Company Quick10K Filing
Quick10K
Clementia Pharmaceuticals
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$26.38 38 $1,010
20-F 2018-12-31 Annual: 2018-12-31
20-F 2017-12-31 Annual: 2017-12-31
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TTWO Take Two Interactive Software 10,290
AER AerCap 7,030
CLBK Columbia Financial 1,810
CTSO Cytosorbents 228
AMBO Ambow Education Holding 107
DIT Amcon Distributing 54
BKTI BK Technologies 51
AHNR Athena Silver 0
GXP Great Plains Energy 0
CMTA 2018-12-31
Part I
Item 1.Identity of Directors, Senior Management and Advisors
Item 2.Officer Statistics and Expected Timetable
Item 3.Key Information
Item 4.Information on The Company
Item 4A.Unresolved Staff Comments
Item 5.Operating and Financial Review and Prospects
Item 6.Directors, Senior Management and Employees
Item 7.Major Shareholders and Related Party Transactions
Item 8.Financial Information
Item 9.The Offer and Listing
Item 10.Additional Information
Item 11.Qualitative and Quantitative Disclosure About Market Risks
Item 12.Description of Securities Other Than Equity Securities
Part II
Item 13.Defaults, Dividend, Arrearages and Delinquencies
Item 14.Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15.Controls and Procedures
Item 16.[Reserved]
Item 16A.Audit Committee Financial Expert
Item 16B.Code of Ethics
Item 16C.Principal Accountant Fees and Services
Item 16D.Exemptions From The Listing Standards for Audit Committees
Item 16E.Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F.Change in Registrant's Certifying Accountant
Item 16G.Corporate Governance
Item 16H.Mine Safety Disclosure
Item 17.Financial Statements
Item 18.Financial Statements
Item 19.Exhibits
EX-10.5 exh_105.htm
EX-10.6 exh_106.htm
EX-10.12 exh_1012.htm
EX-10.13 exh_1013.htm
EX-10.14 exh_1014.htm
EX-10.15 exh_1015.htm
EX-10.17 exh_1017.htm
EX-10.18 exh_1018.htm
EX-12.1 exh_121.htm
EX-12.2 exh_122.htm
EX-13.1 exh_131.htm
EX-13.2 exh_132.htm
EX-23.1 exh_231.htm

Clementia Pharmaceuticals Earnings 2018-12-31

CMTA 20F Annual Report

Balance SheetIncome StatementCash Flow

20-F 1 f20f_032819p.htm FORM 20-F

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

(Mark One)

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

OR

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

For the fiscal year ended December 31, 2018

OR

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

For the transition period from to

OR

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

Date of event requiring this shell company report

 

Commission file number 001-38177

 

CLEMENTIA PHARMACEUTICALS INC.

(Exact name of Registrant as specified in its charter)

 

N/A

(Translation of Registrant’s name into English)

 

Canada

(Jurisdiction of incorporation or organization)

 

1000 de la Gauchetière West, Suite 1200

Montreal, Quebec, Canada H3B 4W5

(Address of principal executive offices)

 

Steve Forte, Chief Financial Officer, Clementia Pharmaceuticals Inc.,

1000 de la Gauchetière West, Suite 1200, Montreal, Quebec, Canada H3B 4W5, Tel: (514) 940-3600

(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
Common Shares, no par value   The Nasdaq Global Select Market

 

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

(Title of Class)

 

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

(Title of Class)

 

 

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: At December 31, 2018, 37,864,068 common shares were issued and outstanding.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨ Yes x 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 x No

 

Note-checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.

 

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.

x Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).

x 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 x Non-Accelerated Filer ¨ Emerging growth company x

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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. ¨

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

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 x

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 x No

 

2

 

TABLE OF CONTENTS

 

 

 

 

GENERAL 6
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 7
PART I 10
Item 1.     Identity of Directors, Senior Management and Advisors 10
Item 2.    Officer Statistics and Expected Timetable 10
Item 3.     Key Information 10
A.   Selected Financial Data 10
B.   Capitalization and Indebtedness 11
C.   Reasons for the Offer and Use of Proceeds 11
D.   Risk Factors 12
Item 4.     Information on the Company 54
A.   History and Development of the Company 56
B.   Business Overview 56
C.   Organizational Structure 78
D.   Property, Plant and Equipment 78
Item 4a.    Unresolved Staff Comments 79
Item 5.    Operating and Financial Review and Prospects 79
A.    Operating Results 79
B.   Liquidity and Capital Resources 86
C.   Research and development, patents and licenses, etc. 92
D.   Trend Information 92
E.   Off-balance Sheet Arrangements 92
F.   Tabular disclosure of Contractual Obligations 93
G.   Safe Harbor 94
Item 6.    Directors, Senior Management and Employees 94
A.   Directors and Senior Management 94
B.   Compensation 98
C.   Board Practices 115
D.   Employees 118

3

 

E.   Share Ownership 119
Item 7.    Major Shareholders and Related Party Transactions 120
A.   Major Shareholders 120
B.   Related Party Transactions 122
C.   Interests of Experts and Counsel 122
Item 8.    Financial Information 122
A.   Consolidated Statements and Other Financial Information 122
B.   Significant Changes 123
Item 9.    The Offer and Listing 123
A.   Offer and Listing Details 123
B.   Plan of Distribution 124
C.   Markets 124
D.   Selling Shareholders 124
E.   Dilution 124
F.   Expenses of the Issue 124
Item 10.   Additional Information 124
A.   Share Capital 124
B.   Memorandum and Articles of Association 126
C.   Material Contracts 129
D.   Exchange Controls 130
E.   Taxation 131
F.   Dividends and Paying Agents 141
G.   Statement by Experts 141
H.   Documents on Display 141
I.   Subsidiary Information 141
Item 11.   Qualitative and Quantitative Disclosure About Market Risks 142
Item 12.   Description of Securities Other Than Equity Securities 142
A.   Debt securities 142
B.   Warrants and Rights 142
C.   Other Securities 143
D.   American Depositary Shares 143
PART II 143
Item 13.     Defaults, Dividend, Arrearages and Delinquencies 143

4

 

Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds 143
Item 15.    Controls and Procedures 143
Item 16.    [Reserved] 144
Item 16A.    Audit Committee Financial Expert 144
Item 16B.    Code of Ethics 144
Item 16C.    Principal Accountant Fees and Services 145
Item 16D.    Exemptions from the Listing Standards for Audit Committees 145
Item 16E.    Purchases of Equity Securities by the Issuer and Affiliated Purchasers 145
Item 16F.    Change in Registrant’s Certifying Accountant 146
Item 16G.    Corporate Governance 146
Item 16H.    Mine Safety Disclosure 146
Item 17.    Financial Statements 146
Item 18.    Financial Statements 146
Item 19.    EXHIBITS 147

 

 

 

 

 

 

 

 

 

 

5

 

GENERAL

 

 

Clementia is a clinical-stage biopharmaceutical company innovating treatments for people with ultra-rare bone disorders, including Fibrodysplasia Ossificans Progressiva (FOP) and Multiple Osteochondromas (MO), as well as other diseases.

 

In August 2017, the Company completed its initial public offering (IPO) and issued 9,191,000 common shares at $15 per share, including the underwriters’ over-allotment option, for total gross proceeds of approximately $137.9 million. The Company’s common shares are listed and traded on the Nasdaq Global Select Market under the symbol CMTA.

 

Immediately prior to the IPO, the Company amended its articles of incorporation to effect an 11.99-for-1 stock split of all of its common shares. The stock split became effective on July 19, 2017 and, as a result, all issued and outstanding common shares, preferred shares, stock options and per share amounts contained in this Annual Report have been retrospectively adjusted to reflect this stock-split.

 

On August 7, 2017, the Company amended and restated its articles. The Company is since then authorized to issue an unlimited number of common shares, without nominal or par value, and an unlimited number of preferred shares issuable in series, without nominal or par value.

 

In October 2018, the Company completed a follow-on offering and issued 6,095,000 common shares at $13.25 per share, for total gross proceeds of $80,758,750.

 

In October 2018, the Company also filed an At-The-Market (ATM) offering prospectus for $40,000,000 of additional common shares for a period of 24 months. The ATM allows the Company to sell common shares having an aggregate offering price of up to $40,000,000 from time to time at prevailing market prices. The underwriters’ commission will be 3% of the amount of funds raised. There were no draws on this ATM offering prospectus as at the date of this Form 20-F.

 

On February 24, 2019, the Company entered into an agreement (the Arrangement Agreement) with Ipsen S.A. (Ipsen), a global specialty-driven biopharmaceutical group organized under the laws of France and listed in Paris (Euronext: IPN), and a wholly-owned subsidiary of Ipsen (the Purchaser, and together with Ipsen, the Purchaser Parties), pursuant to which Ipsen would acquire, through the Purchaser, all outstanding shares of Clementia for a purchase price of US$25.00 per share in cash upfront, plus a contingent value right (CVR) of US$6.00 per share related to the MO indication for a total transaction value of up to US$1.31 billion (Plan of Arrangement). Completion of the transaction is anticipated to occur in the second quarter of 2019, subject to satisfaction or waiver of all closing conditions. As of the date of this Form 20-F, the arrangement (the Arrangement) contemplated in the Arrangement Agreement has not yet been approved or completed.

 

All references in this Annual Report to “the Company”, “Clementia”, “we”, “us”, or “our” refer to Clementia Pharmaceuticals Inc. and the subsidiaries through which it conducts its business unless otherwise indicated.

