantholders and noteholders of Arcturus Therapeutics, Inc. received an aggregate of 6,631,712 of our Ordinary Shares pursuant to the merger in an unregistered transaction. Those shares remain restricted from resale under the Securities Act of 1933, as amended, or the Securities Act, for a six-month period following the closing of the merger pursuant to Rule 144 under the Securities Act. Once those restrictions lapse, those shareholders will be eligible to sell those shares in the public market without restriction, except for shareholders who are deemed “affiliates” of the Company under Rule 144 under the Securities Act. In addition, Ordinary Shares that are either subject to outstanding options or reserved for future issuance under our employee benefit plans are or may become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules and Rule 144 under the Securities Act. If these Ordinary Shares are sold, or if it is perceived that they will be sold, in the public market, that could create downward pressure on the trading price of our Ordinary Shares and cause the trading price to decline.

Future sales and issuances of our Ordinary Shares or rights to purchase Ordinary Shares, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our shareholders and could cause our share price to fall.

We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, our shareholders may experience substantial dilution. Pursuant to our 2010 Incentive Option Plan, or the 2010 Plan, our management is authorized to grant options and other equity-based awards to our employees, directors and consultants. We may sell Ordinary Shares, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time, any of which may result in material dilution to investors and/or our existing shareholders. New investors could also be issued securities with rights superior to those of our existing shareholders.

29


 

We may be unable to comply with the applicable continued listing requirements of Nasdaq.

Our Ordinary Shares are currently listed on Nasdaq. In order to maintain this listing, we must satisfy minimum financial and other continued listing requirements and standards, including a minimum closing bid price requirement for our Ordinary Shares of $1.00 per share. There can be no assurance that we will be able to comply with the applicable listing standards. For example, if we were to fail to meet the minimum bid price requirement for 30 consecutive business days, we could become subject to delisting. Although Nasdaq may provide us with a compliance period in which to regain compliance with the minimum bid price requirement, we cannot assure you that we would be able to regain compliance within the period provided by Nasdaq. In order to regain compliance with such requirement, the closing bid price of our Ordinary Shares would need to meet or exceed $1.00 per share for at least 10 consecutive business days during the compliance period. If we were not able to regain compliance within the allotted compliance period for this requirement or any other applicable listing standard, including any extensions that may be granted by Nasdaq, our Ordinary Shares would be subject to delisting. In the event that our Ordinary Shares are delisted from Nasdaq and are not eligible for quotation or listing on another market or exchange, trading of our Ordinary Shares could be conducted only in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for our Ordinary Shares and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our Ordinary Shares to decline further.

Our business and the market price of our ordinary shares could be negatively affected as a result of a proxy contest.

On February 1, 2018, Mr. Payne, the Company’s former President and Chief Executive Officer, was terminated by the Company for cause. On February 12, 2018, Mr. Payne wrote a letter to the Company’s board of directors demanding that the Company hold an extraordinary general meeting of shareholders.  On March 11, 2018, the Company announced that it would hold an extraordinary general meeting of shareholders on May 7, 2018 as a result of Mr. Payne’s demand.  On April 8, 2018, upon the recommendation of the Executive Committee of the Company’s board of directors, the board of directors approved postponing the extraordinary general meeting.

On May 13, 2018, the District Court at Tel Aviv ruled on a number of issues, including regarding the motion to extend the temporary restraining order, and ordered the Company to convene a Board meeting within seven days, and to summon an extraordinary general meeting within 35 days from that date. See Item 8.A. “Legal Proceedings” and Item 5.A. “Recent Developments” for additional information.

The Company’s board of directors has recommended that shareholders vote against the removal of the current directors and against the election of Mr. Payne’s nominees, and the Company is soliciting proxies from shareholders on this basis. Our business, operating results or financial condition could be harmed by this proxy contest because, among other things:

 

responding to the proxy contest is costly and time-consuming, is a significant distraction for our board of directors, management and employees, and diverts the attention of our board of directors and senior management from the pursuit of our business strategy, which could adversely affect our results of operations and financial condition;

 

perceived uncertainties as to our future direction, our ability to execute on our strategy, or changes to the composition of our board of directors or senior management team may lead to the perception of a change in the direction of our business, instability or lack of continuity which may be exploited by our competitors, and may result in the loss of current and prospective employees, customers, licensees, suppliers and other constituencies important to our success, which could adversely affect our results of operations and financial condition; and

 

the expenses for legal and advisory fees and administrative and associated costs incurred in connection with responding to the proxy contest and the related litigation may be substantial.

In addition, the market price of our ordinary shares could be subject to significant fluctuation or otherwise be adversely affected by the uncertainties described above or the outcome of the proxy contest.

We are treated as a U.S. corporation for U.S. federal tax purposes.

Pursuant to Section 7874 of the Code, we are treated as a U.S. corporation for U.S. federal income tax purposes. As a result, we are subject to U.S. federal corporate income tax as if we were incorporated in the United States. Shareholders should consult their tax advisers regarding the tax consequences of holding our Ordinary Shares based on their particular circumstances.

30


 

The recently enacted U.S. federal income tax reform bill could adversely affect our business and financial condition.

As noted above, on December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, which significantly revises the Code. The Tax Cuts and Jobs Act, among other things, contains significant changes to U.S. federal corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Cuts and Jobs Act is uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will conform to the newly enacted federal tax law. The impact of the Tax Cuts and Jobs Act on holders of our Ordinary Shares is also uncertain and could be adverse. We urge our shareholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our Ordinary Shares.

As a foreign private issuer, we are permitted and actually do follow certain home country corporate governance practices instead of otherwise applicable SEC and Nasdaq requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.

We expect that we will be a foreign private issuer until January 1, 2019. As a foreign private issuer, we are permitted, and actually do follow certain home country corporate governance practices instead of those otherwise required under the Listing Rules of the Nasdaq Stock Market (the “Nasdaq Listing Rules”) for domestic U.S. issuers. For instance, we follow home country practice in Israel with regard to, among other things, director nomination procedures and approval of compensation of officers. In addition, we may follow our home country law instead of the Nasdaq Listing Rules that require that we obtain shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company, a public offering involving issuances of a 20% or greater interest in the company, and certain acquisitions of the stock or assets of another company. Following our home country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on Nasdaq may provide less protection to you than what is accorded to investors under the Nasdaq Listing Rules applicable to domestic U.S. issuers.

In addition, as a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as domestic U.S. issuers whose securities are registered under the Exchange Act. Also, although the Israeli Companies Law regulations require us to disclose the annual compensation of our five most highly compensated senior officer holders on an individual basis, this disclosure is not as extensive as that required of a U.S. domestic issuer. For example, this disclosure required under Israeli law is limited to compensation paid in the immediately preceding year without any requirement to disclose option exercises and vested stock options, pension benefits or potential payments upon termination or change of control. These exemptions and leniencies reduce the frequency and scope of information and protections to which you are entitled as an investor.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

Under the Tax Cuts and Jobs Act, U.S. federal net operating losses, or NOLs, incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal NOLs is limited. It is uncertain if and to what extent various states will conform to the Tax Cuts and Jobs Act. To the extent that we continue to generate taxable losses for United States federal income tax purposes, unused NOLs will carry forward to offset future taxable income (subject to any applicable limitations), if any. Under Sections 382 and 383 of the Code, as amended, if a corporation undergoes an “ownership change,” 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 NOLs and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. We believe we may have triggered an “ownership change” limitation at the completion of our merger with Arcturus Therapeutics, Inc. in November 2017, however we have not completed a study in accordance with Sections 382 and 383 of the Code to determine whether this ownership change has occurred. We may also experience ownership changes in the future as a result of subsequent shifts in our share ownership. As a result, if we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. Similar provisions of U.S. state tax law may also apply to limit our use of accumulated state tax attributes, including our state NOLs. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. As a result, even if we attain profitability, we may be unable to use a material portion of our NOLs and other tax attributes, which could negatively impact our future cash flows.

31


 

We do not intend to pay dividends on our Ordinary Shares so any returns will be limited to the value of our shares.

We have never declared or paid any cash dividends on our Ordinary Shares. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Moreover, the Israeli Companies Law 5759 – 1999, or the Israeli Companies Law, imposes certain restrictions on our ability to declare and pay dividends. See Item 10.B. “Memorandum and Articles of Association – Rights, Preferences and Restrictions of Shares – Dividend and Liquidation Rights” for additional information. Any return to shareholders will therefore be limited to the appreciation of their shares.

RISKS RELATED TO ISRAELI LAW AND OUR OPERATIONS IN ISRAEL

Provisions of Israeli law may make it easy for our shareholders to demand that we convene a shareholders meeting, and/or allow shareholders to convene a shareholder meeting without the consent of our management, which may disrupt our management's ability to run our company.

Section 63(b) of the Israeli Companies Law may allow any one or more of our shareholders holding at least 5% of our voting rights to demand that we convene an extraordinary shareholders meeting. Also, in the event that we deny to convene an extraordinary shareholders meeting pursuant to such a request, Section 64 of the Israeli Companies Law provides that such shareholders may independently convene an extraordinary shareholders meeting and require us to cover the costs. If our shareholders decide to exercise these rights in a way inconsistent with our management's strategic plans, our management's ability to run our company may be disrupted, and this process may entail significant costs to us.

Provisions of Israeli law and our amended and restated articles of association may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a change of control, even when the terms of such a transaction are favorable to us and our shareholders.

Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a merger may not be consummated unless at least 50 days have passed from the date on which a merger proposal is filed by each merging company with the Israel Registrar of Companies and at least 30 days have passed from the date on which the shareholders of both merging companies have approved the merger. In addition, a majority of each class of securities of the target company must approve a merger. Moreover, a tender offer for all of a company's issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer, unless, following consummation of the tender offer, the acquirer would hold at least 98% of our outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition, unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights.

Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. See Item 10.E. “Taxation – Israeli Taxation Considerations” for additional information.

Our amended and restated articles of association also contain provisions that could delay or prevent changes in control or changes in our management without the consent of our Board of Directors. These provisions include the following:

 

no cumulative voting in the election of directors, which limits the ability of minority shareholders to elect director candidates; and

 

the right of our Board of Directors to appoint a director to fill a vacancy created by the expansion of the Board of Directors or the resignation, death or removal of a director, which may prevent shareholders from being able to fill vacancies on our Board of Directors.

As a domiciliary of Israel, our results may be adversely affected by political, economic and military instability in Israel.

As an Israeli company, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, the Hamas militant group and the Hezbollah. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations.

32


 

In addition, since 2010 political uprisings and conflicts have arisen in various countries in the Middle East. Such instability may lead to deterioration in the political and trade relationships that exist between the State of Israel and certain other countries. Several countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region continues or increases. Similarly, Israeli companies are limited in conducting business with entities from countries that are considered to be in a state of war with Israel.

Further, in the past, the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still restrict business with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating results, financial conditions or the expansion of our business.

It may be difficult to enforce a judgment of a U.S. court against us and the Israeli experts named herein in Israel or the United States, to assert U.S. securities laws claims in Israel or to serve process on certain of our officers and directors and these experts.

We were incorporated in Israel. Therefore, a judgment obtained against us, or any directors that reside outside of the United States, including a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not necessarily be enforced by an Israeli court. It also may be difficult for you to effect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel. Additionally, it may be difficult for an investor, or any other person or entity, to initiate an action with respect to U.S. securities laws in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven as a fact by expert witnesses, which can be a time consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, you may not be able to collect any damages awarded by either a U.S. or foreign court.

Your rights and responsibilities as a shareholder will be governed by Israeli law, which differs in some material respects from the rights and responsibilities of shareholders of U.S. companies.

The rights and responsibilities of the holders of our Ordinary Shares are governed by our amended and restated articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in typical U.S.-based corporations. In particular, a shareholder of an Israeli company has certain duties to act in good faith and fairness towards the Company and other shareholders, and to refrain from abusing its power in the Company. See Item 10.B. “Memorandum and Articles of Association – Shareholder Duties” for additional information. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our Ordinary Shares that are not typically imposed on stockholders of U.S. corporations.

We are subject to anti-takeover provisions that could delay or prevent our acquisition by another entity.

Provisions of Israeli corporate and tax law and of our amended and restated articles of association may have the effect of delaying, preventing or making more difficult any merger or acquisition of us. In addition, any merger or acquisition of us may require the prior consent of the Israel Innovation Authority (formerly known as the Office of the Chief Scientist), as well as the Investment Center of the Israeli Ministry of Industry, Trade and Employment, or the Investment Center. Israeli law regulates mergers, votes required to approve a merger, acquisition of shares through tender offers and transactions involving significant shareholders. Any of these provisions may make it more difficult to acquire us. Accordingly, our acquisition by another entity could be delayed or prevented even if it would be beneficial to our shareholders.

ITEM 4.

INFORMATION ON THE COMPANY

4.A.

History and development

Our legal and commercial name is Arcturus Therapeutics Ltd., and we are the product of the 2017 merger of Arcturus Therapeutics, Inc. and Alcobra Ltd. Arcturus Therapeutics, Inc. was incorporated in Delaware in 2013, and Alcobra Ltd. was incorporated in Israel in 2008. On November 15, 2017, the two companies completed a merger (the “merger”) pursuant to which Arcturus Therapeutics, Inc. became a wholly-owned subsidiary of Alcobra Ltd., and Alcobra Ltd. changed its name to Arcturus Therapeutics Ltd. While Alcobra Ltd. was the legal acquirer in the transaction, Arcturus Therapeutics, Inc. was deemed the accounting acquirer. Also, as part of the merger, the Ordinary Shares of Arcturus Therapeutics Ltd. were listed on Nasdaq under the trading symbol “ARCT,” in place of the previous listing of the Ordinary Shares of Alcobra Ltd, which had traded under the symbol “ADHD.” The business plan of the post-merger company is that of Arcturus Therapeutics, Inc. As an Israeli company, we are subject to the Israeli Companies Law, 5759-1999, or the Israeli Companies Law.