 

Unless otherwise indicated, all references to “dollars” or the use of the symbol “$” are to U.S. dollars, the Company’s functional currency, and all references to “Canadian dollars” or “C$” are to Canadian dollars. Unless otherwise specified, all financial information has been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

 

 

 

 

 

6

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

 This Annual Report on Form 20-F contains forward-looking statements within the meaning of applicable securities laws. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “expect,” “estimate,” “may,” “will,” “could,” “leading,” “intend,” “contemplate,” “shall” and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements in this Annual Report include, but are not limited to, statements with respect to:

 

    plans, timing and outcome of the Plan of Arrangement;
    our ability to achieve profitability in the future;
    our projected financial position and estimated cash burn rate;
    our expectations about the timing of achieving milestones and the cost of our development programs;
    our observations and expectations regarding the efficacy of palovarotene and the potential benefits to patients;
    our requirements for, and the ability to obtain, future funding on favorable terms or at all;
    our projections regarding the timely and successful completion of studies and trials and availability of results from such studies and trials;
    our expectations about palovarotene’s safety and efficacy;
    our expectations regarding our ability to arrange for the manufacturing of our products and technologies;
    our expectations regarding the progress, and the successful and timely completion, of the various stages of the regulatory approval process;
    our plans to market, sell and distribute our products and technologies;
    our expectations regarding the acceptance of our products and technologies by the market;
    our ability to retain and access appropriate staff, management and expert advisers;
    our expectations with respect to existing and future corporate alliances and licensing transactions with third parties, and the receipt and timing of any payments to be made by us or to us in respect of such arrangements; and
    our strategy with respect to the protection of our intellectual property.

 

 

 

7

 

All forward-looking statements reflect our belief and assumptions based on information available at the time the assumption was made. These forward-looking statements are not based on historical facts but rather on management’s expectations regarding future activities, results of operations, performance, future capital and other expenditures (including the amount, nature and sources of funding thereof), competitive advantages, business prospects and opportunities. By its nature, forward-looking information involves numerous assumptions, inherent risks and uncertainties, both general and specific, known and unknown, that contribute to the possibility that the predictions, forecasts, projections or other forward-looking statements will not occur. Factors which could cause future outcomes to differ materially from those set forth in the forward-looking statements include, but are not limited to:

  

    the risks that a condition to closing the Plan of Arrangement may not be satisfied;
    our ability to generate revenue and become profitable;
    the ability to obtain, on satisfactory terms or at all, the financing required to support operations, development, clinical trials and commercialization of products;
    the risks related to our heavy reliance on palovarotene, our only current product candidate;
    the risks of delays and inability to complete clinical trials due to difficulties enrolling patients;
    the risks associated with the development of palovarotene and any future product candidate, including the demonstration of efficacy and safety;
    the risks related to clinical trials including the risk of negative results, potential delays, cost overruns and potential adverse events or unacceptable side effects;
    the risks of reliance on third-parties for the planning, conduct and monitoring of clinical trials and for the manufacture of clinical drug supplies and drug product;
    potential changes in regulatory requirements, and delays or negative outcomes from the regulatory approval process;
    our ability to successfully compete in our targeted markets, including the risk that competing therapies could emerge;
    the risks related to healthcare reimbursement policies and potential healthcare reform;
    our heavy dependence on licensed intellectual property, including our ability to source and maintain licenses from third-party owners;
    our ability to adequately protect proprietary information, trade secrets and technology from competitors;
    the risk of patent or other intellectual property related litigation;
    risks related to changes in patent laws and their interpretations;
    risks related to our ability to manage the expansion of the size and scope of our Company, including risks associated with international operations;
    the potential for product liability claims; and
    our ability to attract, retain and motivate key personnel.

 

8

 

The above are further and more fully described under Item 3D of this Annual Report entitled “Risk Factors.” Although the forward-looking statements contained in this Annual Report are based upon what our management believes to be reasonable assumptions, we cannot assure readers that actual results will be consistent with these forward-looking statements. Any forward-looking statements represent our estimates only as of the date of this Annual Report and should not be relied upon as representing our estimates as of any subsequent date. We undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as may be required by applicable securities legislation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

PART I

 

 

Item 1.Identity of Directors, Senior Management and Advisors

 

Not applicable.

 

Item 2.Officer Statistics and Expected Timetable

 

Not applicable.

 

Item 3.Key Information

 

A.Selected Financial Data

 

The following tables present our selected financial data for the periods and as of the dates indicated and have been derived from the audited consolidated financial statements of the Company. Our consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB. You should read these tables in conjunction with our audited consolidated financial statements and accompanying notes thereto included in Item 18 of this Annual Report and Item 5 “Operating and Financial Review and Prospects” section of this Annual Report. Unless otherwise indicated, all references to “dollars” or the use of the symbol “$” are to United States dollars, the Company’s functional currency.

 

Our historical results are not necessarily indicative of the results that should be expected in any future period.

 

All of our operations are continuing operations.

 

Consolidated statements of operations data

 

Year ended December 31,  2018   2017   2016   2015   2014 
   (in thousands, except share and per share data) 
Expenses                    
Research and development  $43,904   $27,406   $16,852   $14,396   $7,797 
Tax credits   (1,039)   (1,237)   (139)   (165)   (214)
    42,865    26,169    16,713    14,231    7,583 
General and administrative   16,492    9,287    3,406    5,479    2,266 
Interest income   (2,358)   (1,082)   (399)   (109)   (19)
Financial expenses   161    80,438    37,646    56,140    2,364 
Income tax expense   966    643    146    156    95 
Net loss and comprehensive loss  $(58,126)  $(115,455)  $(57,512)  $(75,897)  $(12,289)
Net loss per share, basic and diluted  $(1.78)  $(7.93)  $(24.46)  $(33.06)  $(5.70)
Weighted average number of shares outstanding, basic and diluted   32,714,234    14,560,482    2,351,347    2,295,402    2,156,689 

 

10

 

Consolidated statements of financial position data

 

As at December 31,  2018   2017   2016   2015   2014 
   (in thousands, except share and per share data) 
Cash and short-term investments  $169,973   $66,230   $39,434   $58,107   $5,504 
Long-term investments   -    75,000    -    -    - 
Working capital   161,727    64,183    36,101    55,569    4,885 
Total assets   176,844    148,425    41,557    60,657    8,000 
Preferred shares and embedded derivative liabilities   -    -    185,706    147,981    21,598 
Total liabilities   12,412    6,719    190,229    151,992    23,653 
Total shareholders’ equity (deficit)   164,432    141,707    (148,672)   (91,335)   (15,652)
Number of common shares outstanding   37,864,068    31,717,584    2,351,347    2,351,347    2,115,959 
Dividends paid on common shares(1)  $-   $-   $-   $-   $- 
(1)The Company has never declared or paid dividends since inception and does not expect to do so in the foreseeable future.
(2)Working capital is determined by deducting current liabilities from current assets.

 

Exchange rate data

 

The following table sets forth, for the periods indicated, the high, low, average and end of period noon rates of exchange for one U.S. dollar, expressed in Canadian dollars, published by the Bank of Canada during the respective periods.

 

Year ended December 31,  2018   2017   2016   2015 
     
Highest noon rate during the period  $1.3642   $1.3743   $1.4589   $1.3990 
Lowest noon rate during the period  $1.2288   $1.2128   $1.2544   $1.1728 
Average noon spot rate for the period  $1.2957   $1.2986   $1.3248   $1.2787 
Noon rate at the end of the period  $1.3642   $1.2545   $1.3427   $1.3840 

 

On March 28, 2019, the Bank of Canada indicative rate of exchange was $1.00 = C$1.3429.

 

B.Capitalization and Indebtedness

  

Not applicable.

  

C.Reasons for the Offer and Use of Proceeds

  

Not applicable.

 

11

 

D.Risk Factors

 

Our business involves a high degree of risk. Please carefully consider the risks we describe below in additional to the other information set forth elsewhere in this annual report and our other filings with the SEC. These material risks could adversely affect our business, financial condition and results of operations. See “Cautionary Note Regarding Forward-Looking Statements”.

 

Risks Related To Our Financial Position and Need For Capital

 

We are a clinical stage biopharmaceutical company with a limited operating history and have not generated any revenue from product sales. We have incurred significant operating losses and negative operating cash flows since our inception and anticipate that we will incur continued losses for the foreseeable future.

 

We are a clinical stage company with a limited operating history. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We were incorporated in November 2010. Our operations to date have been limited primarily to organizing and staffing our Company, raising capital and conducting research and development activities for palovarotene and other product candidates. We have never generated any revenue from product sales. We have not obtained regulatory approvals for palovarotene or any other product candidate.

 

We have funded our operations to date primarily through proceeds from our IPO and other public offerings, as well as issuances of redeemable convertible preferred stock. From our inception through December 31, 2018, we received gross proceeds of $137.9 million from our IPO, $80.8 million from our follow-on offering, and $102.2 million from the sale of our convertible and redeemable preferred shares. As of December 31, 2018, our cash and short-term investments were $170.0 million. We have incurred net losses in each year since our inception. Our net losses were $58.1, $115.5, $57.5, $75.9 and $12.3 million for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, respectively, and our negative operating cash flows were $49.1, $35.6, $18.8, $17.6 and $9.7 million for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, respectively. The majority of our operating losses have resulted from non-cash financing charges incurred in connection with the accounting for our preferred shares and embedded derivatives from 2014 to 2017, as well as costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to incur increasing levels of operating losses over the next several years and for the foreseeable future. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our accumulated deficit and working capital. In addition, if we obtain marketing approval for palovarotene or any other product candidate, we will incur significant sales, marketing and outsourced-manufacturing expenses. We will also continue to incur additional costs associated with operating as a public company. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or when we will become profitable, if at all. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.

 

Our ability to become profitable depends upon our ability to generate revenue. To date, we have not generated any revenue from palovarotene or any other product candidate and we do not know when, or if, we will generate any revenue. We do not expect to generate significant revenue unless and until we obtain marketing approval of, and begin to sell, palovarotene. Our ability to generate revenue depends on a number of factors, including, but not limited to, our ability to:

 

12

 

initiate and successfully complete clinical trials that meet their clinical endpoints;
initiate and successfully complete all safety studies required to obtain U.S. and foreign marketing approval for palovarotene or any other product candidates;
commercialize palovarotene or any other product candidates, if approved, by developing a sales force or entering into collaborations with third parties; and
achieve market acceptance of palovarotene or any other product candidates in the medical community and with third-party payors.

 

Absent our entering into a collaboration or partnership agreement, we expect to incur significant sales and marketing costs as we prepare to commercialize palovarotene or any other product candidates. Even if we initiate and successfully complete pivotal clinical trials of palovarotene or any other product candidates, and any such product candidate is approved for commercial sale, and despite expending these costs, our product candidate may not be a commercially successful drug. We may not achieve profitability soon after generating product sales, if ever. If we are unable to generate product revenue, we will not become profitable and may be unable to continue operations without continued funding.

 

We expect to need to raise additional funding, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations.

 

We are currently advancing palovarotene through clinical development. Developing our product candidates is expensive, and we expect our research and development and commercialization expenses to increase substantially in connection with our ongoing activities, particularly as we advance palovarotene in clinical trials. Depending on the status of regulatory approval or, if approved, commercialization of palovarotene or any other product candidates, as well as the progress we make in selling palovarotene or any other product candidates, we will require additional capital to fund operating needs thereafter. We may also need to raise additional funds sooner if we choose to pursue additional indications and/or geographies for palovarotene or any other product candidates or otherwise expand more rapidly than we presently anticipate.

 

As of December 31, 2018, our cash and short-term investments were $170.0 million. We expect that our existing cash and short-term investments will be sufficient to fund our operating expenses for at least the next twelve months following December 31, 2018. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. In any event, we will require additional capital to fund operations until profitability is achieved, if ever. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations.

 

Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize palovarotene or any other 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 obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or the commercialization of any product candidates, or be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations.

 

13

 

Risks Related to Product Development, Regulatory Approval and Commercialization

 

We depend heavily on the success of our only current product candidate, palovarotene, for which as of the date of this Annual Report, we have completed a Phase 2 clinical trial, and have initiated a Phase 3 trial in FOP and initiated a Phase 2 clinical trial in MO. We cannot be certain that we will be able to develop, obtain regulatory approval of, or successfully commercialize palovarotene for FOP, MO or any other indication.

 

We currently have no drug products for sale and may never be able to successfully develop drug products. We have invested the vast majority of our efforts and resources into the development of our only current product candidate, palovarotene, for the treatment of FOP and MO. Our business thus depends heavily on the successful non-clinical and clinical development, regulatory approval and commercialization of palovarotene, for which we have initiated, or are preparing to initiate clinical trials for the treatment of FOP and MO.

 

Palovarotene will require substantial additional clinical development, testing and regulatory approval before we may be permitted to commence its commercialization. The clinical trials of our product candidate are, and the manufacturing and marketing of our product candidate will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United States and in other countries where we intend to test and, if approved, market this or any other product candidate. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through clinical trials that the applicable product candidate is safe and effective for use for the target indication. Drug development is a long, expensive and uncertain process, and delay or failure can occur at any stage of any of our clinical trials. This process can take many years and may include post-marketing studies and surveillance, which may require the expenditure of substantial resources beyond the proceeds we raised in our IPO. Of the large number of drugs in development in the United States at any time, only a small percentage will successfully complete the U.S. Food and Drug Administration (FDA) regulatory approval process and will be commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development and clinical trials, we cannot assure you that our product candidate will be successfully developed or commercialized.

 

We are not permitted to market our product candidate in the United States until we receive approval of a new drug application (NDA) from the FDA, or market in any foreign countries until we receive the requisite approval from such countries. We recently met with the FDA and the agency agreed that we may submit our NDA for palovarotene based on our Phase 2 results in FOP. There is no guarantee that our NDA submission will be accepted for filing, or that palovarotene will be approved on the basis of these results. We will also meet with regulatory agencies in other countries to determine if our existing data is sufficient for filing. There is no guarantee that our Phase 2 results will be sufficient for filing in international markets. We also have an ongoing Phase 3 clinical trial to study a chronic and episodic regimen of palovarotene in patients with FOP. There is no guarantee that this trial will be successful or that the FDA will accept a supplemental NDA (sNDA) for this additional regimen. We have initiated a Phase 2 trial using palovarotene for the treatment of MO. While the FDA has recommended that we conduct a Phase 2 trial to inform the optimal dose and the appropriate choice of endpoints in MO followed by a Phase 3 trial, we believe that this Phase 2 study may, if it provides statistically strong evidence of an important clinical benefit, be sufficient for us to submit an NDA for palovarotene for MO. However, there is no guarantee that we will not be required to perform an additional pivotal trial of palovarotene in MO in order to gain approval. Moreover, the FDA has stated their preference for a Phase 2 trial followed by a Phase 3 trial. We cannot be certain that the FDA will not require that we conduct additional pivotal trials before we can submit an NDA for palovarotene for any indication.

 

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The FDA may require that we conduct additional toxicity studies and may also require us to conduct additional non-clinical studies before submitting an NDA for palovarotene.

 

Obtaining approval of an NDA is a complex, lengthy, expensive and uncertain process, and the FDA may delay, limit or deny approval of our product candidate for many reasons, including, among others:

 

we may not be able to demonstrate that palovarotene or any other product candidate is safe and effective in treating FOP to the satisfaction of the FDA;
the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA for marketing approval;
the FDA may disagree with the number, design, size, conduct or implementation of our clinical trials;
the FDA may require that we conduct non-clinical studies and additional clinical trials;
the FDA may not approve the formulation, labeling or specifications of palovarotene or any other product candidate;
the contract research organizations (CROs) that we retain to conduct our non-clinical studies and clinical trials may take actions outside of our control that adversely impact such studies or trials;
the FDA may find the data from non-clinical studies and clinical trials insufficient to demonstrate that palovarotene or any other product candidate’s clinical and other benefits outweigh its safety risks;
the FDA may disagree with our interpretation of data from our non-clinical studies or clinical trials;
the FDA may not accept some or all of the data generated at our non-clinical studies and clinical trial sites;
if our NDA, if and when submitted, is reviewed by an advisory committee, the FDA may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, non-clinical studies or additional clinical trials, limitations on approved labeling or distribution and use restrictions;
the FDA may determine that the manufacturing processes or facilities of third-party manufacturers with which we contract do not conform to applicable requirements, including current Good Manufacturing Practices (cGMPs); or
the FDA may change its approval policies or adopt new regulations.

 

Any of these factors and others, many of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully market palovarotene or any other product candidate. Any such setback in our pursuit of regulatory approval would have a material adverse effect on our business and prospects.

 

The number of patients suffering from FOP and MO is small and has not been established with precision. If the actual number of patients with FOP or MO is smaller than we anticipate, we may encounter difficulties in enrolling patients in our clinical trials, thereby delaying or preventing development of palovarotene or any other product candidate, and if palovarotene or any other product candidate is approved, our revenue and ability to achieve profitability may be materially adversely affected.

 

There is no precise method of establishing the actual number of patients with FOP or MO in any geography over any time period. We estimate that the number of individuals affected by FOP is approximately 1.3 individuals per million lives globally and the number of individuals affected by MO is approximately 20 individuals per million lives worldwide. If we are not able to identify and recruit a sufficient number of FOP or MO patients, we will have difficulty completing our clinical trials. Because the estimated number of patients is so small, and particularly if the actual number of patients with FOP or MO is lower than we believe, we may be adversely affected.

 

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Further, if palovarotene or any other product candidate is approved, the markets for FOP or MO could be smaller than we anticipate, which could limit our ability to achieve profitability.

 

If serious adverse events or unacceptable side effects are identified during the development of palovarotene or at any other time, we may need to delay, limit or terminate our clinical development activities, and such adverse events or unacceptable side effects may negatively impact the regulatory approval and commercial profile of palovarotene, and have other significant negative consequences.

 

Clinical trials by their nature utilize a sample of the potential patient population. Accordingly, any rare and severe side effects of palovarotene may be uncovered only in later stages of our product development activities or only in subsequent trials that we may conduct. Many product candidates that initially showed promise in early stage testing have later been found to cause side effects that prevented their further development. We have observed an increase in specific mucocutaneous side effects when higher doses of palovarotene are administered. These included dry skin, skin exfoliation, erythema (redness) generalized or localized pruritus (or itchiness), excoriation (or skin abrasion), rash and alopecia (or hair loss). These mucocutaneous side-effects may have required dose de-escalations. We are evaluating in our Phase 3 trial a chronic dosing regimen for a duration that will support lifetime chronic dosing of palovarotene and as a result, the severity of side effects observed to date may increase and new side effects may emerge. Since palovarotene is a retinoid and therefore a teratogen, women who are or expect to become pregnant will not be able to take palovarotene and major fetal abnormalities may occur if it is taken, as any fetus that is exposed can be affected. Moreover, the development of palovarotene or any other product candidate may cause certain undesirable side effects in certain patient populations or have characteristics that are unexpected, and we may need to abandon development or limit development to more narrow uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective, any of which could adversely affect our business, prospects, financial condition and results of operations.