33


 

Our principal place of business is located at 10628 Science Center Drive, Suite 250, San Diego, California, and our telephone number there is (858) 900-2660. Our agent in the United States is Arcturus Therapeutics, Inc., whose address is that of our San Diego, California headquarters. Our World Wide Web address is www.arcturusrx.com. The information contained on that web site is not a part of this annual report.

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, or the Securities Act, as modified by the JOBS Act. As such, we are eligible to, and intend to, take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not “emerging growth companies,” such as not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We could remain an “emerging growth company” for up to five years from our initial public offering in 2013, or, if earlier, until the earliest of (a) the last day of the first fiscal year in which our annual gross revenue exceeds $1.07 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our Ordinary Shares that is held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the preceding three-year period.

For additional information relating to the development of our company, see Item 4.B. “Business Overview.” For additional information concerning our company’s capital expenditures over the course of the last three fiscal years, see Item 5 B. “Liquidity and Capital Resources – Capital Expenditures in Last Three Fiscal Years.” 

4.B.

Business overview

Nucleic Acid Medicines and Markets

The World Health Organization estimates there are 10,000 monogenic diseases. Monogenic diseases are caused by mutations in a single gene. These disorders affect 1/100 people at birth, and between 250 and 350 million people worldwide live with a rare genetic disease. Many of these diseases cause moderate to severe symptoms and significantly decrease the quality of life and life expectancy for patients. There are no FDA-approved drugs for over 95% of known rare genetic diseases. This is a significant unmet medical need.

Nucleic acid medicines have the potential to treat many diseases caused by genetic mutations including diseases that cannot be treated by conventional drugs such as small molecules and biologics. DNA carries the blueprint from which all proteins necessary for life are produced inside cells. Each gene has the code needed to make one or more proteins. Various types of nucleic acids, including messenger RNA (“mRNA”), small interfering RNA (“siRNA”) and microRNA, work together to control how the genes contained in DNA are translated into proteins.

mRNA or DNA has the potential to be used as protein replacement therapy to treat diseases caused by a lack of protein, or by defective proteins, such as cystic fibrosis. If a gene has a mutation that stops it from producing protein or causes it to produce defective proteins, mRNA or DNA medicines may be used to ensure that a healthy version of the missing protein is produced. Nucleic acid vaccines are also being evaluated for their potential in infectious disease and oncology, using mRNA or DNA to express an antigen and trigger an immune response.

siRNA medicines can treat viral infections like HBV and diseases like Huntington’s disease that are caused by malfunctioning proteins. Each siRNA binds perfectly to one mRNA which produces a result whereby the resulting cell destroys the mRNA. This mechanism, called RNA interference (“RNAi”), can be used to prevent mutated genes from being translated into defective proteins that cause disease. It can also stop viruses from replicating inside the body.

Naked RNA and DNA are quickly degraded by enzymes in the bloodstream and can cause a strong immune response. Therefore, nucleic acid medicines developed for systemic use must use a vector to deliver the nucleic acid to target cells. Viral delivery vectors and lipid-mediated delivery systems are the two main delivery systems used in nucleic acid therapeutics development.

Viral delivery vectors are very effective at delivering DNA to cells. However, they can cause liver damage and activate an immune response in human patients. Viral vectors may also cause accidental mutations in host DNA. Patients treated with viral vectors can also develop antibodies against these vectors that make the treatment less effective over time.

Lipid-mediated delivery systems are the most common non-viral vectors because they are biocompatible and do not cause insertional mutagenesis. They can also be manipulated to target specific cells in the body. Despite these advantages, older lipid-mediated delivery systems also stimulate adverse immune responses and cause liver damage in patients.

34


 

Who We Are

We are a preclinical nucleic acid medicines company focused on developing therapeutics for rare, infectious, fibrotic, and respiratory diseases with significant unmet medical needs. We have two proprietary technologies with the potential to address the major hurdles in nucleic acid medicine development, namely the effective and safe delivery of nucleic acids to disease-relevant target tissues. We believe the versatility of our platform to target multiple tissues, its compatibility with various nucleic acid therapeutic modalities, and our expertise developing scalable manufacturing processes puts us in a good position to deliver on the next generation of nucleic medicines.

 

We have developed a novel lipid-mediated delivery system called Lipid-enabled and Unlocked Nucleomonomer Agent modified RNA (“LUNAR®”). Drawing from a library of over 150 proprietary lipids, LUNAR can be flexibly designed to deliver nucleic acids to many clinically important cells and tissues, including liver hepatocytes, liver stellate cells, myocytes and lung cells, resulting in knockdown or upregulation of target proteins. Our lipids are pH-sensitive and designed to be biodegradable, minimizing lipid accumulation in cells after multiple dosing and potentially improving chronic safety.

 

 

Our proprietary Unlocked Nucleomonomer Agent (“UNA”) oligomer chemistry technology can be incorporated into multiple types of nucleic acid medicines. UNA has the potential to improve the efficacy and/or safety profile of nucleic acid medicines.

Our LUNAR and UNA technologies are wholly-owned by us and covered by our patent portfolio of 140 patents and patent applications, issued in the United States, China, Europe, Japan and other countries. We believe that we can use our technologies to develop medicines in multiple nucleic acid-based therapeutic modalities: (1) mRNA, DNA, and replicon – up-regulation of proteins for therapeutics or vaccines; (2) siRNA, microRNA, and antisense oligonucleotides – knockdown of genes overexpressed in disease; and (3) CRISPR, TALEN, zinc finger proteins, and meganucleases – gene editing of errant genes.

 

We are using our proprietary technology to develop nucleic acid medicines to treat diseases with clear unmet medical needs, accelerated clinical paths and commercial opportunities. Our preclinical pipeline currently has seven active preclinical drug discovery and development programs. This includes programs which are wholly-owned, as well as programs in partnership with Ultragenyx Pharmaceutical, Inc. (“Ultragenyx”), Takeda Pharmaceutical Company Limited (“Takeda”), Janssen Pharmaceuticals, Inc, one of the Janssen Pharmaceutical Companies of Johnson & Johnson (“Janssen”), Synthetic Genomics, Inc. (“Synthetic Genomics” or “SGI”) and  CureVac AG (“CureVac”).

 

The LUNAR-OTC program is developing mRNA compounds to treat ornithine transcarbamylase (“OTC”) deficiency, a life-threatening genetic disease that affects approximately 1 in 60,000 people. This is a co-development program with CureVac, and we have achieved preclinical proof of concept for LUNAR-OTC in a mouse model of the disease.

 

The LUNAR-CF program is developing mRNA compounds to replace dysfunctional cystic fibrosis transmembrane conductance regulator (“CFTR”) protein in cystic fibrosis (“CF”) patients. CF is a common genetic disease in the United States, and approximately 1,000 patients are newly diagnosed each year. This program is supported by CFFT. We have demonstrated proof of concept for LUNAR delivery to lung epithelial cells in vivo and shown activity of an optimized CFTR mRNA in cultured cells.

 

The LUNAR-RLD program is an internal research program focused on target validation of multiple pipeline LUNAR-mRNA program candidates. A rare liver disease will be selected as a future development program based on these efforts.

 

We have partnered with Ultragenyx to develop up to ten mRNA therapeutic candidates for certain rare disease targets. LUNAR-GSDIII is the first program to be disclosed from the collaboration. Glycogen Storage Disease Type III (“GSD”) is caused by genetic mutations in the glycogen debranching enzyme AGL which leads to glycogen accumulation in liver and muscle. There are approximately 10,000 patients worldwide.

 

We have partnered with Takeda to develop nucleic acid-based therapeutic candidates for the treatment of nonalcoholic steatohepatitis (“NASH”) and other gastrointestinal (“GI”) disorders.

 

We have partnered with Janssen, a Johnson & Johnson company, to develop nucleic acid-based products for the treatment of hepatitis B virus infection (“HBV”) and potentially other infectious and respiratory diseases.

 

We have a license and collaboration agreement with SGI focused on developing vaccines and therapeutics using their proprietary self-replicating nucleic acid technology. We have demonstrated proof of concept in preclinical animal models for both vaccines and therapeutics.

35


 

Our team has extensive experience in the discovery and development of nucleic acid medicines. We are led by Mark R. Herbert, Interim President. Mr. Herbert’s background includes over 15 years of experience in business and technical development of large and small molecules working across a number of different platforms and therapeutic areas, including serving as Head of U.S. Development and Sales at STA Pharmaceutical Co., Ltd. and Director of Pharmaceutical Sciences at Aragon Pharmaceuticals, Inc. He is an author or inventor on over 35 peer-reviewed manuscripts and patents and has led or contributed to the submission of 13 investigational new drug (“IND”) applications and one new drug application (“NDA”). Also, Dr. Christine Esau serves as our Vice President of Research and Development and Dr. Priya Karmali serves as our Senior Director of Pharmaceutical Development. Dr. Esau has over 15 years of experience in nucleic acid therapeutics drug discovery at Ionis Pharmaceuticals, Inc., Regulus Therapeutics, Inc. and as Chief Scientific Officer of AptamiR Therapeutics, Inc. She performed pioneering work in microRNA biology and targeting technology development, resulting in landmark, highly cited papers and early patent filings. Dr. Karmali has over 15 years of experience in lipid-based drug delivery systems at Nitto Denko and Regulus Therapeutics, Inc. where she led drug product development efforts for nucleic acid medicines currently in various stages of clinical trials. She is an author or inventor on over 35 scientific publications and patents. In addition, Stuart Collinson, Ph.D., serves as our Executive Chair. Dr. Collinson’s experience includes Chief Executive Officer of Aurora Biosciences and senior roles at GlaxoWellcome plc and Baxter International Inc.

Our Strategy

We aim to leverage our proprietary and licensed intellectual property relating to LUNAR and UNA technologies to develop a pipeline of nucleic acid medicines for rare, infectious, fibrotic and respiratory diseases. In addition to our collaborations noted above, we are focused on developing a balanced portfolio of proprietary and partnered programs to advance our preclinical candidates in a timely and cost-effective manner.

Our internal programs are focused on significant unmet medical needs in rare diseases. These diseases affect between 250 and 350 million people around the world. There are no drugs approved by the U.S. Food and Drug Administration (“FDA”) for over 95% of these conditions. Therefore, these diseases represent both a significant unmet medical need and a large potential market. We believe the versatility of our nucleic acid development platform technologies gives us a distinct advantage in developing nucleic acid medicines to treat the genetic cause of rare diseases.

Our novel UNA chemistry and LUNAR delivery technologies are covered by our extensive patent portfolio, and we believe that we can use our technologies to enable multiple types of nucleic acid medicines. We are actively pursuing technology alliances and strategic therapeutic partnerships to address other targets.

We continue to invest in further development of the LUNAR delivery, UNA oligomer chemistry, siRNA and mRNA technology platforms to improve their efficacy and safety profile and expand their applications. Our team is also exploring new nucleic acid chemistries and intellectual property opportunities, including locked nucleic acid (“LNA”), to expand our nucleic acid technology platform portfolio and facilitate our development of novel nucleic acid therapeutic candidates.

Our business strategy includes:

 

Develop a portfolio of nucleic acid therapeutics to treat rare diseases and become a clinical stage company. Our initial focus is on OTC deficiency and cystic fibrosis. We have achieved preclinical proof of concept in the LUNAR-OTC and LUNAR-CF programs, including robust target protein expression and functional activity in preclinical disease models. We aim to establish the infrastructure required to move these programs into the clinic.

 

Leverage our UNA and LUNAR technologies to develop therapeutics for a broad range of additional rare diseases. We believe that many other rare diseases would be good candidates for mRNA replacement therapy or siRNA-mediated gene silencing. Given that the delivery system will be similar across multiple programs, we anticipate that the costs and risks associated with developing new nucleic acid therapeutics for other orphan diseases will be greatly reduced. Efforts to prioritize rare liver diseases for progression to mRNA development programs are ongoing.

36


 

 

Drive existing collaborations and form new strategic collaborations that leverage our UNA and LUNAR technologies. We are in discussions with several biopharmaceutical firms to develop nucleic acid, gene editing and vaccine programs for various disease indications. We intend to pursue partnerships in order to accelerate the development and maximize the market potential of our UNA and LUNAR technology platforms. In particular, we intend to partner with larger biopharmaceutical companies that possess market know-how and marketing capabilities to complete the development and commercialization of nucleic acid therapeutics.

 

Identify new chemistries and intellectual property opportunities to expand Arcturus’ nucleic acid technology platform portfolio. Our team is working to discover and develop new nucleic acid chemistries that will complement its LUNAR and UNA technology platforms and strengthen our ability to develop novel nucleic acid therapeutic candidates for a range of unmet medical needs.

Our Competitive Strengths

We believe our proprietary UNA and LUNAR technologies, extensive intellectual property portfolio and experienced scientific team will enable us to advance our drug candidates and existing partnerships, and further partner our technology platform to expand future development and commercial opportunities.

Our competitive strengths include:

 

LUNAR delivery technology is not limited to a specific nucleic acid modality. Preclinical studies have shown that LUNAR delivery technology is compatible with different types of nucleic acids, from short double-stranded siRNAs, to long single-stranded mRNAs, to double-stranded DNA molecules. This means that we are not restricted in the types of nucleic acid medicines that we can develop.