 

Further, it is possible that rare and severe side effects of palovarotene or any other product candidate may only be uncovered after palovarotene or any other product candidate receives marketing approval. This would result in a number of potentially significant negative consequences, including:

 

regulatory authorities may withdraw or limit their approval of such product candidate;
regulatory authorities may require the addition of labeling statements, such as a “boxed” warning or a contraindication; for example, palovarotene, like all retinoids, is a teratogen and its labeling will communicate that it must not be taken by pregnant women or women who may become pregnant;
we may be required to change the way such product candidate is distributed or administered, conduct additional clinical trials or change the labeling of the product candidate;
we may be subject to regulatory investigations and government enforcement actions;
we may decide to remove such product candidate from the marketplace;
we could be sued and held liable for injury caused to individuals exposed to or taking our product candidate; or
our reputation may suffer.

 

We believe that any of such events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercializing palovarotene or any other product candidate and significantly impact our ability to successfully commercialize palovarotene or any other product candidate and generate revenues.

 

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Results from early clinical trials of palovarotene or any other product candidate are not necessarily predictive of the results of later nonclinical studies and clinical trials of palovarotene or any other product candidate. If later clinical trials are not successful, we will not be able to successfully develop, obtain regulatory approval for and commercialize palovarotene or any other product candidate.

 

Any trends we observe and results we obtain from our early clinical trials of palovarotene or any other product candidate may not necessarily be predictive of the results from later clinical trials. For example, as is common with Phase 2 trials, particularly with the first clinical trials to be conducted in a patient population, we explored numerous endpoints and analyzed the data from our Phase 2 clinical trials of palovarotene in a number of ways. Product candidates such as palovarotene in Phase 3 clinical trials may fail to demonstrate sufficient efficacy despite having progressed through initial clinical trials, even if certain analyses of primary or secondary endpoints or cross-study comparisons of pooled results in those early trials showed trends toward efficacy. Much of the data we present on the use of palovarotene for the treatment of FOP is drawn from the results of multiple clinical trials which have been pooled and then analyzed. While we believe this data is useful in informing the design of future clinical trials in palovarotene, cross-study comparisons of pooled results involve the inherent bias of post-hoc manipulation of data and choice of analytical methods, as well as methodological issues surrounding heterogeneity among studies contributing to the analyses; therefore, it is important to view such results in light of the totality of all available information, such as individual study results on pre-specified analyses of endpoints. Prior to obtaining approval for palovarotene, the results of our registration trials may have to demonstrate statistically significant improvements. Also, our later-stage clinical trials could differ in significant ways from our Phase 2 clinical trials of palovarotene, which may cause the outcome of these later-stage trials to differ from our earlier stage clinical trials. These differences may include changes to inclusion and exclusion criteria, efficacy endpoints and statistical design. For example, our Phase 3 clinical trial in FOP has implemented a chronic dosing regimen with increased dosing in the case of flare-ups and a primary endpoint of new HO volume as measured by whole body CT scans (WCTBs). This dosing regimen and primary endpoint of annualized change in new HO volume is different from those of our PVO-1A-201 study (‘201 study) and Part A of our PVO-1A-202 study (‘202 study), and different from the data we present herein on the use of palovarotene for the treatment of FOP; this Phase 3 primary endpoint is a continuous variable rather than a discrete, responder analysis, as was performed in our ‘201 study and Part A of our ‘202 study. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in early-stage development, and we cannot be certain that we will not face similar setbacks. These setbacks have been caused by, among other things, non-clinical findings made while clinical trials were underway or safety or efficacy observations made in non-clinical studies and clinical trials, including previously unreported adverse events. Moreover, non-clinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in non-clinical studies and clinical trials nonetheless failed to obtain FDA approval. If we fail to produce positive results in our clinical trials of palovarotene or any other product candidate, the development timeline and regulatory approval and commercialization prospects for palovarotene or any other product candidate, and, correspondingly, our business and financial prospects, would be materially adversely affected.

 

Failures or delays in the commencement or completion of our planned clinical trials of palovarotene or any other product candidate could result in increased costs to us and could delay, prevent or limit our ability to generate revenue and continue our business.

 

Successful completion of our clinical trials is a prerequisite to submitting an NDA to the FDA and, consequently, the ultimate approval and commercial marketing of palovarotene. We have completed one Phase 2 trial which will form the basis of our NDA for palovarotene submission in 2019, we have initiated a Phase 3 trial which may expand the labeling for palovarotene in FOP, we have initiated one Phase 2 clinical trial in MO in April of 2018 and we initiated a Phase 1 trial of an ophthalmic formulation of palovarotene in October of 2018; however, we do not know if these trials or any future clinical trials will begin or be completed on schedule, if at all, as the commencement and completion of clinical trials can be delayed or prevented for a number of reasons, including, among others:

 

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the FDA may deny permission to proceed with our planned clinical trials or any other clinical trials we may initiate, or may place a clinical trial on hold;
delays in filing or obtaining permission to proceed under additional investigational new drug applications (INDs) that may be required;
delays in reaching or failing to reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
inadequate quantity or quality of palovarotene or any other product candidate or other materials necessary to conduct clinical trials, for example delays in the manufacturing of sufficient supply of finished drug product;
difficulties obtaining Institutional Review Board (IRB) approval to conduct a clinical trial at a prospective site or sites;
challenges in recruiting and enrolling patients to participate in clinical trials, including the small size of the patient population, acute nature of the flare-ups in and chronic nature of the disease FOP, the proximity of patients to trial sites, eligibility criteria for the clinical trial, the nature of the clinical trial protocol and competition from other clinical trial programs for similar indications;
severe or unexpected drug-related side effects experienced by patients in a clinical trial;
delays in validating any endpoints utilized in a clinical trial that we may choose to use, particularly any clinical outcome measures, such as the FOP-Physical Function Questionnaire that we have developed;
the FDA may disagree with our clinical trial design and our interpretation of data from clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials;
reports from non-clinical or clinical testing of other FOP and MO treatments that raise safety or efficacy concerns; and
difficulties retaining patients who have enrolled in a clinical trial but may be prone to withdraw due to rigors of the clinical trials, lack of efficacy, side effects, personal issues or loss of interest.

 

Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, the FDA, the IRBs at the sites where the IRBs are overseeing a clinical trial, a data and safety monitoring board, overseeing the clinical trial at issue or other regulatory authorities due to a number of factors, including, among others:

 

failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities that reveals deficiencies or violations that require us to undertake corrective action, including the imposition of a clinical hold;
unforeseen safety issues, adverse side effects or lack of effectiveness;
changes in government regulations or administrative actions;
problems with clinical supply materials; and
lack of adequate funding to continue clinical trials.

 

Product development costs for palovarotene for FOP, MO or for any other future indications we may pursue or for any other product candidates we may develop in the future will increase if we have delays in testing, or if we need to perform more or larger clinical studies than planned. If we experience delays in completion of any of our clinical trials, or if we, the FDA, other regulatory authorities, IRBs or other reviewing entities, or any of our clinical trial sites suspend or terminate any of our clinical trials of palovarotene for any indication, its commercial prospects may be harmed and our ability to generate product revenues will be delayed, if we are able to generate product revenue at all. Any delays in completing our clinical trials will increase our costs, slow down our development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, termination or suspension of, or a delay in the commencement or completion of, clinical trials may also ultimately lead to the denial or even withdrawal of regulatory approval of palovarotene for any indication. In addition, if one or more clinical trials are delayed, our competitors may be able to bring products to market before we do, and the commercial viability of palovarotene could be significantly reduced.

 

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We have never submitted an NDA before, and may be unable to do so for palovarotene.

 

The successful submission of an NDA is a complicated process. We have limited experience in preparing and submitting regulatory filings and have not submitted an NDA before. Consequently, we may be unable to successfully and efficiently execute and complete these planned clinical trials in a way that leads to NDA submission and approval of palovarotene. We may require more time and incur greater costs than our competitors and may not succeed in obtaining regulatory approvals of drug candidates that we develop. Failure to commence or complete, or delays in, our planned clinical trials would prevent or delay commercialization of palovarotene.

 

Potential changes in regulatory requirements, FDA guidance or unanticipated events during clinical trials of palovarotene or any other product candidate may result in changes to clinical trial protocols or additional non-clinical studies and clinical trial requirements, which could result in increased costs to us and could delay our development timeline.

 

Changes in regulatory requirements, FDA guidance or unanticipated events during our clinical trials may force us to amend clinical trial protocols or cause the FDA to impose new or additional clinical trial requirements. For example, based on our discussions with the FDA, the FDA has indicated that new HO volume is a clinically meaningful outcome for our clinical trials for palovarotene in FOP. However, there can be no assurance that the FDA may not later determine that mean new HO volume does not qualify as a clinically meaningful endpoint for our clinical trials for palovarotene. Further, we have had discussions with the FDA regarding endpoints related to our Phase 2 clinical trial in MO and we cannot be certain that the proposed study design will be acceptable to the FDA or that additional clinical studies will not be required. We have not yet discussed with the FDA our clinical trial for surgical release in FOP.

 

Amendments or changes to our clinical trial protocols would require resubmission to the FDA and IRBs for review and approval, which may adversely impact the cost, timing or successful completion of clinical trials. If we experience delays completing, or if we terminate, any of our clinical trials, or if we are required to conduct non-clinical studies or additional clinical trials, the commercial prospects for palovarotene and any other product candidate may be harmed and our ability to generate product revenue will be delayed, if we are able to generate product revenue at all.

 

We rely, and expect that we will continue to rely, on third parties to conduct clinical trials for palovarotene and any other product candidate. If these third parties do not successfully carry out their contractual duties or fail to meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize palovarotene and any other product candidate and our business could be substantially harmed.

 

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We do not have the ability to independently conduct clinical trials. We rely on universities, contract laboratories and other third parties, such as CROs, to conduct clinical trials on palovarotene and any other product candidate. We enter into agreements with third-party CROs to provide monitors for and to manage data for our ongoing clinical trials. We rely heavily on these parties for execution of clinical trials for palovarotene and any other product candidate and control only certain aspects of their activities. As a result, we have less direct control over the conduct, timing and completion of these clinical trials and the management of data developed through clinical trials than would be the case if we were relying entirely upon our own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside parties may, among other things:

 

have staffing difficulties;
fail to comply with contractual obligations;
experience regulatory compliance issues;
undergo changes in priorities or become financially distressed; or
form relationships with other entities, some of which may be our competitors.

 

These factors may materially adversely affect the willingness or ability of third parties to conduct our clinical trials and may subject us to unexpected cost increases that are beyond our control. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific requirements and standards, and our reliance on CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with regulations and guidelines, including current Good Clinical Practices (cGCPs) for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the trial patients are adequately informed of the potential risks of participating in clinical trials. These regulations and standards are enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA enforces cGCPs regulations and standards through periodic inspections of clinical trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. In addition, our clinical trials must be conducted with product candidates produced under cGMPs regulations and will require a large number of test patients. Our failure or the failure of our CROs to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement action up to and including civil and criminal penalties.

 

Although we design our clinical trials for palovarotene and will do so for any future product candidate, CROs conduct all of the clinical trials. As a result, many important aspects of our drug development programs are outside of our direct control. In addition, the CROs may not perform all of their obligations under arrangements with us or in compliance with regulatory requirements, but we remain responsible and are subject to enforcement action that may include civil penalties up to and including criminal prosecution for any violations of FDA laws and regulations during the conduct of our clinical trials. If the CROs do not perform clinical trials in a satisfactory manner, breach their obligations to us or fail to comply with regulatory requirements, the development and commercialization of palovarotene and any other product candidates may be delayed or our development program materially and irreversibly harmed. We cannot control the amount and timing of resources these CROs devote to our program or our clinical products. If we are unable to rely on clinical data collected by our CROs, we could be required to repeat, extend the duration of, or increase the size of our clinical trials and this could significantly delay commercialization and require significantly greater expenditures.

 

If any of our relationships with these third-party CROs terminates, we may not be able to enter into arrangements with alternative CROs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, any clinical trials such CROs are associated with may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize palovarotene and any other product candidate. As a result, we believe that our financial results and the commercial prospects for palovarotene and any other product candidate in the subject indication would be harmed, our costs could increase and our ability to generate revenue could be delayed.

 

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Sales of counterfeit palovarotene or unauthorized sales of palovarotene may have a material adverse effect on our revenues, business, results of operations and damage our brand and reputation.

 

Palovarotene may become subject to competition from counterfeit pharmaceutical products, which are pharmaceutical products sold under the same or very similar brand names and/or having a similar appearance to genuine products, but which are sold without proper licenses or approvals. Such products divert sales from genuine products, often are of lower cost, often are of lower quality (having different ingredients or formulations, for example), and have the potential to damage the reputation for quality and effectiveness of the genuine product.

 

Obtaining regulatory approval for palovarotene is a complex and lengthy process. If during the period while the regulatory approval is pending illegal sales of counterfeit palovarotene begin, consumers may buy such counterfeit palovarotene, which could have an adverse impact on our revenues, business and results of operations. In addition, if illegal sales of counterfeit palovarotene result in adverse side effects to consumers, we may be associated with any negative publicity resulting from such incidents.

 

Although pharmaceutical regulation control and enforcement systems throughout the world have been increasingly active in policing counterfeit pharmaceuticals, we may not be able to prevent third parties from manufacturing, selling or purporting to sell counterfeit products competing with our product candidate.

 

Further, we are aware that third parties are manufacturing unauthorized palovarotene for research use, and it is possible that unauthorized sales of palovarotene may be made through such channels without our knowledge.

 

The existence and any increase in production or sales of counterfeit palovarotene or unauthorized palovarotene could negatively impact our revenues, brand reputation, business and results of operations.

 

We rely completely on one third-party supplier to manufacture the active pharmaceutical ingredient (API) for palovarotene and another third-party supplier to manufacture final drug product, and we intend to rely on third parties to produce non-clinical, clinical and commercial supplies of any future product candidates.

 

We do not currently have, nor do we plan to acquire, the infrastructure or capability to internally manufacture our clinical drug supply of palovarotene, or any future product candidates, for use in the conduct of our non-clinical studies and clinical trials, and we lack the internal resources and the capability to manufacture any product candidates on a clinical or commercial scale. We currently have the API for palovarotene manufactured by one supplier and final drug product supplied by another supplier. At this time, we have not identified secondary sources of clinical supplies of palovarotene and identifying an additional manufacturer would require significant delay and likely significant additional cost.

 

The facilities used by contract manufacturers to manufacture the active pharmaceutical ingredient and final drug product will generally be required to complete a pre-approval inspection by the FDA and other comparable foreign regulatory agencies to assess compliance with applicable requirements, including cGMPs, after we submit our NDA or relevant foreign regulatory submission to the applicable regulatory agency.

 

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We do not control the manufacturing process of, and are completely dependent on, our contract supplier to comply with cGMPs for manufacture of the API for our clinical trials, and upon another supplier for manufacture of final drug product. These manufacturers must successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or applicable foreign regulatory agencies. In addition, although we have no direct control over these manufacturers’ ability to maintain adequate quality control, quality assurance and qualified personnel, we are responsible for ensuring that our materials and product candidates are manufactured in accordance with cGMPs. Furthermore, these manufacturers are engaged with other companies to supply and/or manufacture materials or products for such companies, which exposes our manufacturers to regulatory risks for the production of such materials and products. As a result, failure to satisfy the regulatory requirements for the production of those materials and products may affect the status of their facilities generally. If the FDA or an applicable foreign regulatory agency determines now or in the future that these facilities for the manufacture of our product candidate are noncompliant, any pending NDAs or other applications for marketing authorization may not be approved until the facilities have a compliance status that is acceptable to the FDA or an applicable foreign regulatory agency. In such case, we may need to find alternative manufacturing facilities, which would adversely impact our ability to develop, obtain regulatory approval for or market palovarotene and any future product candidate. Our reliance on these manufacturers also exposes us to the possibility that they, or third parties with access to their facilities, will have access to and may appropriate our trade secrets or other proprietary information.

 

We do not have long-term supply agreements in place with any party, and each batch of palovarotene is individually contracted under a quality and supply agreement. If we engage new contractors, such contractors must complete an inspection by the FDA and other applicable foreign regulatory agencies. We plan to continue to rely upon the same manufacturers and, potentially, collaboration partners to manufacture commercial quantities of palovarotene, if approved.

 

If we are unable to obtain the supplies we need at a reasonable price or on a timely basis, it could have a material adverse effect on our ability to complete the development of palovarotene or, if we obtain regulatory approval for palovarotene, to properly commercialize it.

 

Even though we have obtained orphan drug designation for palovarotene as a treatment for FOP and MO, there may be limits to the regulatory exclusivity afforded by such designation.

 

Even though we obtained orphan drug designation in July 2014 for palovarotene for the treatment of FOP by the FDA and the EMA, and in November 2017 for palovarotene for the treatment of MO by the FDA, there are limitations to exclusivity afforded by such designation. In the United States, the company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition receives orphan drug marketing exclusivity for that drug for a period of seven years. This orphan drug exclusivity prevents the FDA from approving another application, including a full NDA to market the same drug for the same orphan indication, except in very limited circumstances, including when the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. For purposes of small molecule drugs such as palovarotene, the FDA defines “same drug” as a drug that contains the same active moiety and is intended for the same use as the drug in question. To obtain orphan drug exclusivity for a drug that shares the same active moiety as an already approved drug, it must be demonstrated to the FDA that the drug is safer or more effective than the approved orphan designated drug, or that it makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition or if another drug with the same active moiety is determined to be safer, more effective, or represents a major contribution to patient care.

 

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In Europe, orphan drugs may be able to obtain ten years of marketing exclusivity and up to an additional two years on the basis of qualifying pediatric studies. However, orphan exclusivity may be reduced to six years if the drug no longer satisfies the original designation criteria. Additionally, a marketing authorization holder may lose its orphan exclusivity if it consents to a second orphan drug application or cannot supply enough drug. Orphan drug exclusivity also can be lost when a second applicant demonstrates its drug is “clinically superior” to the original orphan drug.

 

Even though we have obtained Fast Track Designation from the FDA for palovarotene for the treatment of FOP, it may not lead to a faster development or regulatory review or approval process and does not increase the likelihood that palovarotene will receive marketing approval.