 

LUNAR delivery technology is compatible with multiple routes of administration and can be targeted to diverse tissues and cell types. Preclinical studies in both rodents and non-human primates have shown that LUNAR can deliver nucleic acid compounds specifically to hepatocytes via intravenous injection. Additionally, preclinical studies in rodents have shown that LUNAR can deliver nucleic acid compounds to liver stellate cells via intravenous injection, muscle cells via intramuscular injection, retinal cells via subretinal injection, and lung cells via nebulization. This is a clear advantage over the N-acetylgalactosamine (“GalNAc”) delivery system that can deliver a single small nucleic acid molecule to hepatocytes. GalNAc technology is utilized by companies such as Ionis Pharmaceuticals, Inc., Alnylam Pharmaceuticals, Inc., Arrowhead Pharmaceuticals, Inc., Regulus Therapeutics Inc., Dicerna Pharmaceuticals, Inc. and Silence Therapeutics plc. This versatility in route of administration and cell type targeting, combined with the ability to use LUNAR delivery technology with many different types of nucleic acids, means that the platform can potentially be used to develop nucleic acid therapies for a range of different diseases.

 

LUNAR can deliver mixtures of different nucleic acids as one drug product. LUNAR can deliver mixtures containing multiple nucleic acids to target cells in vivo, as we previously demonstrated for a combination of three HBV-targeting siRNAs which was efficacious in multiple mouse models of HBV infection.

 

Ability to repeat dose. Multiple preclinical studies in rodents and non-human primates have shown no reduction in efficacy upon repeat dosing of LUNAR formulated siRNA or mRNA. We believe this indicates that LUNAR-delivered nucleic acids may not elicit antibody or cell-mediated immunity that can reduce potency upon repeat dosing.

 

Experienced team. Our team has extensive experience in the discovery and development of nucleic acid medicines, as well as experience and know-how in lipid-mediated delivery technology. This combination of in-house expertise uniquely positions us to develop novel nucleic acid development technologies and nucleic acid medicines.   

 

Our intellectual property portfolio. The LUNAR and UNA technologies are wholly owned by us and covered by our patent portfolio of 140 patents and patent applications, issued in the United States, China, Europe, Japan and other countries. These intellectual property assets allow us to pursue nucleic acid therapeutic candidates and serve as a barrier-to-entry for competitors.

 

Ability to develop high barrier-to-entry products with rapid development of subsequent products with lower costs and risks. The properties of our proprietary technologies, outlined above, allow us to develop high barrier-to-entry nucleic acid medicines. The versatility of our two development platforms will allow us to develop subsequent products relatively quickly with less risk and lower costs.

37


 

Our nucleic acid technology platforms

To address the challenges of nucleic acid medicine delivery and improve safety and tolerability in vivo, we have developed two nucleic acid technology platforms. We believe that our LUNAR delivery platform and UNA oligomer technology can be used together or separately to create the next-generation of safe, effective nucleic acid medicines. These technologies are wholly-owned by us and covered by our patent portfolio of 140 patents and patent applications, issued in the United States, China, Europe, Japan and other countries.

Our LUNAR approach can be paired with multiple classes of nucleic acid medicine-based therapeutics, including mRNA, self-amplifying mRNA (or replicon), siRNA, microRNA, antisense oligonucleotides and other oligonucleotide therapeutic approaches. We can combine our technology with nucleic acids that encode for transmembrane proteins (such as transporters, GPCRs, and receptors), secreted proteins (such as hormones and antibodies), engineered nucleases (CRISPR and TALEN), engineered antigen receptors (CAR-T) and intracellular proteins (chaperones and enzymes). We are also evaluating the potential for LUNAR to deliver DNA-based vaccines and therapeutics.

Our nucleic acid delivery technology – LUNAR

We have designed our LUNAR delivery platform to address major challenges with nucleic acid medicine delivery, including transfection efficiency, adverse immune reactions and liver damage. See below for a graphic representation of our LUNAR formulation, where blue spheres represent polyethylene glycol (“PEG”) lipids and the orange, darker orange, and yellow spheres represent the proprietary Arcturus lipid excipient and other structural components (phospholipid and cholesterol).  

Graphic of LUNAR

 

 

LUNAR formulations are a multi-component drug delivery system that utilizes a proprietary lipid, called ATX. The ATX lipid contains an ionizable amino head group and a biodegradable lipid backbone. The amino head group makes the ATX lipid pH-sensitive. At acidic pH, LUNAR lipids are positively charged, facilitating interaction with the negatively charged nucleic acid, enabling particle formation. At physiological pH (e.g., pH 7.4), LUNAR formulations are neutrally charged. This pH-sensitivity avoids the toxicity often seen with permanently charged cationic lipid-mediated delivery vectors. Upon uptake into a cell by endocytosis, the amino head group again becomes protonated, disrupting the endosome and releasing the nucleic acid payload into the cytosol.

38


 

To deliver a nucleic acid payload, the LUNAR particles associate with the cell membrane of target cells and quickly enter the cell via endocytosis, causing the cell membrane to invaginate and form an endosome. The LUNAR formulations then become entrapped in the endosomes and with increased acidity as the endosome ages, a pH-mediated disruption enables release of the nucleic acid payload following rapid biodegradation of the LUNAR components. Once release of the RNA into the cytosol occurs, the translational machinery can interact with the nucleic acid and processing and/or trafficking can then take place to make functional protein (schematic diagram below represents delivery of an mRNA payload).

LUNAR-mediated delivery of RNA into cells

 

The ATX lipid backbone is designed to be biodegradable. This prevents the lipids from accumulating inside the cell and causing toxicity. Ester groups in the ATX lipid backbone can be cleaved by esterases inside the cell once the nucleic acid payload has been released, and the resulting lipid fragments are quickly metabolized by the cell.

We have generated a library of over 150 proprietary ATX lipids. ATX lipids are rationally designed to fit the application and vary depending on the target cell type and route of administration. Formulation screening and optimization is performed for each program to determine the optimal ATX lipid and LUNAR composition. High encapsulation efficiency was observed when LUNAR was formulated with nucleic acids of 20 to 12,000 nucleotides in length (figure below, left) and particle size was within the acceptable range to maximize targeting and efficacy (figure below, right).

39


 

LUNAR compatibility with nucleic acids of various size

LUNAR can be optimized to deliver nucleic acids preferentially to different cell types in the liver after intravenous delivery.  When mice were treated with a single intravenous dose of two different LUNAR-siRNA formulations, significant target mRNA knockdown was observed in hepatocytes 72 hours post-treatment (figure below, left). Shown in green, the composition of a different LUNAR-siRNA formulation was modified to also achieve significant target mRNA knockdown in stellate cells, an important cell type for certain liver indications, such as NASH. The hepatocyte-targeting (formulation 1, red bars) was also used to formulate a green fluorescent protein (GFP) mRNA and mice were treated with a single intravenous dose (figure below, right). 24 hours later, GFP protein was seen throughout the liver, particularly in hepatocytes.

LUNAR formulations can be designed to target different cell types in the liver

 

To demonstrate efficacy of LUNAR-mRNA in a repeat-dose setting, non-human primates were treated once weekly for four weeks with LUNAR-encapsulated EPO mRNA (figure below). EPO protein expression levels were determined 6 hours following each treatment, and elevated serum EPO levels were maintained following each treatment.

40


 

Repeat dose efficacy in non-human primates

 

Proof-of concept studies were completed in mice to demonstrate LUNAR-mRNA use in oncology and infectious disease vaccine applications. Mice were treated at Day 0 (prime) and Day 21 (boost) via intramuscular delivery with 0.5 mg/kg LUNAR-encapsulated hemagglutinin mRNA (2 formulations; LUNAR 1 and LUNAR 2). At Day 35, serum titers were determined in a hemagglutination inhibition assay (figure below, left) and antigen-specific cytokine production was evaluated from CD8+ T-cells (figure below, right). With both formulations tested, titers between 103-104 were achieved and a significant increase in % of TNFα and IFNα expressing cells was observed.

Antigen-specific responses following IM delivery of LUNAR-mRNA in influenza vaccination mouse model

41


 

The safety and efficacy profile of first generation LUNAR 1.0 has been most extensively characterized in rodent and non-human primates, and its scalability for manufacturing has been demonstrated. Particle size and % RNA encapsulation were maintained in three separate 30 gram batches and in batch sizes from 50 milligrams to 30 grams (two figures below).

LUNAR Scalability

 

 

LUNAR Reproducibility

 

 

42


 

Our UNA oligomer chemistry

UNAs are RNA analogues in which the C2'-C3' bond of the ribose ring is absent (figure below). UNA chemistry technology can potentially be applied to multiple types of RNA medicines including mRNA, siRNA, microRNA and guide RNAs for gene editing. One or more UNAs can be positioned strategically along a nucleic acid strand to manipulate the chemical properties of the molecule.

RNA structure compared with UNA structure

 

UNAs can potentially improve the efficiency and specificity of siRNA-mediated protein suppression. siRNAs are short double-stranded RNA molecules. Once inside the cell, they become part of the RNA-induced silencing complex (“RISC”) and are split into two single siRNA strands. One of these strands stays with RISC and binds to any mRNA with a complementary sequence. If the wrong siRNA strand stays with RISC, it can bind to different mRNAs than the target mRNA and therefore inhibit translation of other proteins. This is an undesired off-target effect and is one of the major barriers to developing effective siRNA medicines. Incorporating a single UNA into siRNA molecules can make one of the strands preferentially bind to RISC improving specificity. Additionally, incorporation of UNA modifications can reduce susceptibility of the siRNA to nuclease degradation, improving the efficiency of siRNA-mediated protein suppression.

We own a comprehensive suite of UNA technology patents for therapeutic and reagent use, enabling us to operate freely and to independently pursue nucleic acid therapeutic candidates. We are also actively pursuing other novel chemistry technologies with the aim of overcoming the development and therapeutic challenges of nucleic acid medicines. Our goal is to expand our nucleic acid technology portfolio and strengthen our ability to develop safer and more effective nucleic acid therapeutic candidates.

INTERNAL DEVELOPMENT PROGRAMS

We are developing mRNA and siRNA therapeutic candidates to treat rare and global diseases through the following internal development programs.

LUNAR-OTC

Our most advanced research program addresses OTC deficiency, a life-threatening genetic disease that affects approximately 1 in 60,000 people. OTC deficiency is the most common urea cycle disorder. A lack of the OTC enzyme in liver cells results in high blood ammonia levels, called hyperammonemia. This causes neurotoxicity and can lead to seizures, coma and death in untreated patients. There is no cure for OTC deficiency. Current standard of care aims to manage symptoms and control blood ammonia levels.

Together with our development partner CureVac, we are developing an mRNA replacement therapy that enables OTC patients to make healthy functional OTC enzyme in their liver cells. Preclinical studies have shown that our proprietary LUNAR technology safely and effectively delivers nucleic acid to liver cells in animal models.

In preclinical proof of concept studies, we used our LUNAR platform to deliver target human OTC mRNA to the liver cells of a mouse model of OTC deficiency. This treatment induced the production of human OTC enzyme at normal/physiological levels in the liver cells of treated mice and normalized levels of two key clinical biomarkers: blood ammonia and urinary orotic acid.

43


 

Overview of OTC Deficiency

OTC deficiency is caused by mutations in the OTC gene which leads to a non-functional or deficient OTC enzyme. OTC is a critical enzyme in the urea cycle, which takes place in liver cells, and converts ammonia to urea. This conversion does not occur properly in patients with OTC deficiency and ammonia accumulates in their blood, acting as a neurotoxin and liver toxin. This can cause severe symptoms including vomiting, headaches, coma and death. OTC deficiency is an inherited disease that can cause developmental problems, seizures and death in newborn babies. It is an X-linked disorder, so is more common in boys. Patients with less severe symptoms may present later in life, as adults.

There is no cure for OTC deficiency, apart from liver transplant. However, this treatment comes with significant risk of complications such as organ rejection. Transplant recipients must take immunosuppressant drugs for the rest of their lives. Current standard of care for OTC patients is a low-protein diet and ammonia scavengers, such as Ravicti®, to try and prevent their bodies from accumulating ammonia. These treatments do not address the cause of the disease.

The LUNAR-OTC Solution

Patients with uncontrolled OTC deficiency have high levels of ammonia in their blood and orotic acid in their urine. Our preclinical proof of concept studies have shown that LUNAR-delivered human OTC mRNA can potentially reduce urinary orotic acid levels in a well-established mouse model of OTC deficiency: OTC-spf ash mice. These mice have elevated urinary orotic acid. Because they have a small amount of residual OTC enzyme activity, they are not hyperammonemic unless challenged with a high protein diet through inhibition of the residual OTC enzyme activity.  

We treated OTC-spf ash mice with one intravenous dose of LUNAR-encapsulated human OTC mRNA (three lead candidate mRNA sequences tested at a low, middle, and high dose levels). As shown in the figure below, this single treatment significantly reduced urinary orotic acid levels for at least seven days post-treatment (n=4-6 animals per group).

Urinary orotic acid levels following single administration

 

 

Functional effects following repeat dosing of LUNAR-encapsulated human OTC mRNA in OTC-spf ash mice were then determined. OTC-spf ash mice were placed on a high-protein diet to induce hyperammonemia and treated with once weekly intravenous doses of LUNAR-encapsulated human OTC mRNA for 5 weeks at 0.3 and 1.0 mg/kg with a 2-week washout period.   As shown in the figure below, animals in the 1.0 mg/kg LUNAR-OTC treatment group were completely protected from lethality (n=10 animals per group).

44


 

Survival of OTC-deficient mice on high protein diet following weekly LUNAR-OTC treatment

 

LUNAR-CF

The LUNAR-CF program addresses cystic fibrosis, a progressive lung disease caused by mutations in the CFTR gene. We use our LUNAR platform to deliver normal CFTR mRNA into airway epithelial cells. This allows airway cells to produce functional CFTR protein using their native translational machinery and protein trafficking pathways.

This approach has the potential to treat the underlying defect that causes CF (dysfunctional or absent CFTR protein) in all such patients, regardless of mutation type.