 

If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may apply to the FDA for Fast Track Designation. Even though we have obtained Fast Track Designation for palovarotene for the treatment of FOP, we may not experience a faster development process, review or approval compared to conventional FDA procedures. The FDA may withdraw Fast Track Designation if it believes that the designation is no longer supported by data from our clinical development program. Many drugs that have received Fast Track Designation have failed to obtain approval.

 

Even though we have obtained Breakthrough Therapy Designation from the FDA for palovarotene for the treatment of FOP, it may not lead to a faster development or regulatory review or approval process and does not increase the likelihood that palovarotene will receive marketing approval.

 

The Breakthrough Therapy Designation is intended to expedite the development and review of products that treat serious or life-threatening conditions where “preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The designation of a product candidate as a Breakthrough Therapy provides potential benefits that include but are not limited to more frequent meetings with the FDA to discuss the development plan for the product candidate and ensure collection of appropriate data needed to support approval; more frequent written correspondence from the FDA about such things as the design of the proposed clinical trials; guidance on an efficient drug development program; organization commitment involving senior managers; and eligibility for rolling review and priority review. Breakthrough Therapy Designation does not change the standards for product approval. Even though we have obtained Breakthrough Therapy Designation for palovarotene for the treatment of FOP, we may not experience a faster development process, review or approval compared to conventional FDA procedures. Many drugs that have received Breakthrough Therapy Designation have failed to obtain approval.

 

Even though we have obtained a Rare Pediatric Disease designation from the FDA for palovarotene for the treatment of FOP, it does not guarantee that the NDA for the product will qualify for a priority review voucher upon approval, and it does not lead to a faster development or regulatory review process, or increase the likelihood that any of our product candidates will receive marketing approval.

 

Under the Rare Pediatric Disease Priority Review Voucher program, upon the approval of a qualifying NDA for the treatment of a rare pediatric disease, the sponsor of such an application would be awarded a rare pediatric disease priority review voucher that can be used to obtain priority review for a subsequent NDA or BLA (Biologic License Application). In February 2019, the FDA notified us that we obtained Rare Pediatric Disease designation for palovarotene for the treatment of patients with FOP. If a product candidate is designated before October 1, 2020, as is the case with palovarotene, the sponsor of a qualifying NDA for such a product is eligible to receive a voucher if the NDA is approved before October 1, 2022. However, there is no guarantee that any of our product candidates will be approved by that date, or at all, and, therefore, we may not be in a position to obtain a priority review voucher prior to expiration of the program, unless Congress further reauthorizes the program. Additionally, designation of a drug for a rare pediatric disease does not guarantee that an NDA will meet the other eligibility criteria for a rare pediatric disease priority review voucher at the time the application is approved. Finally, a Rare Pediatric Disease designation does not lead to faster development or regulatory review of the product, or increase the likelihood that it will receive marketing approval.

 

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Expanded access studies may provide safety or efficacy data that differ from controlled clinical trials and could delay or limit approval.

 

Expanded access studies are uncontrolled, either carried out by individual investigators or under company-sponsored protocols, and may not be conducted in strict compliance with cGCPs or in identical patient populations to those studied in controlled studies, all of which can lead to a treatment effect which may differ from that in controlled trials. In addition, these studies provide only anecdotal evidence of efficacy for regulatory review, are not designed to be aggregated or reported as study results, and may provide highly variable information in light of the small number of patients.

 

Expanded access programs provide supportive safety information for regulatory review, and this safety information, including adverse events and any safety signals observed, will be reviewed as part of any palovarotene NDA we may submit. Any adverse events or reactions experienced by subjects in the expanded access program may be attributed to palovarotene and may delay or limit our ability to obtain regulatory approval with labeling that we consider desirable, or at all.

 

Even if we receive marketing approval for palovarotene in the United States, we may never receive regulatory approval to market palovarotene outside of the United States.

 

We have selected markets outside of the United States, including but not limited to parts of Europe, Asia, South America and Canada, where we intend to seek regulatory approval to market palovarotene. In order to market any product outside of the United States, however, we must establish and comply with the numerous and varying safety, efficacy and other regulatory requirements of any such other country. Approval procedures vary among countries and can involve additional product candidate testing and additional administrative review periods. The time required to obtain approvals in other countries might differ from that required to obtain FDA approval. The marketing approval processes in other countries may implicate all of the risks detailed above regarding FDA approval in the United States as well as other risks. In particular, in many countries outside of the United States, products must receive pricing and reimbursement approval before the product can be commercialized. Obtaining this approval can result in substantial delays in bringing products to market in such countries. Marketing approval in one country does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one country may have a negative effect on the regulatory process in others. Failure to obtain marketing approval in other countries or any delay or other setback in obtaining such approval would impair our ability to market palovarotene in such foreign markets. Any such impairment would reduce the size of our potential market, which could have a material adverse impact on our business, results of operations and prospects.

 

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell palovarotene or any other product candidate, we may not be able to generate any revenue.

 

We do not currently have an infrastructure for the sales, marketing and distribution of pharmaceutical products. In order to market palovarotene or any other product candidate, if approved by the FDA or any other regulatory body, we must build our sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, or if we are unable to do so on commercially reasonable terms, our business, results of operations, financial condition and prospects will be materially adversely affected.

 

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Even if we receive marketing approval for palovarotene or any other product candidate, our product candidate may not achieve broad market acceptance, which would limit the revenue that we generate from its sales.

 

The commercial success of palovarotene or any other product candidate, if approved by the FDA or other applicable regulatory authorities, will depend upon the awareness and acceptance of palovarotene or any other product candidate among the medical community, including physicians, patients and healthcare payors. Market acceptance of palovarotene or any other product candidate, if approved, will depend on a number of factors, including, among others:

 

the efficacy of palovarotene or any other product candidate as demonstrated in clinical trials;
limitations or warnings contained in the labeling approved for palovarotene or any other product candidate by the FDA or other applicable regulatory authorities, including that palovarotene, like all retinoids, is a teratogen and must not be taken by pregnant women or women who may become pregnant;
the clinical indications for which palovarotene or any other product candidate is approved;
availability of alternative treatments already approved or expected to be commercially launched in the near future;
the potential and perceived advantages of palovarotene or any other product candidate over current treatment options or alternative treatments, including future alternative treatments;
the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

the strength of marketing and distribution support and timing of market introduction of competitive products;
publicity concerning our product or any competing products and treatments;
pricing and cost effectiveness;
the effectiveness of our sales and marketing strategies;
our ability to increase awareness of palovarotene or any other product candidate through marketing efforts;
our ability to obtain sufficient third-party coverage or reimbursement; or
the willingness of patients to pay out-of-pocket in the absence of third-party coverage.

 

If palovarotene or any other product candidate is approved but does not achieve an adequate level of acceptance by patients, physicians and payors, we may not generate sufficient revenue from palovarotene or any other product candidate to become or remain profitable. Before granting reimbursement approval, healthcare payors may require us to demonstrate that palovarotene or any other product candidate, in addition to treating its intended target indication, also provides incremental health benefits to patients. Our efforts to educate the medical community and third-party payors about the benefits of palovarotene and any other product candidate may require significant resources and may have limited or no success.

 

If we obtain approval to commercialize palovarotene or any other product candidate outside of the United States, a variety of risks associated with international operations could materially adversely affect our business.

 

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If palovarotene or any other product candidate is approved for commercialization, we may enter into agreements with third parties to market it 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;
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 revenue, or other obligations incidental to doing business in another country;
workforce uncertainty in countries where labor unrest is more common than in the United States;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; or
business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters, including earthquakes, typhoons, floods and fires.

 

Even if we receive marketing approval for palovarotene or any other product candidate, we may still face future development and regulatory difficulties.

 

Even if we receive marketing approval for palovarotene or any other product candidate, regulatory authorities may still impose significant restrictions on palovarotene or any other product candidate, indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies. Palovarotene and any other product candidate will also be subject to ongoing FDA requirements governing the labeling, packaging, storage and promotion of the product as well as record keeping, submission of safety and other post-market information, and prohibitions regarding the promotion of off-label uses.

 

The FDA has significant post-marketing authority, including, for example, the authority to require labeling changes based on new safety information and to require post-marketing studies or clinical trials to evaluate serious safety risks related to the use of a drug. The FDA also has the authority to require, as part of an NDA or post-approval, the submission of a Risk Evaluation and Mitigation Strategy. Any Risk Evaluation and Mitigation Strategy required by the FDA may lead to increased costs to assure compliance with new post-approval regulatory requirements and potential requirements or restrictions on the sale of approved products, all of which could lead to lower sales volume and revenue. Further, the FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products, and we could be subject to significant liability if, for example, physicians prescribe palovarotene to their patients in a manner that is inconsistent with the approved label and we are found to have promoted such off-label uses.

 

Manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMPs and other regulations. If we or a regulatory agency discover problems with palovarotene or any other product candidate, such as adverse events of unanticipated severity or frequency, or problems with the facility where our product candidate is manufactured, a regulatory agency may impose restrictions or penalties on our product candidate, the manufacturer or us, including requiring withdrawal of our product candidate from the market or suspension of manufacturing.

 

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The occurrence of any regulatory penalty may inhibit or preclude our ability to commercialize palovarotene and any other future product candidates we may develop which in turn would inhibit or preclude our ability to generate revenue.

 

Competing therapies could emerge, adversely affecting our opportunity to generate revenue from the sale of our product candidate.

 

The biopharmaceuticals industry is highly competitive. There are many public and private biopharmaceutical companies, universities, governmental agencies and other research organizations actively engaged in the research and development of products that may be similar to palovarotene or any other product candidate or address similar markets. We believe it is probable that the number of companies seeking to develop products and therapies similar to our product will increase. Gene therapy, cell therapy and other approaches may also emerge for the treatment of any of the disease areas in which we focus.