Overview of CF

According to the National Institutes of Health, CF is the most common lethal genetic disease in the United States. Currently, more than 30,000 people are living with CF in the United States, 75,000 people worldwide, and approximately 1,000 people are newly diagnosed each year. There are 2,000 known mutations in the CFTR gene. These mutations affect the function of the CFTR protein. CFTR is an ion channel that controls chloride and sodium movement in-and-out of cells. When this channel is absent or dysfunctional, thick mucus can accumulate in airways and pancreatic ducts, which can cause coughing, chronic bacterial infections, inflammation, tissue scarring, digestive problems and other serious complications. The median age of death for a person with CF in the United States is 37 years, and the cause of death is usually lung damage.

There are currently no FDA-approved drugs that can treat all 2,000 CFTR mutations. The FDA has approved three CFTR modulator therapies, Kalydeco®, Orkambi® and Symdeko™, to treat fewer than 40 CF-causing mutations. These drugs do not treat the underlying genetic cause of CF, but instead assist the mutant CFTR protein to reach the cell membrane and/or increase ion channel gating, thus increasing functional activity. For patients with other mutations, antibiotics and mucolytics are the primary standards of care. Many of these patients ultimately suffer from decreased lung function and require lung transplant.

Our LUNAR-CF Solution

With the support of CFFT, we are developing an mRNA therapeutic to treat and prevent lung disease in CF patients. Our LUNAR-CF compound comprises normal CFTR mRNA encapsulated by LUNAR delivery technology. This approach is a form of protein replacement therapy as it enables lung cells to produce normal CFTR protein.

We have completed preclinical proof of concept studies, demonstrating that LUNAR is able to deliver a functional reporter mRNA efficiently into mouse lung epithelial cells and into primary lung epithelial cells in vivo (figure below). Six hours following intratracheal delivery of 0.1 mg/kg LUNAR-encapsulated green fluorescent protein (GFP) mRNA, GFP protein expression (shown in brown) is detected by immunohistochemistry in mouse lung epithelial cells of the primary bronchus and in bronchioles located in the upper and lower airways.

45


 

In vivo targeting to lung epithelial cells following treatment with LUNAR-reporter mRNA

 

 

 

Through optimization of the CFTR mRNA coding sequence and untranslated regions, we were also able to significantly improve CFTR expression and demonstrate enhanced channel activity in an in vitro model system. In CFBE cells transfected with a lead candidate CFTR mRNA sequence, protein expression was significantly increased and the duration of activity prolonged compared to a reference CFTR mRNA which is the natural coding sequence (figure below, left). When the Arcturus lead candidate CFTR mRNA was then transfected in FRT cells, a significant increase in transepithelial conductance was observed (figure below, right), indicating that the CFTR protein produced from the mRNA is functional. In this study, the same reference CFTR mRNA was included and minimal functional activity was observed, indicating significant improvement of Arcturus’ mRNA design compared to the natural sequence.

CFTR protein expression (left) and functional activity (right)

 

LUNAR-RLD

We aim to achieve functional correction of rare diseases using our proprietary LUNAR-delivered mRNA therapeutic candidates. The LUNAR-RLD program is an internal research program focused on target validation of multiple pipeline LUNAR-mRNA program candidates. To accomplish this goal, we have prioritized a list of rare liver diseases. All have significant unmet medical needs and few treatment options are available to patients. Arcturus will use its LUNAR delivery platform to deliver normal mRNA into target cells of interest, allowing these cells to produce functional protein using their native translational machinery and protein trafficking pathways.

COLLABORATION AGREEMENTS

Arcturus has a number of externally funded development partnerships. We are collaborating with Janssen to develop nucleic acid-based candidates for HBV and potentially other infectious or respiratory diseases, with SGI to enable their self-replicating RNA technology for animal and human vaccines and therapeutics, with Takeda to develop nucleic acid therapeutic candidates for NASH and other gastrointestinal disorders, with Ultragenyx to develop mRNA therapeutic candidates for rare disease targets and with CureVac to develop mRNA therapeutic and vaccine candidates for various indications. We have also received funding from CFFT to support our LUNAR-CF development program, which is described above.

46


 

Janssen Agreement

On October 18, 2017, we entered into a new Research Collaboration and License Agreement (“Janssen Agreement”) with Janssen that took a different approach to treat HBV. Under the Janssen Agreement, we and Janssen will use commercially reasonable efforts to create therapeutics intended to treat Hepatitis B, and at Janssen’s option, other infectious or respiratory disease viruses. The parties will jointly own all patent rights covering inventions that are made jointly by employees, agents or subcontractors of both parties under the collaboration agreement.

Both parties will carry out their respective research obligations pursuant to applicable joint research plan(s). Janssen may select certain therapeutics in the field for further development by the parties under a joint research plan subject to the terms of the Janssen Agreement. Following the development efforts, if Janssen selects a development candidate, the compound comprising the candidate and the pharmaceutical product (if any) containing such compound are subject to an exclusive license to Janssen from us (which exclusivity is even as to us). In addition, we will not engage in certain research, commercialization or licensing activities or solicit counterparties to engage in such activities that negatively impact the programs conducted pursuant to the Janssen agreement. The exclusivity restrictions and related limitations on subsequent activities impacting the program does not extend to certain of our activities and agreements, and, subject to certain conditions, pre-existing or subsequently acquired programs of an acquirer of Arcturus.

The Janssen Agreement provides that Janssen will use commercially reasonable efforts to develop pharmaceutical products comprised of development candidate-compounds, obtain certain regulatory approvals and commercialize such products. With respect to rights in infectious and respiratory diseases, Janssen also has an option to have developed and license therapeutics for such infectious and respiratory disease viruses, provided that we may collaborate with third parties and license any rights in the option disease areas to third parties so long as Janssen has not exercised its option rights to products in the therapeutic area. Under the collaboration agreement, both parties also grant each other certain non-exclusive, royalty-free licenses.

Under the collaboration, Janssen paid us an up-front fee in the mid $5 million to $10 million range. On a development candidate-by-development candidate basis, Janssen will pay us certain development milestone payments of up to $56.5 million for each of the first two products in HBV and in each option indication for which Janssen exercises an option. In addition, Janssen will pay us aggregate payments in the $20 million to $40 million range, depending on net sales volume, in annual net sales milestone payments on a research program-by-research-program basis for the first calendar year in which such net sales milestone levels have been met. Janssen will also pay option exercise fees within the $1 to $5 million range, depending on timing of the election to include either of the option fields. In addition, Janssen will pay royalties on annual net sales of licensed products in the low to mid-single digits range, subject to reduction on a country-by-country and licensed-product-by-licensed-product basis and subject to certain events, such as expiration of program patents.

The Janssen Agreement will terminate when no further royalty payments on any licensed products are payable. Janssen may terminate the Janssen Agreement at any time on a licensed product-by-licensed product and country-by-country basis, or in its entirety, in each case upon 60 days’ written notice.

SGI Agreement

On October 24, 2017, we entered into a Research and Exclusive License Agreement with Synthetic Genomics, Inc. (the “Synthetic Genomics Agreement”). Under the Synthetic Genomics Agreement, we will use commercially reasonable efforts to carry out research relating to lipid-mediated delivery (“LMD”) for specifically agreed research programs.

We granted Synthetic Genomics an exclusive, worldwide license, under our intellectual property related to LMD, to research, develop, manufacture and commercialize (including, without limitation LUNAR products) for vaccine and human therapeutic self-amplifying RNA products but expressly excluding diagnosis, prophylaxis and treatment of respiratory disease viruses other than influenza.

Each party retains ownership rights over intellectual property invented jointly by Synthetic Genomics and us (with inventorship determined by U.S. patent law). Under the Synthetic Genomics Agreement, we own all LUNAR product manufacturing process and process technology within any jointly invented program intellectual property (pursuant to an assignment by Synthetic Genomics of its interest in the joint intellectual property). Synthetic Genomics owns all other intellectual property conceived by or for us or jointly invented in performing any research plan that is not expressly assigned to us. Synthetic Genomics will pay us a percentage of all cash payments received from any sublicense for a LUNAR product, in the mid 10% to 20% range, less payments made to third parties to obtain the right to practice intellectual property used to develop or necessary to make, use, or sell all or part of licensed LUNAR product (which reduction may not exceed 50% of the aggregate amount paid to us with respect to a specific LUNAR product for any calendar quarter).

47


 

If Synthetic Genomics enters into a LUNAR contemplated research agreement with a third party, does not develop a LUNAR product with such third party, but subsequently licenses non-LUNAR products to and develops non-LUNAR products with such third party, then Synthetic Genomics will pay us a percentage of the consideration received for such non-LUNAR product in the 5% to 10% range. In the event that Synthetic Genomics desires to sell LUNAR products for which it obtains marketing approval, the Synthetic Genomics Agreement provides that we and Synthetic Genomics will negotiate in good faith with respect to that specific product opportunity.

Under the Synthetic Genomics Agreement, in order to maintain exclusive rights, Synthetic Genomics must achieve certain specified milestones or pay us annual exclusivity maintenance fees.

Unless earlier terminated, the Synthetic Genomics Agreement continues in full force and effect until the expiration, abandonment, or termination of the last valid claim of a patent within the licensed intellectual property, provided that, the agreement will terminate on the seventh anniversary of the effective date if the agreement becomes non-exclusive and neither Synthetic Genomics nor its sublicensee have achieved specified preclinical milestones within designated time periods. In addition, Synthetic Genomics has the right to terminate the agreement for convenience on ninety (90) days’ written notice.

Takeda Agreement

On December 6, 2016, we entered into a Research Agreement with Millennium Pharmaceuticals, Inc, a wholly-owned subsidiary of Takeda (collectively, “Takeda”), as amended December 21, 2017 (the “Takeda Agreement”). Under the Takeda Agreement, we and Takeda are conducting a research program (“Research Program”) to discover siRNA medicine(s) for the treatment of Nonalcoholic Steatohepatitis (“NASH”). We will develop siRNA compounds formulated in LUNAR lipid-mediated delivery technology for in vivo studies.

The Takeda Agreement provides that for the (unless terminated or extended) research program term ending December 20, 2018 (“Research Term”), Takeda receives a non-exclusive and worldwide license, with a right to sub-license, our technology for the purpose of conducting the research program. We have further agreed, for a period of two years after the Research Term, not to engage in any research or development activities for which LUNAR and UNA oligomers are used against the same target as the Research Program. The Takeda Agreement further provides that if Takeda requests additional targets to be added to the Research Program, the parties will negotiate in good faith to amend the Takeda Agreement with respect to such targets.

During the Research Term, Takeda will fund our costs for the Research Program and pay milestone payments upon the achievement of specified events (which payments are in the low six-digit range). Further, pursuant to the Takeda Agreement amendment, Takeda agreed to additional fixed payments to support additional studies under the Research Program.

Under the Takeda Agreement, Research Program results specifically related to improvements to LUNAR or UNA oligomers are owned by Arcturus, while all other Research Program results are owned by Takeda. Takeda has an option to negotiate with Arcturus to obtain a non-exclusive, sub-licensable worldwide license to use our background technology and our owned Research Program results for the purposes of exploiting the Takeda-owned Research Program results.

The Takeda Agreement remains in effect until Takeda no longer has payment obligations to us for research milestones. Takeda may terminate the Takeda Agreement upon sixty days written notice.

Ultragenyx Agreement

On October 26, 2015, we and Ultragenyx Pharmaceutical Inc. entered into a Research Collaboration and License Agreement, as amended October 17, 2017 and April 20, 2018 (the “Ultragenyx Agreement”). Ultragenyx initially selected two development targets, including Glycogen Storage Disease III, and the parties agreed to a list of eight additional reserved targets related to rare diseases for which Ultragenyx has the exclusive right to evaluate for collaborative development. During the reserved target exclusivity period Ultragenyx may substitute a reserved target for a selected target, and/or exercise an expansion option by payment to us, whereby a reserved target will be deemed an additional target (and will preclude an additional reserved target in place of the converted reserved target). Further, during the reserved target exclusivity period, Ultragenyx may replace a reserved target with a proposed new target, subject to certain conditions including availability of such new target.

Under the Ultragenyx Agreement, during the development target exclusivity period, we have agreed to exclusivity with respect to any product containing mRNA (including modified mRNA) or UNA oligomer with respect to each development target, including prohibitions on our activities with third parties with respect to any development target. The exclusivity period ends on the earlier of (i) the date such development target becomes a discontinued target or (ii) termination of the Ultragenyx Agreement with respect to such

48


 

development target. On a development-target-by-development-target basis, during the corresponding development target exclusivity period, Ultragenyx receives an exclusive right of first negotiation to obtain an exclusive license to exploit RNA products that do not contain mRNA (including modified mRNA) or UNA oligomer. Following the development target right of first negotiation period, if the parties have not entered into an agreement during a specified time period, the rights of Ultragenyx terminate and we may grant a license or enter into a third-party arrangement with respect to such development target.

The Ultragenyx Agreement additionally provides for limitations on our activities with third parties utilizing LUNAR lipid-mediated delivery technology with respect to a development target for a specified period of time. During the reserved target exclusivity period, we have agreed to exclusivity with respect to any product containing mRNA, including modified mRNA, or UNA oligomer with respect to such reserved target, and will first offer Ultragenyx a right of first negotiation for any other RNA product or a product utilizing the LUNAR delivery technology with respect to such reserved target. The reserved target restrictions terminate upon expiration of the reserved target exclusivity period for each target, which may be extended on a reserved target-by-reserved target basis upon payment of an exclusivity extension fee.

On a reserved target-by-reserved target basis, following the target exclusivity period, Ultragenyx receives an exclusive right of first negotiation to obtain an exclusive license to exploit RNA products with respect to such reserved target. Following the reserved target right of first negotiation period, if the parties have not entered into an agreement during a specified time period, the rights of Ultragenyx terminate and we may grant a license or enter into a third-party arrangement with respect to such reserved target.

Under the Ultragenyx Agreement, Ultragenyx receives a co-exclusive, royalty-free, sublicenseable license under our technology and collaboration technology to conduct collaborative development of development targets, compounds and products. The license remains in effect for a specified option period based upon development plan milestones being achieved with respect to development targets and reserved targets and compounds and products with respect to such development targets and reserved targets. If Ultragenyx exercises its option with respect to a development target and the parties enter into a license agreement, Ultragenyx receives an exclusive (even as to us), royalty bearing, sublicenseable (subject to certain limitations), license under our technology and collaboration technology to exploit compound and products with respect to such development target.

For development and reserved targets that revert to us, we will pay Ultragenyx royalties on net sales of discontinued target on a country-by-country basis, until the expiration of the last valid claim or the product-specific patents or patent rights licensed by Ultragenyx to us covering such discontinued targets. Such royalties depend on the state of development of the corresponding discontinued target, set in the low to mid-single digits range.

Ultragenyx paid us an upfront fee of $10 million. We are entitled to certain additional payments upon exercise of the Ultragenyx expansion option and/or exclusivity extension (if any), and for costs incurred by us in conducting the activities assigned to us under each collaboration development plan. In addition, on a development target-by-development target basis, Ultragenyx will pay us a one-time milestone payment after the first optimized lead designation for the first product with respect of such development target. For each development target for which Ultragenyx exercises its option, Ultragenyx will pay us a one-time option exercise fee based upon on the total number of development targets for which option exercises have been made by Ultragenyx. The option exercise fee is subject to reduction if a development target does not, for example, utilize RNA delivery technology covered by our patent. Ultragenyx will also pay us certain milestone payments in the maximum amount of $49 million per development target with respect to clinical/regulatory development, and a maximum amount of $90 million per development target with respect to commercialization, in each case subject to reduction if such product does not utilize RNA delivered technology covered by our patent. Ultragenyx will pay royalties as a percentage of net sales on a product-by-product and country-by-country basis during the applicable royalty term up to 10%.

The Ultragenyx Agreement provides that each party owns their respective collaboration know-how and collaboration patents and jointly own all joint collaboration know-how and joint collaboration patents, provided that Ultragenyx owns all right, title and interest in and to all collaboration technology that specifically relates to (a) the composition or formulation of a particular compound or product, or (b) any method of using, making or administering a particular compound or product. Further, we will own all improvements to LUNAR lipid-mediated delivery technology and/or UNA oligomer chemistry.

The Ultragenyx Agreement expires on the last-to-expire royalty term for the last product on a development target-by-development target basis, unless earlier terminated. Upon expiration with respect to a particular development target, the licenses to Arcturus know-how granted to Ultragenyx to exploit products with respect to such development target will be fully paid-up, irrevocable and exclusive. On a target-by-target basis, Ultragenyx has the right to terminate for convenience with respect to such target upon 60 days written notice.

49


 

CureVac Agreements

Development and Option Agreement

On January 1, 2018, we entered into a Development and Option Agreement with CureVac, as amended May 3, 2018 (“CureVac,” and such agreement, the “Development Agreement”). Under the terms of the Development Agreement, the parties have agreed to conduct joint preclinical development programs on the basis of which CureVac is granted an option for taking several licenses on pre-agreed license terms to develop and commercialize certain products incorporating our patents and know-how related to delivery systems based on or incorporating lipid-mediated delivery systems (including the LUNAR® platform) (the “Arcturus LMD Technology”), and CureVac patents and know-how related to mRNA technology. Under the terms of the Development Agreement, we granted to CureVac a worldwide, non-exclusive license to use the our LMD Technology, including the right to grant sublicenses, for the purpose of conducting research and preclinical development activities, subject to certain limitations. In addition, CureVac granted to us a worldwide, non-exclusive license under its mRNA technology, solely to the extent necessary to execute the activities contemplated by the agreement. Subject to certain restrictions, the parties will have an undivided one-half interest in the patents and know-how developed jointly by the parties during the course of the agreement. Pursuant to the May 3, 2018 amendment, we granted CureVac a security interest in certain of our intellectual property.

In consideration for the rights granted under the agreement, we received an upfront fee from CureVac. Each development program will be subject to the terms of a work plan under which the parties will use diligent efforts to develop defined products. CureVac may designate certain targets as reserved targets, subject to certain pre-existing restrictions. CureVac has options to obtain licenses from us for a pre-defined number of targets to use our LMD Technology for the development and commercialization of products. To the extent a reserved target is only available on a nonexclusive basis, CureVac may elect to enter into a non-exclusive license agreement. Such licenses shall be obtained under separate, pre-negotiated forms of license agreements to be entered into by the parties upon exercise of the option(s). If CureVac exercises its option under the agreement, it will be required to pay us an option exercise fee for an exclusive license – or non-exclusive license, as applicable – based on whether the target is a rare disease target or non-rare disease targets. Pursuant to the form of exclusive license agreement, if CureVac achieves all development and commercialization milestones with respect to the licensed product subject to an option, CureVac will be required to pay certain development and regulatory approval milestones depending on whether the target is a rare disease target or non-rare disease target. CureVac will also be required to pay us low single-digit royalties on the net sales of each product falling under a license agreement on a country-by-country and product-by-product basis. Such royalties are subject to reduction for third party payments with respect to licensed products or if there is no valid claim under the licensed patents, but may not fall below a specified percentage if the licensed product during the royalty term is not covered by a licensed claim. Further, if within 24 months after the license agreement effective date, CureVac grants a sublicense to a third party under the license agreement for the development and commercialization of licensed products, then CureVac will pay us a single-digit percentage of the total sublicense income actually received by CureVac to the extent the sublicense income exceeds the option exercise fee paid by CureVac under the Development Agreement to exercise the option for this license agreement and the milestone payments paid by CureVac under this license agreement. The fees, milestones and royalty payments for a non-exclusive license are fifty percent (50%) of the corresponding payments for an exclusive license.

The Development Agreement has an initial term of eight years unless earlier terminated or extended in accordance with its terms. Within 60 days prior to the expiration of the initial term, CureVac has the option to extend the initial term of the agreement on an annual basis for up to a total of three successive years upon payment to us of an annual non-refundable extension fee. CureVac has the right to terminate the agreement in full or on a program-by-program basis (i) in the event of material breach by us that is not cured within the cure period specified in the agreement, (ii) in the event of a change in control of Arcturus or (iii) without cause upon 60 days’ notice to us. We have the right to terminate the agreement upon material breach by CureVac that is not cured within the period specified by the agreement. Upon termination, all licenses granted under the agreement will terminate, but any license agreement entered into pursuant to any option exercise will remain in effect.

Co-Development and Co-Commercialization Agreement

Concurrently with the Development Agreement, we entered into a Co-Development and Co-Commercialization Agreement with CureVac (the “Co-Development Agreement”). Under the terms of the agreement, the parties will collaborate to develop and commercialize mRNA-based products for treating ornithine transcarbamylase (“OTC”) deficiency, incorporating CureVac mRNA technology, our mRNA technology and our LMD Technology (“OTC Products”). The overall collaboration will be managed by a joint steering committee. The parties also have the option to co-develop two mRNA programs for CureVac and one mRNA program for us, including targets for such programs selected from the reserved target list established under the Development Agreement.

The Co-Development Agreement includes an OTC preclinical development plan specifying the activities of the respective parties. Following selection as a development candidate by the steering committee, the steering committee will submit a clinical development plan to the parties outlining a comprehensive clinical development plan and budget and respective activities of the parties for each such OTC Product. In any event, we will have the primary responsibility to conduct the development activities under the OTC clinical development plan.

50


 

Under the Co-Development Agreement, CureVac has one option to co-develop and share operating profit and loss for a product using our mRNA technology and our LMD Technology (“Arcturus Product”). If CureVac exercises its option, CureVac will be responsible for 50% of our preclinical program costs for development prior to option exercise, and thereafter the parties will share costs equally. The Co-Development Agreement further provides for two options to us to co-develop and share operating profit and loss for two products using CureVac mRNA technology and our LMD Technology (each, a “CureVac Product”). If we exercise our option, we will be responsible for 50% of CureVac’s preclinical program costs for development prior to option exercise and thereafter the parties will share costs equally. For each CureVac Product and Arcturus Product, the steering committee is responsible for preparing and submitting to the parties for approval a clinical development plan and budget for a co-developed product. For each OTC Product, Arcturus Product or CureVac Product, a party may elect to not pay a continuing share of its further development costs at specified decision points and upon such election, the applicable product will result in royalties being paid to the non-participating party at rates in a range of 5% to 25% dependent on the time of election not to participate. The royalty rate has been agreed upon by the parties for the OTC Product, and the parties will agree in good faith on royalty rates for the other products.

The Co-Development Agreement provides for respective licenses to applicable technology of a party to enable the other party (i) develop mRNA constructs and products in accordance with the development plans on a non-exclusive, royalty-free basis; (ii) commercialize co-developed CureVac Products on an exclusive profit sharing or royalty bearing basis depending on the commercialization or opt-out as set forth in the agreement; and (iii) a non-exclusive, royalty-free right to manufacture mRNA constructs included in the products subject to the development plans. Subject to certain restrictions, each party also has the right to grant sublicenses of its rights with respect to each such OTC Product, Arcturus Product or CureVac Product. Under the terms of the agreement, we have the primary responsibility for all aspects of the commercialization of OTC Products and Arcturus Products, and CureVac has the primary responsibility for all aspects of the commercialization of co-developed CureVac Products, in each case subject to a plan of commercialization agreed upon by the parties.

The parties shall use diligent effort to conduct all manufacturing activities allocated to such party under the development plans and the commercialization plans established under the agreement. The manufacture of the mRNA constructs and the products shall be overseen by the steering committee. CureVac shall manufacture all mRNA constructs in the products for use in development activities under the development plans and for commercial use, with the parties entering into preclinical and clinical supply agreements for the mRNA constructs. We shall manufacture and supply all products using mRNA constructs from CureVac for use in development activities under the development plans and for commercial use, with the parties entering into preclinical and clinical supply agreements for the products.

Unless earlier terminated, the Co-Development Agreement shall continue in full force and effect on a product-by-product and country-by-country basis until the commercialization party no longer sells product in such country, or with respect to opt-out products, the expiration of the royalty term for such product in accordance with the terms of the agreement. The agreement may be earlier terminated (i) by either party for convenience upon 180 days written notice, (ii) by either party in the event of material breach, if the breaching party has not cured such breach in the applicable cure period, or (iii) by either party in the event a party commences legal action against another challenging the scope of the non-challenging party’s patents.

OTHER MATERIAL AGREEMENTS

The Company has certain other material agreements which includes the Protiva Agreement and CFFT Agreement which are discussed below.

Protiva Agreement

On August 9, 2013, Marina Biotech, Inc. (“Marina”) assigned certain intellectual property, including patents, inventions and patent-related information related to UNA oligonucleotide therapeutics to us pursuant to a Patent Assignment and License Agreement, as well as Marina’s rights and obligations under a License Agreement with Protiva Biotherapeutics Inc. (“Protiva”), a wholly-owned subsidiary of Arbutus Biopharma Corporation, dated November 28, 2012 (the “Protiva Agreement”). The intellectual property licensed from Marina and Protiva is a significant component of our UNA oligomer chemistry platform. As partial consideration for the assignment from Marina, we granted Marina a royalty-free, fully-paid, irrevocable, worldwide, non-exclusive license to use the inventions, ideas and information embodied in the assigned patents to develop, make, use and sell chemical compounds intended for human and animal therapeutic uses (including certain rights to sublicense in connection with continuing research, development and/or commercialization). We also paid an upfront fee to Marina, and agreed to maintain the assigned patents in certain countries.

Under the assigned Protiva Agreement, we granted Protiva a non-exclusive, irrevocable, perpetual, worldwide license with certain rights to sublicense (in connection with continuing research, development and/or commercialization) to exploit our patents, know-how and inventions relating to our technology for purposes of the development of human therapeutics. Protiva will pay us milestone

51


 

payments with an aggregate value of up to $3.25 million for each Protiva product directed to a specific gene target, upon achievement of certain development milestones with respect to each such product and target. If instead Protiva sublicenses the commercialization rights for a Protiva product, then Protiva will pay us a percentage of sublicense revenues paid to Protiva by such sublicensee, depending on the development stage of such Protiva product at the time of sublicense. In addition, Protiva will pay us royalties on net sales of Protiva products during the royalty term depending on the type of product, on a country-by-country basis. For licensed Protiva products, royalties will be paid in the low single digit range on net sales for such product, subject to reduction on net sales for such product in the event there is no patent coverage or generic products are introduced with respect to such Protiva product. A royalty reduction for a Protiva product will also apply if Protiva is required to license third party intellectual property to commercialize such product, subject to a floor for such reductions.

The Protiva Agreement term, for a particular Protiva product in a particular country, will expire (on a country-by-country basis) upon the earlier of (i) the expiration of the royalty term for such Protiva product in such country or (ii) the end of the calendar quarter in which sales in such country of generic products exceed a certain amount compared to sales of Protiva products in such country. The Protiva Agreement will expire in its entirety upon expiration of the last royalty term for any of our patents with respect to which Protiva has a license under the Protiva Agreement, unless earlier terminated. Protiva may terminate the Protiva Agreement for convenience in its entirety, or for a particular country or countries, upon ninety days’ prior written notice to Arcturus.

CFFT Agreement

On May 16, 2017, CFFT awarded us with funds for a development program to identify lead CFTR mRNA sequences and LUNAR formulations, demonstrate tolerability of LUNAR CFTR mRNA, and demonstrate translatability of aerosolized LUNAR (the “CFFT Agreement”). The award of approximately $3.1 million will be received according to a milestone schedule and unused funds will be retained by CFFT. We will use commercially reasonable efforts to conduct the development program, and after the completion of a development program, we will use commercially reasonable efforts to continue to develop the product. The award includes a grant of rights under CFFT know-how to assist us to research, develop, commercialize, make or otherwise exploit a product.