 

Currently, there are no therapies that have been specifically approved for treatment of FOP. However, products approved for other indications, for example, corticosteroids and non-steroidal anti-inflammatory drugs, are used off-label to manage FOP symptoms during flare-ups, though none of these medications has been shown to prevent HO. Further, we are aware that Regeneron Pharmaceuticals Inc. is conducting a Phase 2 clinical trial in adults with FOP. Blueprint Medicines Corporation, BioCryst Pharmaceuticals, Keros Therapeutics and La Jolla Pharmaceutical Company are each in early stages of development of therapies for the treatment of FOP. See Item 4B, “Business Overview” for a more detailed discussion.

 

Many of our potential competitors, alone or with their strategic partners, could have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of treatments and the commercialization of those treatments. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated among a smaller number of our competitors. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market.

 

We may not be able to establish collaborations, and, if we are able to establish collaborations, we may not be able to establish them on commercially reasonable terms, which could result in alterations or delays of our development and commercialization plans.

 

Our drug development program and the potential commercialization of palovarotene and any other product candidate will require substantial additional cash to fund expenses. We may decide to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of palovarotene and any other product candidate. We may be restricted under existing collaboration agreements from entering into future agreements on certain terms with potential collaborators.

 

We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the product candidate, the costs and complexities of manufacturing and delivering the product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate. The terms of any collaborations or other arrangements that we may establish may not be favorable to us.

 

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Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.

 

We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the development of the product candidate, reduce or delay its development program, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our product candidate or bring it to market and generate product revenue.

 

In addition, any future collaborations that we enter into may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations. Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters can lead to delays in the development process or commercializing the applicable product candidate and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision-making authority. Collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party. Any such termination or expiration would adversely affect us financially and could harm our business reputation.

 

We may not be successful in potential future efforts to identify or discover additional product candidates or we may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

 

The success of our business depends primarily upon our ability to identify, develop and commercialize products. Although palovarotene is in clinical development, our research programs may fail to identify other potential product candidates for clinical development for a number of reasons. Our research methodology may be unsuccessful in identifying potential product candidates or our 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.

 

Because we have limited financial and management resources, we are currently focused on our FOP and MO programs. As a result, we 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 drugs or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable drugs. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through future collaboration, 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.

 

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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.

 

We are subject to healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

 

Although we do not currently have any products on the market, once we begin commercializing our product, we may be subject to additional healthcare statutory and regulatory requirements and enforcement by the federal government and the states and foreign governments in which we conduct our business. Healthcare providers, physicians and others will play a primary role in the recommendation and prescription of our product candidate, if approved. Our future arrangements with third-party payors will expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our product candidate, if we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:

 

The federal anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid.
The federal False Claims Act imposes criminal and civil penalties, including those from civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government.
The federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information.
The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services.
The federal transparency requirements, sometimes referred to as the "Sunshine Act," under the Patient Protection and Affordable Care Act, require manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program to report on an annual basis to the Department of Health and Human Services information related to transfers of value to physicians and teaching hospitals and physician ownership and investment interests. Effective January 1, 2022, manufacturers will also be required to report on payments or transfers of value to physician assistants, nurse practitioners or clinical nurse specialists, certified registered nurse anesthetists, and certified nurse-midwives.
Analogous state laws and regulations, such as state anti-kickback and false claims laws and transparency laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures and drug pricing.

 

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Ensuring that our future business arrangements with third parties comply with applicable healthcare laws and regulations could be costly. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations, including anticipated activities to be conducted by our sales team, were found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines and exclusion from government funded healthcare programs, such as Medicare and Medicaid, any of which could substantially disrupt our operations. If any of the physicians or other providers or entities with whom we expect to do business is found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

 

Healthcare legislative reform measures may have a material adverse effect on our business and results of operations.

 

In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively referred to as the Affordable Care Act, was enacted, which substantially changes the way health care is financed by both governmental and private insurers, and significantly impacts the U.S. pharmaceutical industry. The Affordable Care Act, among other things, imposed reporting requirements on manufacturers related to drug samples and financial relationships with physicians and teaching hospitals, increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extended the rebate program to individuals enrolled in Medicaid managed care organizations, established annual fees on manufacturers of certain branded prescription drugs, and established a Medicare Part D coverage gap discount program. The healthcare regulatory environment in the U.S. is still in flux, and judicial challenges and legislative initiatives to modify, limit, or repeal the Affordable Care Act continue, and may increase in light of the change in administration following the 2016 U.S. presidential election. For example, a recent Executive Order signed by the U.S. President directed executive departments and federal agencies to waive, defer, grant exemptions from, or delay the implementation of provisions of the Affordable Care Act that would impose a fiscal or regulatory burden on individuals and certain entities to the maximum extent permitted by law. In addition, the future implementation of the Affordable Care Act is not assured. By way of example, in January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal portions of the Affordable Care Act. The Budget Resolution is not a law; however, it is widely viewed as the first step toward the passage of legislation that would repeal certain aspects of the Affordable Care Act. Congress has also proposed and may in the future propose legislation to replace elements of the Affordable Care Act that are repealed. We cannot predict the impact on our business of changes to current laws and regulations. However, any changes that lower reimbursements for products for which we may obtain regulatory approval, or that impose administrative and financial burdens on us, could adversely affect our business.

 

In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. These changes include, among others, aggregate reductions of Medicare payments to providers of up to 2% per fiscal year, starting in 2013. We expect that additional state and federal healthcare reform measures will be adopted in the future, which may alter or completely replace the existing healthcare financing structure. Any of these reform measures could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for any such product candidate that we may have developed or additional pricing pressures on our business. Similar initiatives and legislations may come into force in other jurisdictions as well, such as in the different countries of the European Union, where price ceilings and rebate systems are essential parts of the reimbursement of medicinal products. Some of these systems are being adapted on a regular or irregular basis to further reduce drug prices.

 

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Even if approved, reimbursement policies could limit our ability to sell palovarotene and any other product candidate.

 

Market acceptance and sales of palovarotene and any other product candidate will depend on reimbursement policies and may be affected by healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels for those medications. Cost containment is a primary concern in the U.S. healthcare industry and elsewhere. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure what the level of reimbursement will be for palovarotene and any future product candidate and, if any reimbursement is available, the level of such reimbursement. Reimbursement may impact the demand for, or the price of, palovarotene and any other product candidate. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize palovarotene and any other product candidate. In some foreign countries, particularly in Canada and European countries, the pricing of prescription pharmaceuticals is subject to strict governmental control. In these countries, pricing negotiations with governmental authorities can take six to twelve months or longer after the receipt of regulatory approval and product launch. To obtain favorable reimbursement for the indications sought or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate with other available therapies. If reimbursement for our product candidate is unavailable in any country in which we seek reimbursement, limited in scope or amount, conditioned upon our completion of additional clinical trials, or set at unsatisfactory levels, our operating results could be materially adversely affected.

 

Risks Related To Our Intellectual Property Rights

 

We are heavily dependent on licensed intellectual property. If we were to lose our rights to licensed intellectual property, we would not be able to continue developing or commercializing palovarotene or any other product candidate, if approved. If we breach any of the agreements under which we license the use, development and commercialization rights to palovarotene or any other product candidate or technology from third parties or if certain insolvency events were to occur, we could lose license rights that are important to our business.

 

We are a party to a number of license agreements under which we are granted rights to intellectual property that are important to our business and we may need to enter into additional license agreements in the future. Our existing license agreements impose, and we expect that any future license agreements will impose on us, various development, regulatory and/or commercial diligence obligations, payment of milestones and/or royalties and other obligations. If we fail to comply with our obligations under these agreements, or we are subject to a bankruptcy, the licensor may have the right to terminate the license, in which event we would not be able to market products covered by the license. Our business could suffer, for example, if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms. See Item 4B “Business Overview” for a description of our existing license agreements, which includes a description of the termination provisions of each such agreement.

 

As we have done previously, we may need to obtain licenses from third parties to advance our research or allow commercialization of palovarotene or any other product candidates, and we cannot provide any assurances that third-party patents do not exist that might be enforced against palovarotene or any other product candidates or future products in the absence of such a license. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In that event, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or commercialize the affected product candidates, which could materially harm our business and the third parties owning such intellectual property rights could seek 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.

 

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Licensing of intellectual property is of critical importance to our business and involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding intellectual property subject to a license agreement, including:

 

the scope of rights granted under the license agreement and other interpretation-related issues;
whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;
our right to sublicense patent and other rights to third parties under collaborative development relationships;
our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our product candidates, and what activities satisfy those diligence obligations; and
the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners.

 

If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates.

 

We may enter into additional licenses to third-party intellectual property that are necessary or useful to our business. Our current licenses and any future licenses that we may enter into impose various royalty payments, milestones, diligence and other obligations on us. If we fail to comply with any of our obligations under a current or future license agreement, such licensor may allege that we have breached our license agreement and may accordingly seek to terminate our license with them. In addition, future licensors may decide to terminate any such license at will. Termination of any of our current or future licenses could result in our loss of the right to use the licensed intellectual property, which could materially adversely affect our ability to develop and commercialize palovarotene or any other product candidate, if approved, as well as harm our competitive business position and our business prospects. Moreover, our current or future licenses may provide for a reversion to the licensor of our rights in regulatory filings or other intellectual property or data that we regard as our own in the event the license terminates under certain circumstances, such as due to breach.