If the award results in a successful product, we will pay CFFT a specified payment amount in installments following commercialization based on a formula that is a single-digit multiple of the total award amount, plus a payment equal to the awarded payments, after aggregate net sales of the product exceed certain thresholds. Further, in the event of a license, sale or other transfer of the product or our development program technology (including a change of control transaction), we will pay CFFT a percentage of such transfer payments actually received by us or our shareholders (subject to a royalty cap).

CFFT has an interruption license right under the CFFT Agreement so that if we fail to use commercially reasonable efforts to develop a product for a certain time period before the first commercial sale of the product, CFFT may, upon written notice of such interruption to us and our failure to effectively deny such interruption or cure such interruption as set forth in the CFFT Agreement, exercise certain rights pursuant to procedures set forth in the CFFT Agreement. CFFT’s interruption license rights include, in certain cases, payments from us to CFFT, or the grant of an exclusive (even as to us), worldwide license to CFFT under our development program technology solely to the extent necessary to manufacture, have manufactured, license, use, sell, offer to sell, and support the product in the field of treatment of cystic fibrosis and other pulmonary diseases.

All inventions, data, know-how, information, results, analyses and other intellectual property rights resulting from the development program will be owned by us, and subject to certain exceptions, CFFT assigns and transfers to us all of CFFT’s right, title, and interest in and to all inventions and other intellectual property resulting from the development program.

Either party may terminate the CFFT Agreement for cause (e.g., material breach by the other party of its covenants or obligations).

INTELLECTUAL PROPERTY

Our business success depends in part on our ability to obtain and maintain intellectual property protection for our proprietary technologies, inventions and know-how, and on its ability to operate without infringing on the proprietary rights of others. We strive to protect our intellectual property through a combination of patents, trademarks, trade secrets, licensing agreements and confidentiality agreements with employees, advisors, consultants and contractors.

We rely on continuing technological innovation to strengthen our proprietary position in the field of nucleic acid medicines. Therefore, we plan to continue to file patent applications in jurisdictions around the world as we discover and develops novel nucleic acid technology platforms and novel nucleic acid therapeutic candidates. We cannot guarantee that future applications will be issued.

52


 

Our Patent Portfolio

As of April 1, 2018, we are the sole owner of 140 patents and pending patent applications including 16 U.S. patents, 25 pending U.S. patent applications, 40 foreign patents and 59 pending foreign patent applications. The claims of these patents and pending applications include compositions of matter, methods of use and drug product formulations. These claims cover the use of our core platform technologies including the use of LUNAR and lipid components to deliver nucleic acid, the use of UNA oligomers for therapeutics and reagents, and the use of LNA oligomers for therapeutics. Claims also cover the composition of matter and use of our therapeutic candidates to treat target diseases including HBV and NASH. Our issued patents are expected to expire between 2028 and 2036, without taking into account any possible patent term extensions.

Our patent portfolio includes the following patents and pending patent applications for LUNAR, UNA and LNA:

 

LUNAR – As of April 1, 2018, we own 8 U.S. patents, 12 U.S. pending patent applications and 25 foreign pending patent applications covering the composition of matter and use of our LUNAR technology for nucleic acid delivery and drug delivery.

 

UNA, mRNA and LNA – As of April 1, 2018, we own 8 U.S. patents, 13 U.S. pending patent applications, 40 foreign patents and 34 foreign pending patent applications covering methods and uses of LNA, UNA oligomer and mRNA therapeutics, and compositions of UNA oligomers or mRNA to treat specific target diseases.

Patent Terms

The term of individual patents depends on the countries in which they are obtained. The patent term is 20 years from the earliest date of filing a non-provisional patent application in most of the countries in which we file.

Under the Drug Price Competition and Patent Term Restoration Act (also known as the Hatch-Waxman Act), U.S. patent holders can apply for a patent term extension to compensate for the patent term lost during the FDA regulatory review process. Patent extension is only available for patents covering FDA-approved drugs. The extension can be up to five years beyond the original expiration date of the patent and cannot extend a patent term for longer than 14 years from the date of product approval. Only one patent extension is granted per approved drug. Similar provisions may be available in foreign jurisdictions including Europe. Arcturus intends to apply for patent term extensions where possible.

We also rely on trade secrets to protect our product candidates. Our commercial success also depends in part on our non-infringement of the patents or proprietary rights of third parties. For a more comprehensive discussion of the risks related to our intellectual property, please see Item 3.D. “Risk Factors” – “Risks Related to Our Intellectual Property.”

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. 

Our success depends in part on our ability to:

 

preserve trade secrets;

 

prevent third parties from infringing upon our proprietary rights; and

 

operate our business without infringing the patents and proprietary rights of third parties, both in the United States and internationally.

We also protect our proprietary technology and processes, in part, by confidentiality and invention assignment agreements with our employees, consultants, scientific advisors and other contractors. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants, scientific advisors or other contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

53


 

COMPETITION

We believe that our scientific knowledge and expertise in nucleic acid-based therapies provide us with competitive advantages over the various companies and other entities that are attempting to develop similar treatments. However, we face competition at the technology platform and therapeutic indication levels from both large and small biopharmaceutical companies, academic institutions, governmental agencies and public and private research institutions. Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

Our success will be based in part upon our ability to identify, develop and manage a portfolio of drugs that are safer and more effective than competing products in the treatment of our targeted patients. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, are more convenient or are less expensive than any products we may develop.

We are aware of several other companies that are working to develop nucleic acid medicines, including gene therapy, gene editing, mRNA, siRNA, and antisense therapeutics. Many of these companies, such as the newly formed Genevant, are also developing nucleic acid delivery platforms which compete with LUNAR technology.

Companies currently developing mRNA therapeutics for prophylactic vaccines, cancer vaccines, or mRNA replacement therapy for rare genetic diseases include Moderna Therapeutics, Translate Bio, Ethris GmbH, CureVac GmbH, BioNTech, and eTheRNA. Translate Bio is developing mRNA replacement therapies for cystic fibrosis and OTC deficiency which are in preclinical or early clinical development, and which directly compete with our LUNAR-OTC and LUNAR-CF programs. Ethris is in preclinical development of ETH-CFTR, a mRNA replacement therapy for cystic fibrosis. A number of companies are developing viral vector or DNA-based approaches to gene delivery for rare liver diseases, including Ultragenyx Pharmaceutical, REGENXBIO, Inc., uniQure, Vivet Therapeutics, LogicBio Therapeutics, Touchlight Genetics Ltd., Generation Bio, and Audentes Therapeutics. Ultragenyx is developing a gene therapy product for OTC deficiency which is in early clinical trials.

Companies developing siRNA therapeutics include Arbutus Biopharma, Arrowhead Pharmaceuticals, Inc, Quark Pharmaceuticals, Inc., Silence Therapeutics plc, Nitto Denko, Dicerna Pharmaceuticals, Inc., and Alnylam Pharmaceuticals, Inc.  Antisense therapeutics are also in development by Ionis Pharmaceuticals, Roche Pharma, WAVE Life Sciences, Celgene Corporation, Akcea Therapeutics, Inc., Antisense Therapeutics, Ltd., ProQR, and Sarepta Therapeutics, Inc. Both Ionis Pharmaceuticals and ProQR are developing antisense therapies for cystic fibrosis which compete with our LUNAR-CF program.

In addition, to the companies mentioned above, several companies are developing non-nucleic acid therapies for OTC deficiency which are competitors to our LUNAR-OTC program. For example, Synlogic’s SYNB1020 product is treating urea cycle disorders, including OTC deficiency, by introducing engineered probiotic bacteria to the gut. Promethera’s Heparesc product involves infusion of their HepaStem, liver-derived stem cells into urea cycle disorder patients to restore normal enzyme function. For cystic fibrosis, many companies are pursuing small molecule therapies designed to increase CFTR function, targeted to different patient populations, which could compete with our LUNAR-CF program. These include Vertex Pharmaceuticals, Proteostasis Therapeutics, Inc., Novartis and Galapagos.

The competitive landscape continues to expand and we expect that additional companies will initiate programs focused on the development of nucleic acid therapeutic products using the approaches described above as well as potentially new approaches that may result in the more rapid development of nucleic acid therapeutics or more effective technologies for nucleic acid drug development or delivery.

MANUFACTURING AND SUPPLY

To date, we have manufactured only limited quantities of drug substance for use in research activities. We have contracted with several third-party contract manufacturing organizations, or CMOs, for the supply of drug substance and finished product to meet our testing needs for preclinical toxicology and clinical testing. We expect to continue to rely on third-party CMOs for the supply of drug substance and drug product for our product candidates for at least the next several years, including to support the launch of our first commercial products.

54


 

PRODUCT APPROVAL AND GOVERNMENT REGULATION

Government authorities in the United States, at the federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of products such as those we are developing. Any product candidate that we develop must be approved by the FDA before it may be legally marketed in the United States and by the appropriate foreign regulatory agency before it may be legally marketed in foreign countries.

U.S. drug development process

In the United States, the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act, or FDCA, and implementing regulations. Drugs are also subject to other federal, state and local statutes and regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, may subject an applicant to administrative or judicial civil or criminal sanctions. FDA sanctions could include refusal to approve pending applications, withdrawal of an approval, clinical hold, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, debarment, restitution, disgorgement or civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us. The process required by the FDA before a drug may be marketed in the United States generally involves the following:

 

completion of nonclinical laboratory tests, animal studies and formulation studies according to good laboratory practices, or GLP, or other applicable regulations;  

 

submission to the FDA of an application for an IND, which must become effective before human clinical trials may begin;  

 

performance of adequate and well-controlled human clinical trials according to the FDA’s regulations commonly referred to as current good clinical practices, or GCPs, to establish the safety and efficacy of the proposed drug for its intended use;  

 

submission to the FDA of an NDA for a new drug;  

 

satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the drug is produced to assess compliance with the FDA’s current good manufacturing practice standards, or cGMP, to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity;  

 

potential FDA audit of the nonclinical and clinical trial sites that generated the data in support of the NDA; and  

 

FDA review and approval of the NDA.

The lengthy process of seeking required approvals and the continuing need for compliance with applicable statutes and regulations require the expenditure of substantial resources and approvals are inherently uncertain.

Before testing any compounds with potential therapeutic value in humans, the drug candidate enters the preclinical study stage. Preclinical tests, also referred to as nonclinical studies, include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies to assess the potential safety and activity of the drug candidate. The conduct of the preclinical tests must comply with federal regulations and requirements including GLP. The sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of the IND. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA imposes a clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. The FDA may also impose clinical holds on a drug candidate at any time before or during clinical trials due to safety concerns or non-compliance. Accordingly, we cannot be sure that submission of an IND will result in the FDA allowing clinical trials to begin, or that, once begun, issues will not arise that suspend or terminate such trial.

Clinical trials involve the administration of the drug candidate to healthy volunteers or patients under the supervision of qualified investigators, generally physicians not employed by or under the trial sponsor’s direct control. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety. Each protocol must be submitted to the FDA as part of the IND. Clinical trials must be conducted in accordance with the FDA’s regulations comprising the good clinical practices requirements. Further, each clinical

55


 

trial must be reviewed and approved by an independent institutional review board, or IRB, at or servicing each institution at which the clinical trial will be conducted. An IRB is charged with protecting the welfare and rights of trial participants and considers such items as whether the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the form and content of the informed consent that must be signed by each clinical trial subject or his or her legal representative and provide oversight for the clinical trial until completed.

Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:

 

Phase 1.   The drug is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. In the case of some products for severe or life-threatening diseases, especially when the product may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing may be conducted in patients.  

 

Phase 2.   The drug is evaluated in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule.  

 

Phase 3.   Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk/benefit ratio of the product and provide an adequate basis for product labeling. Generally, two adequate and well-controlled Phase 3 clinical trials are required by the FDA for approval of an NDA.  

Post-approval clinical trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These clinical trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication.

Annual progress reports detailing the results of the clinical trials must be submitted to the FDA and written IND safety reports must be promptly submitted to the FDA and the investigators for serious and unexpected adverse events or any finding from tests in laboratory animals that suggests a significant risk for human subjects. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA or the sponsor or its data safety monitoring board may suspend a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.

Concurrently with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the drug as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug candidate and, among other things, must develop methods for testing the identity, strength, quality and purity of the final drug. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life.

U.S. review and approval processes

The results of product development, nonclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests conducted on the chemistry of the drug, proposed labeling and other relevant information are submitted to the FDA as part of an NDA requesting approval to market the product. The submission of an NDA is subject to the payment of substantial user fees; a waiver of such fees may be obtained under certain limited circumstances.

In addition, under the Pediatric Research Equity Act, or PREA, an NDA or supplement to an NDA must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation has been granted.

The FDA reviews all NDAs submitted to determine if they are substantially complete before it accepts them for filing. If the FDA determines that an NDA is incomplete or is found to be non-navigable, the filing may be refused and must be re-submitted for consideration. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under the goals and policies agreed to by the FDA under the Prescription Drug User Fee Act, or PDUFA, the FDA has 10 months from acceptance of filing in which to complete its initial review of a standard NDA and respond to the applicant, and six months from acceptance of filing for a priority

56


 

NDA. The FDA does not always meet its PDUFA goal dates. The review process and the PDUFA goal date may be extended by three months or longer if the FDA requests or the NDA sponsor otherwise provides additional information or clarification regarding information already provided in the submission before the PDUFA goal date.

After the NDA submission is accepted for filing, the FDA reviews the NDA to determine, among other things, whether the proposed product is safe and effective for its intended use, and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity, strength, quality and purity. The FDA may refer applications for novel drug or biological products or drug or biological products which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions. During the drug approval process, the FDA also will determine whether a risk evaluation and mitigation strategy, or REMS, is necessary to assure the safe use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposed REMS; the FDA will not approve the NDA without a REMS, if required.

Before approving an NDA, the FDA will inspect the facilities at which the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect the sponsor and one or more clinical sites to assure that the clinical trials were conducted in compliance with IND study requirements. If the FDA determines that the application, manufacturing process or manufacturing facilities are not acceptable it will outline the deficiencies in the submission and often will request additional testing or information.

The NDA review and approval process is lengthy and difficult and the FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or may require additional clinical data or other data and information. Even if such data and information is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret the same data. The FDA will issue a complete response letter if the agency decides not to approve the NDA. The complete response letter usually describes all of the specific deficiencies in the NDA identified by the FDA. The deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally, the complete response letter may include recommended actions that the applicant might take to place the application in a condition for approval. If a complete response letter is issued, the applicant may either submit new information, addressing all of the deficiencies identified in the letter, or withdraw the application.

If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. In addition, the FDA may require post marketing clinical trials, sometimes referred to as Phase 4 clinical trials, which are designed to further assess a drug safety and effectiveness and may require testing and surveillance programs to monitor the safety of approved products that have been commercialized.

Orphan drug designation

Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biological product intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making a drug or biological product available in the United States for this type of disease or condition will be recovered from sales of the product. Orphan product designation must be requested before submitting an NDA. After the FDA grants orphan product designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan product designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.

If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the same drug or biological product for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity. Competitors, however, may receive approval of different products for the indication for which the orphan product has exclusivity or obtain approval for the same product but for a different indication for which the orphan product has exclusivity. Orphan product exclusivity also could block the approval of one of our products for seven years if a competitor obtains approval of the same drug or biological product as defined by the FDA or if our drug candidate is determined to be contained within the competitor’s product for the same indication or disease. If a drug or biological product designated as an orphan product receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan product exclusivity. Orphan drug status has similar but not identical benefits in the European Union.

57


 

Expedited development and review programs

The FDA has several regulatory pathways for expedited development and/or review of products intended to treat serious conditions. These pathways are Fast Track designation, Breakthrough Therapy designation, accelerated approval, and priority review. These programs do not change the standards for approval but may expedite the development or approval process. Products may meet the standards for consideration under one or more of these pathways.

The Fast Track program is intended to expedite development or facilitate the process for reviewing new drugs and biological products that meet certain criteria. Specifically, new drugs and biological products are eligible for Fast Track designation if they are intended to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the product and the specific indication for which it is being studied. In addition to more frequent meetings with the FDA to discuss the drug’s development plan and ensure collection of appropriate data needed to support drug approval, the FDA will consider for review sections of the NDA on a rolling basis as sections are completed, based on an agreed schedule, and the sponsor pays any required user fees upon submission of the first section of the NDA.

Breakthrough Therapy designation is a process designed to expedite the development and review of drugs that are intended to treat a serious condition and where preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapy on or more clinically significant endpoint(s). A drug that receives Breakthrough Therapy designation from the FDA is eligible for all Fast Track designation features, plus intensive guidance on an efficient drug development program beginning as early as Phase 1 and organizational commitment involving senior managers.

Products may be eligible for accelerated approval. Drug or biological products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may receive accelerated approval, which means that they may be approved on the basis of adequate and well-controlled clinical trials establishing that the product has an effect on a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on the basis of an effect on a clinical endpoint other than survival or irreversible morbidity. As a condition of approval, the FDA may require that a sponsor of a drug or biological product receiving accelerated approval perform adequate and well-controlled post-marketing clinical trials. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product. Accelerated Approval can be granted with restrictions to the marketing and distribution of the product, and the FDA can withdraw marketing approval if the required post-marketing studies fail to show a clinical benefit or if the sponsor fails to conduct required post-marketing studies.

Any product is eligible for priority review if it has the potential to provide safe and effective therapy where no satisfactory alternative therapy exists or a significant improvement in the treatment, diagnosis or prevention of a disease compared to marketed products. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug or biological product designated for priority review in an effort to facilitate the review.

Post-approval requirements

Any drug products for which we or our strategic alliance partners receive FDA approvals are subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution requirements, complying with certain electronic records and signature requirements and complying with FDA promotion and advertising requirements, which include, among others, standards for direct-to-consumer advertising, promoting drugs for uses or in patient populations that are not described in the drug’s approved labeling (known as “off-label use”), industry-sponsored scientific and educational activities, and promotional activities involving the internet. Failure to comply with FDA requirements can have negative consequences, including adverse publicity, enforcement letters from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties. Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or promote such off-label uses.

Manufacturers of our products are required to comply with applicable FDA manufacturing requirements contained in the FDA’s cGMP regulations. cGMP regulations require among other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance. Discovery of problems with a product after approval may result in restrictions on a product, manufacturer, or holder of an approved NDA, including withdrawal of the product from the market. In addition, changes to the manufacturing process generally require prior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.

58


 

U.S. patent term restoration and marketing exclusivity

Depending upon the timing, duration and specifics of the FDA approval of the use of our drug candidates, some of our United States patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND and the submission date of an NDA plus the time between the submission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent. The United States Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we may intend to apply for restoration of patent term for one of our currently owned or licensed patents to add patent life beyond its current expiration date, depending on the expected length of the clinical trials and other factors involved in the filing of the relevant NDA.

Market exclusivity provisions under the FDCA can also delay the submission or the approval of certain applications of other companies seeking to reference another company’s NDA. The FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to obtain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement to one of the patents listed with the FDA by the innovator NDA holder. The FDCA also provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness. Pediatric exclusivity is another type of regulatory market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be granted based on the voluntary completion of a pediatric trial in accordance with an FDA-issued “Written Request” for such a trial.

U.S. Foreign Corrupt Practices Act

The U.S. Foreign Corrupt Practices Act, or FCPA, prohibits certain individuals and entities, including us, from promising, paying, offering to pay, or authorizing the payment of anything of value to any foreign government official, directly or indirectly, to obtain or retain business or an improper advantage. The U.S. Department of Justice and the U.S. Securities and Exchange Commission, or SEC, have increased their enforcement efforts with respect to the FCPA. Violations of the FCPA may result in large civil and criminal penalties and could result in an adverse effect on a company’s reputation, operations, and financial condition. A company may also face collateral consequences such as debarment and the loss of export privileges.

Federal and state healthcare laws and regulations

In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal healthcare laws and regulations have been applied to restrict certain business practices in the biopharmaceutical industry in recent years. These laws include the following:

The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce or in return for purchasing, leasing, ordering, or arranging for the purchase, lease, or order of any healthcare item or service reimbursable under Medicare, Medicaid, or other federally financed healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value, including for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payment, ownership interests and providing anything at less than its fair market value. The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and our practices may not in all cases meet all of the criteria for statutory exemptions or safe harbor protection. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases, or recommendations may be subject to scrutiny if they do not qualify for

59


 

an exemption or safe harbor. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. The reach of the Anti-Kickback Statute was also broadened by the Patient Protection and Affordable Health Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, which, among other things, amended the intent requirement of the federal Anti-Kickback Statute. Pursuant to the statutory amendment, a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act (discussed below) or the civil monetary penalties statute, which imposes penalties against any person who is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.

Federal false claims laws, including the federal civil False Claims Act, prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government. Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing of the product for unapproved, and thus non-reimbursable, uses.

Many states also have statutes or regulations similar to the federal Anti-Kickback Statute and civil False Claims Act, which state laws apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Also, the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created additional federal criminal statutes that prohibit, among other things, knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private third-party payors and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.

Because of the breadth of these laws and the narrowness of the federal Anti-Kickback Statute’s safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Such a challenge could have a material adverse effect on our business, financial condition and results of operations.

In addition, we may be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, impose on certain types of individuals and entities certain requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s security standards directly applicable to “business associates” – independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. State laws also govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. In addition, the European Union, or EU, has established its own data security and privacy legal framework, including but not limited to Directive 95/46/EC, or the Data Protection Directive. The Data Protection Directive will be replaced starting in May 2018 with the recently adopted European General Data Protection Regulation, or GDPR, which contains new provisions specifically directed at the processing of health information, higher sanctions and extra-territoriality measures intended to bring non-EU companies under the regulation. We anticipate that over time we may expand our business operations to include additional operations in the EU, including potentially conducting preclinical and clinical trials. With such expansion, we would be subject to increased governmental regulation in the EU countries in which we might operate, including the GDPR.

Further, the federal Physician Payments Sunshine Act, enacted as part of the ACA, requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to payments or other transfers of value made to physicians and teaching hospitals. Applicable manufacturers and applicable group purchasing organizations must also report annually to CMS ownership and investment interests held by the physicians and their immediate family members.

Other state laws and regulations may also apply, such as those that: require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government; and/or state laws that require manufacturers to report information related to transfers of value to healthcare providers or marketing expenditures.

60


 

If our operations are found to be in violation of any of the federal and state healthcare laws or regulations described above or any other governmental regulations that apply to us, we may be subject to penalties, including criminal and significant civil monetary penalties, damages, fines, imprisonment, exclusion of products from reimbursement under government programs, disgorgement, additional reporting requirements and/or oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, contractual damages, reputational harm, diminished profits and future earnings, 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. To the extent that any of our product candidates are ultimately sold in a foreign country, we may be subject to similar foreign laws and regulations, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws, and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals.

In the United States and foreign jurisdictions, there have been a number of legislative and regulatory changes to the healthcare system that could affect our future results of operations. In particular, there have been and continue to be a number of initiatives at the United States federal and state levels that seek to reduce healthcare costs.

For example, the ACA includes measures to significantly change the way healthcare is financed by both governmental and private insurers. Among the provisions of the ACA of greatest importance to the pharmaceutical and biotechnology industry are the following:

 

an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs, that began in 2011;

 

an increase in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13% of the average manufacturer price for branded and generic drugs, respectively;  

 

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts to negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D;  

 

an extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;  

 

an expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the Federal Poverty Level, thereby potentially increasing manufacturers’ Medicaid rebate liability;  

 

an expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;  

 

a requirement to annually report drug samples that manufacturers and distributors provide to physicians;  

 

a licensure framework for follow-on biologic products;  

 

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research; and

 

establishment of a Center for Medicare Innovation at CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending.

Some of the provisions of the ACA have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of the ACA, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the ACA. Since January 2017, President Trump has signed two Executive Orders designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by 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, two bills affecting the implementation of certain taxes under the ACA have been signed into law. The Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. Additionally, on January 23, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. Congress may enact additional legislation to real or replace certain elements of the ACA. As a result, there is significant uncertainty regarding future healthcare reform and its impact on our operations.

61


 

Further, there has been heightened governmental scrutiny in the United States and abroad of pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics. In the United States, such scrutiny has resulted in several recent Congressional inquiries and proposed federal 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 state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological 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. Outside of the United States, particularly in the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain coverage and reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed.

Pharmaceutical Coverage, Pricing, and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain regulatory approval. In the United States and markets in other countries, sales of any products for which we or our collaborators receive regulatory approval for commercial sale will depend, in part, on the extent to which third-party payors provide coverage and establish adequate reimbursement levels for such drug products.

In the United States, third-party payors include federal and state healthcare programs, government authorities, private managed care providers, private health insurers and other organizations. Third-party payors are increasingly challenging the price, examining the medical necessity and reviewing the cost-effectiveness of medical drug products and medical services, in addition to questioning their safety and efficacy. Moreover, the process for determining whether a third-party payor will provide coverage for a drug product may be separate from the process for setting the price of a drug product or for establishing the reimbursement rate that such a payor will pay for the drug product. A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a drug product does not assure that other payors will also provide coverage for the drug product. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

The marketability of any product candidates for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. In addition, emphasis on managed care in the United States has increased and we expect will continue to increase the pressure on pharmaceutical pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we or our collaborators receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

Europe / rest of world government regulation

In addition to regulations in the United States, we and our strategic alliance partners are subject to a variety of regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales and distribution of our products.

Whether or not we or our collaborators obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior to the commencement of clinical trials or marketing of the product in those countries. Certain countries outside of the United States have a similar process that requires the submission of a clinical trial application much like the IND prior to the commencement of human clinical trials. In the European Union, for example, a clinical trial application, or CTA, must be submitted to each country’s national health authority and an independent ethics committee, much like the FDA and IRB, respectively. Once the CTA is approved in accordance with a country’s requirements, clinical trial development may proceed.

The requirements and process governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, the clinical trials are conducted in accordance with GCPs and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.

To obtain regulatory approval of an investigational drug or biological product under European Union regulatory systems, we or our strategic alliance partners must submit a marketing authorization application. The application in the United States is similar to that required in the European Union, with the exception of, among other things, country-specific document requirements.

62


 

For other countries outside of the European Union, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, again, the clinical trials are conducted in accordance with GCPs and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.

If we or our strategic alliance partners fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

4.C.

Organizational structure

Our wholly-owned subsidiaries are Alcobra, Inc. and Arcturus Therapeutics, Inc. which are both Delaware corporations.

4.D.

Property, plants and equipment

Our San Diego, California headquarters consists of approximately 24,700 square feet of leased office and laboratory space under a lease that extends through 2025. Our wholly owned subsidiary Alcobra Inc. also leases office space totaling approximately 3,500 square feet in the greater Philadelphia, Pennsylvania area under a lease that expires in 2018 which space is sublet through the remaining term of the lease. We believe that our existing facilities are adequate for our current needs and that suitable additional space will be available if and when needed.

ITEM 4A.

UNRESOLVED STAFF COMMENTS

None.

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

5.A

Operating Results

Overview

We are an emerging biopharmaceutical company primarily focused on the development and commercialization of nucleic acid technologies and novel nucleic acid therapeutics for rare, infectious, fibrotic, and respiratory diseases with significant unmet medical needs. We have two proprietary technologies with the potential to address the major hurdles in nucleic acid medicine development such as nucleic acid delivery challenges, limited potency and narrow therapeutic index.

Our activities since inception have consisted principally of performing research and development activities and raising capital to fund those efforts. Our activities are subject to significant risks and uncertainties, including failing to secure additional funding before we achieve sustainable revenues and profit from operations. As of December 31, 2017, we had an accumulated deficit of $23.1 million.  

Recent Developments

Merger with Arcturus Therapeutics, Inc. and Related Activities

On November 15, 2017, our company, Alcobra Ltd., acquired Arcturus Therapeutics, Inc. pursuant to a merger in which Arcturus Therapeutics, Inc. became our wholly owned subsidiary. In connection with and immediately preceding the merger, we effected a 1-for-7 reverse stock split of our Ordinary Shares and reduced our authorized number of Ordinary Shares to 30,000,000 shares. Also, we changed our name to “Arcturus Therapeutics Ltd.” and the business conducted by our company became primarily the pre-merger business conducted by Arcturus Therapeutics, Inc., which is that of a preclinical nucleic acid medicines company focused on developing nucleic acid technologies and novel nucleic acid therapeutics for rare, infectious, fibrotic, and respiratory diseases with significant unmet medical needs. While Alcobra Ltd. was the legal acquirer in the transaction, Arcturus Therapeutics, Inc. was deemed the accounting acquirer. The Ordinary Shares of Alcobra Ltd. which had been listed on the Nasdaq Global Market, ceased trading at the close of business on November 15, 2017 under the ticker symbol “ADHD,” and once again commenced trading, as the post-merger company, on the Nasdaq Global Market, under the ticker symbol “ARCT,” on November 16, 2017.

In connection with and following the merger, our Board of Directors and management team have undergone significant changes in connection with the appointment of Arcturus’ management team to similar roles with our company. After the merger, the combined company is headquartered in San Diego, California, and the members of the board of directors of the post-merger parent company (Arcturus Therapeutics Ltd.) are Stuart Collinson, PhD (Executive Chairman), Craig Willett, MACC, Daniel Geffken, MBA, David Shapiro, MD and Joseph Payne, MSc. Effective as of February 1, 2018, we are led by our Interim President, Mark R. Herbert, who was part of the Arcturus pre-merger team.

63


 

The annual consolidated financial statements of the Company reflect the operations of Arcturus Therapeutics, Inc. as the acquirer for accounting purposes and acquired the assets and assumed the liabilities of Alcobra Ltd., and the stockholders and management of Arcturus Therapeutics, Inc. gained control of the combined company after the merger. The annual consolidated financial statements include the accounts of the Company since the effective date of the merger and the accounts of Arcturus Therapeutics, Inc. since inception.

Mr. Payne’s and Dr. Chivukula’s Termination and Ongoing Proxy Contest

On February 1, 2018, Mr. Payne was terminated for cause as President and Chief Executive Officer of the Company.  In connection with Mr. Payne’s termination, the Company exercised its right to repurchase 366,274 ordinary shares held by Mr. Payne that were not vested when he was terminated for an aggregate amount of $2,500. Under Israeli law, any repurchase of outstanding shares by a company must be made out of retained earnings. Since we do not have retained earnings we have filed a motion for approval of distribution under Section 303(a) of the Companies Law in order to finalize the repurchase. On February 6, 2018, Mr. Payne filed a Schedule 13D to report his ownership of the Company’s ordinary shares, in which he included the shares subject to repurchase, which he disputes. The effectuation of this repurchase is contingent upon approval of an Israeli court, which approval the Company is seeking. In that filing, Mr. Payne disputed the efficacy of his termination.

On February 11, 2018, Dr. Chivukula resigned as the Company’s Chief Scientific Officer and Chief Operating Officer from the Company’s board of directors. In connection with his resignation, Dr. Chivukula entered into a separation agreement which provided him with severance benefits, a consulting agreement and the Company agreeing to waive its right of repurchase with respect to 183,137 ordinary shares held by Dr. Chivukula. In addition, the separation agreement required that Dr. Chivukula place his 732,548 ordinary shares into a voting trust, to be voted as directed by the principal executive officer of the Company on all matters during the ensuing three years. Dr. Chivukula retained all financial benefit with regards to these shares.

On February 12, 2018, Mr. Payne wrote a letter to the Company’s board of directors demanding that the Company hold an extraordinary general meeting of shareholders.

On February 25, 2018, Mr. Payne challenged Dr. Chivukula’s voting trust in in the District Court at Tel Aviv – Yafo and, as interim relief, the court placed a temporary order on the Company, restricting the Company from implementing any action related to the voting of Dr. Chivukula’s shares.

Because Mr. Payne’s and Dr. Chivukula’s affidavits filed in Israel claimed that the Company’s agreement with Dr. Chivukula was invalid, on March 21, 2018, the Company filed a demand for arbitration with JAMS, because the Company’s agreements with Dr. Chivukula are governed by U.S. law and subject to mandatory arbitration.

On February 26, 2018, the Company held an extraordinary meeting of our shareholders for the purpose of ratifying the appointment of Ernst & Young LLP, an affiliate of our prior auditor, as the Company’s independent auditors for the audit of the Company’s financial statements for the fiscal year ended December 31, 2017 and for such subsequent period prior to the Company’s 2018 annual general meeting of shareholders. At that meeting, the proposal to ratify the appointment of Ernst & Young LLP failed to receive shareholder approval. Despite Mr. Payne’s previous vote in support of the proposal in his fiduciary role as a member of the board of directors, the Company was informed that he had voted his shares against the shareholder proposal despite his knowledge of the serious potential consequences of a failure of shareholders to approve the proposal.

On March 11, 2018, the Company announced that it would hold an extraordinary general meeting of shareholders on May 7, 2018 as a result of Mr. Payne’s demand.  On April 8, 2018, upon the recommendation of the Executive Committee of the Company’s board of directors in light of the uncertainty as to the agenda of the Extraordinary General Meeting created by Mr. Payne's March 28, 2018 motion challenging the meeting agenda as stated in the Company's notice published on March 11, 2018, the board of directors approved postponing the extraordinary general meeting.

On March 27, 2018, the Company filed an action against Mr. Payne in the Superior Court of the State of California, San Diego County. The lawsuit outlines Mr. Payne’s misconduct, poor judgement and bad decisions during his tenure, details his self-dealing and inappropriate business conflicts of interests, and seeks damages and injunctive relief.

On April 19, 2018, the Company filed an action against Mr. Payne and others in the United States District Court, Southern District of California.  The lawsuit alleges that the defendants violated and continue to violate Section 13(d) of the Exchange Act, 15 U.S.C. §, and Regulation 13D by failing to disclose in Schedule 13D filings the existence of group agreements to buy, sell, or vote shares of the Company and effect a change in the composition of the Company’s board of directors. The lawsuit seeks injunctive relief.

64


 

On May 13, 2018, the District Court of Tel Aviv ruled on a number of issues, including regarding the motion to extend the temporary restraining order, and ordered the Company to convene a Board meeting within seven days, and to summon an extraordinary general meeting within 35 days from that date. See Item 8.A. “Legal Proceedings” and Item 5.A. “Recent Developments” for additional information.

The Company’s board of directors has recommended that shareholders vote against the removal of the current directors and against the election of Mr. Payne’s nominees, and the Company is soliciting proxies from shareholders on this basis.

See Item 8.A. “Legal Proceedings” for additional information.

5.A.  Results of Operations

The following discussion of our results of operations should be read together with the consolidated financial statements included in this annual report. Our historical results of operations and the year-to-year comparisons of our results of operations that follow are not necessarily indicative of future results. As noted in the “Introduction” to this annual report, from an accounting perspective, the merger which closed on November 15, 2017 has been reflected in our financial statements as a recapitalization, whereby Arcturus Therapeutics, Inc. was the deemed accounting acquirer and our company was the deemed accounting acquiree. Accordingly, our results of operations described below reflect Arcturus Therapeutics, Inc.’s results, not Alcobra Ltd.’s results, for all periods preceding November 15, 2017.

Revenues

 

 

 

Year Ended December 31,

 

 

2016 to 2017

 

 

2015 to 2016

(Dollars in thousands)

 

2017

 

 

2016

 

 

2015

 

 

$ change

 

 

% change

 

 

$ change

 

 

% change

Revenue under strategic alliances and collaborations

 

$

12,998

 

 

$

20,382

 

 

$

6,138

 

 

$

(7,384

)

 

 

-36.2

%

 

$

14,244

 

 

*

 

*Greater than 100%

We enter into arrangements with pharmaceutical and biotechnology partners that may contain upfront payments, license fees for research and development arrangements, research and development funding, milestone payments, option exercise fees and royalties on future sales. The following table summarizes our total revenues for the periods indicated (in thousands):

 

 

 

Year Ended December 31,

 

 

2016 to 2017

 

 

2015 to 2016

 

(Dollars in thousands)

 

2017

 

 

2016

 

 

2015

 

 

$ change

 

 

% change

 

 

$ change

 

 

% change

 

Collaboration Partner A

 

$

4,862

 

 

$

12,008

 

 

$

5,123

 

 

$

(7,146

)

 

 

-59.5

%

 

$

6,885

 

 

*

 

Collaboration Partner B

 

 

5,639

 

 

 

7,395

 

 

 

979

 

 

 

(1,756

)

 

 

-23.7

%

 

 

6,416

 

 

*

 

Collaboration Partner C

 

 

1,403

 

 

 

28

 

 

 

-

 

 

 

1,375

 

 

*

 

 

 

28

 

 

 

100.0

%

Other

 

 

1,094

 

 

 

951

 

 

 

36

 

 

 

143

 

 

 

15.0

%

 

 

915

 

 

*

 

Total

 

$

12,998

 

 

$

20,382

 

 

$

6,138

 

 

$

(7,384

)

 

 

-36.2

%

 

$

14,244

 

 

*

 

 

65


 

*Greater than 100%

Revenue under strategic alliances and collaborations decreased by $7.4 million during fiscal year 2017 as compared to the prior fiscal year 2016. The decrease in revenue was primarily the result of the decrease in revenue of $7.1 million due the cancellation of a collaboration agreement during 2017, lower revenue of $1.8 million as a result of lower revenue recognition on upfront payments during 2017, offset by higher revenue of $1.5 million from a collaboration agreement signed during 2016.  

Operating Expenses

Our operating expenses consist of research and development and general and administrative expenses.

 

 

 

Year Ended December 31,

 

 

2016 to 2017

 

 

2015 to 2016

 

(Dollars in thousands)

 

2017

 

 

2016

 

 

2015

 

 

$ change

 

 

% change

 

 

$ change

 

 

% change

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development, net

 

$

15,918

 

 

$

17,934

 

 

$

5,476

 

 

$

(2,016

)

 

 

-11.2

%

 

$

12,458

 

 

*

 

General and administrative

 

 

7,572

 

 

 

3,448

 

 

 

2,574

 

 

 

4,124

 

 

*

 

 

 

874

 

 

 

34.0

%

Total

 

$

23,490

 

 

$

21,382

 

 

$

8,050

 

 

$

2,108

 

 

 

9.9

%

 

$

13,332

 

 

*

 

 

*Greater than 100%

Research and Development Expenses, net

Our research and development expenses consist primarily of payments for salaries and related personnel expenses, third-party clinical consultants, and laboratory supplies related to conducting research and development activities in conjunction with collaborative agreements and our internal research and development activities and are reflected net of any royalty bearing grants.

The decrease of $2.0 million in research and development expenses for the year ended December 31, 2017 as compared to the year ended December 31, 2016 resulted primarily from lower research and development expenses incurred of $3.7 million, $3.2 million which resulted from our termination of a collaboration agreement during 2017- a contract that was in place for the full year of 2016. The remaining decrease of $0.5 million was due to less consumption of materials for existing experiments. This decrease in expenses was offset by higher salary related costs of $1.3 million and general facility expenses and other costs of $0.4 million.

The increase of $12.5 million in research and development expenses for the year ended December 31, 2016 as compared to the year ended December 31, 2015 resulted from a $10.4 million increase in research and development expenses incurred primarily due to new collaboration agreements that were entered into during 2015, and incurred development costs during all of 2016. Additionally, we had an increase in salary related costs of $1.6 million and $0.5 million of other costs.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related benefits for our executive, administrative and accounting functions and professional service fees for legal and accounting services as well as other general and administrative expenses.

The increase in general and administrative expenses of $4.1 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016 was due to an increase in stock based compensation of $2.0 million as a result of charges resulting from the acceleration of a restricted stock grant and certain stock option grants, $1.2 million increase in professional fees related to increased legal and accounting services associated with being a public company, $0.4 million increase in salary related costs for additional personnel costs related to the support of our publicly-traded company, and an increase of $0.5 million in other costs.

The increase in general and administrative expenses of $0.9 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015 was due to increased personnel-related costs of $0.3 million, $0.2 million increase in professional fees related to legal and accounting services, and other costs of $0.4 million.        

66


 

Finance (expense) income, net

 

 

 

Year Ended December 31,

 

 

2016 to 2017

 

 

2015 to 2016

 

(Dollars in thousands)

 

2017

 

 

2016

 

 

2015

 

 

$ change

 

 

% change

 

 

$ change

 

 

% change

 

Finance (expense) income, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

89

 

 

$

9

 

 

$

1

 

 

$

80

 

 

*

 

 

$

8

 

 

*

 

Interest expense

 

 

(150

)

 

 

(295

)

 

 

(251

)

 

 

145

 

 

 

-49.2

%

 

 

(44

)

 

 

17.5

%

Other (expense) income, net