 

In addition, if our current or future licensors fail to abide by the terms of the applicable license, if the licensors fail to prevent infringement by third parties, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms, if at all, our business could suffer.

 

Moreover, our licensors under current licenses retain and our licensors under future licenses may retain certain rights and obligations. For example, the licensor may retain control over patent prosecution and maintenance under a license agreement, in which case we may not be able to adequately influence patent prosecution or prevent inadvertent lapses of coverage due to failure to pay maintenance fees. Similarly, the licensor may retain the sole right or a first right to enforce the licensed patents against infringement, in which case we may not be able to adequately influence or may be delayed in enforcing certain licensed patents.

 

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Some intellectual property that we have licensed may have been discovered through government funded programs and thus may be subject to federal regulations such as “march-in” rights, certain reporting requirements, and a preference for U.S. industry. Compliance with such regulations may limit our exclusive rights, subject us to expenditure of resources with respect to reporting requirements, and limit our ability to contract with non-U.S. manufacturers.

 

Some of the intellectual property rights we have licensed may have been generated through the use of U.S. government funding and may therefore be subject to certain federal regulations. As a result, the U.S. government may have certain rights to intellectual property embodied in our current or future product candidates pursuant to the Bayh-Dole Act of 1980 (Bayh-Dole Act). Moreover, intellectual property that we may own or license in the future may be subject to the applicable provisions of the Bayh-Dole Act. These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). The U.S. government also has the right to take title to these inventions if we fail, or the applicable licensor fails, to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. In addition, the U.S. government may acquire title to these inventions in any country in which a patent application is not filed within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us, or the applicable licensor, to expend substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturers may limit our ability to contract with non-U.S. product manufacturers for products covered by such intellectual property.

 

We currently do not plan to apply for U.S. government funding, but if we do, and we discover compounds or drug candidates as a result of such funding, intellectual property rights to such discoveries may be subject to the applicable provisions of the Bayh-Dole Act.

 

If we are unable to adequately protect our proprietary technologies, or obtain and maintain issued in-licensed patents that are sufficient to protect palovarotene or any future product candidates, others could compete against us more directly, which would have a material adverse impact on our business, results of operations, financial condition and prospects.

 

Our commercial success will depend in part on our success in obtaining and maintaining issued owned and in-licensed patents and other intellectual property rights in the United States and elsewhere and protecting our proprietary technologies. We will seek to protect our proprietary position by filing patent applications in the United States and abroad related to our business plans. We also rely on trade secrets that protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection. If we do not adequately protect our intellectual property and proprietary technologies, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability.

 

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We cannot provide any assurances that any of our in-licensed patents have, or that any of our pending owned or in-licensed patent applications will mature into issued patents that include claims with a scope sufficient to protect palovarotene or any other product candidate, any additional features we develop for palovarotene or any other product candidate, or any new products or otherwise provide any competitive advantage. Other parties may have developed technologies that may be related or competitive to our approach and may have filed or may file patent applications and may have received or may receive patents that may overlap or conflict with our owned or in-licensed patent applications, either by claiming the same methods or formulations or by claiming subject matter that could dominate our patent position. Such third-party patent positions may limit or even eliminate our ability to obtain patent protection for certain inventions.

 

The patent positions of biotechnology and pharmaceutical companies, including our patent position, involve complex legal and factual questions, and, therefore, the issuance, scope, validity and enforceability of any patent claims that we have or may obtain cannot be predicted with certainty. Patents may be challenged, deemed unenforceable, invalidated, or circumvented. U.S. patents and patent applications may also be subject to interference proceedings, ex parte re-examination, or inter partes review proceedings, supplemental examination and challenges in district court. Patents may be subjected to opposition, post-grant review, or comparable proceedings lodged in various foreign, both national and regional, patent offices. These proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents that we may own or exclusively license may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent right sought by us, which in turn could affect our ability to develop, market or otherwise commercialize palovarotene or any other product candidate.

 

Furthermore, though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may be interpreted in a manner adverse to our interests, or not provide us with adequate proprietary protection or competitive advantages against competitors with similar products. Even if an issued patent is held to be valid and enforceable, it may be interpreted in a manner adverse to our interests, or competitors may be able to design around any patents that we may own or in-license, such as through the use of pre-existing or newly developed technology. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. Moreover, the life of a patent and the term of any protection it may provide is limited. Given the period of time it takes to bring a drug to market, it is possible that some of our patent rights will expire or be near the end of their term before we obtain approval to sell palovarotene or any other product candidate, if such approval is obtained. For example, a U.S. patent licensed from F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc. (Roche) claiming palovarotene as a composition of matter has a statutory expiration date in 2021, without extensions or adjustments.

 

We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, vendors, former employees and current employees. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries, such as China. If these developments were to occur, they could have a material adverse effect on our sales.

 

Our ability to enforce our patent rights depends on our ability to detect infringement. It is difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. Any litigation to enforce or defend our in-licensed patent rights, even if we were to prevail, could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful.

 

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In addition, proceedings to enforce or defend our owned or in-licensed patents, if and when issued, could put our patents at risk of being invalidated, held unenforceable, or interpreted narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or more of our patents are invalid or otherwise unenforceable. If any of our owned or in-licensed patents, if and when issued, that cover or which we believe cover palovarotene or any other product candidate (including any method of use) are invalidated or found unenforceable or interpreted in a manner adverse to our interests, such as to not cover the relevant product candidate, our financial position and results of operations would be materially and adversely impacted. In addition, if a court found that valid, enforceable patents held by third parties covered palovarotene or any other product candidate, our financial position and results of operations would also be materially and adversely impacted.

 

The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

 

any of our in-licensed patents or pending owned or in-licensed patent applications, if issued, will include claims having a scope sufficient to protect palovarotene or any other product candidates;
any of our pending owned or in-licensed patent applications will issue as patents at all;
we will be able to successfully commercialize palovarotene or any other product candidate, if approved, before our relevant in-licensed patents expire;
our licensors were the first to make the inventions covered by each of our in-licensed patents, and we or our licensors were the first to make the inventions covered by each of our pending owned or in-licensed patent applications;
we or our licensors were the first to file patent applications for these inventions;

 

others will not develop similar or alternative technologies that do not infringe our in-licensed patents, or our owned or in-licensed patent applications, if issued;
others will not use pre-existing technology to effectively compete against us;
any of our in-licensed patents, if issued, will be found to ultimately be valid and enforceable;
any patents issued to us or our licensors will provide a basis for an exclusive market for our commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;
we will develop additional proprietary technologies or product candidates that are separately patentable; or
that our commercial activities or products will not infringe upon the patents or proprietary rights of others.

 

We rely upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. It is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees and consultants who are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.

 

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We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing palovarotene or any other product candidates, if approved.

 

Our success will depend in part on our ability to operate without infringing the intellectual property and proprietary rights of third parties. We cannot assure you that our business, products and methods do not or will not infringe the patents or other intellectual property rights of third parties.

 

The pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may allege that palovarotene or any other product candidate or the use of our technologies infringes patent claims or other intellectual property rights held by them or that we are employing their proprietary technology without authorization. As we continue to develop and, if approved, commercialize palovarotene or any future product candidates, competitors may claim that our technology infringes their intellectual property rights as part of business strategies designed to impede our successful commercialization. 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 palovarotene or any other product candidate. Because patent applications can take many years to issue, third parties may have currently pending patent applications which may later result in issued patents that palovarotene or any other product candidate may infringe, or which such third parties claim are infringed by our technologies. Moreover, we may fail to identify relevant third-party patents or patent applications, or we may incorrectly conclude that the claims of an issued patent were not relevant to our activities.

 

The outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our product candidate, products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid, and we may not be able to do this. Even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings, which could have a material adverse effect on us. In addition, we may not have sufficient resources to bring these actions to a successful conclusion.

 

Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome is uncertain. Any claim relating to intellectual property infringement that is successfully asserted against us may require us to pay substantial damages, including treble damages and attorney’s fees if we are found to be willfully infringing another party’s patents, for past use of the asserted intellectual property and royalties and other consideration going forward if we are forced to take a license. In addition, if any such claim were successfully asserted against us and we could not obtain such a license, we may be forced to stop or delay developing, manufacturing, selling or otherwise commercializing palovarotene or any other product candidate.

 

Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required or may choose to seek a license, defend an infringement action or challenge the validity of the patents in court, or redesign our product. Patent litigation is costly and time-consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, intellectual property litigation or claims could force us to do one or more of the following:

 

cease developing, selling or otherwise commercializing palovarotene or any other product candidate;
pay substantial damages for past use of the asserted intellectual property;
obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; and
in the case of trademark claims, redesign or rename palovarotene or any other product candidate to avoid infringing the intellectual property rights of third parties, which may not be possible and, even if possible, could be costly and time-consuming.

 

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Any of these risks coming to fruition could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

We may be subject to claims challenging the inventorship or ownership of our owned or in-licensed patents and other intellectual property.

 

We generally enter into confidentiality and intellectual property assignment agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. For example, inventorship disputes may arise from conflicting obligations of consultants or others who are involved in developing palovarotene or any other product candidates.

 

Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. The owners of intellectual property in-licensed to us could also face such claims. If we or our licensors fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we or our licensors are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

 

Obtaining and maintaining our patent protection, including patents licensed from third parties, depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

 

The U.S. Patent and Trademark Office (U.S. PTO), and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.

 

If we or our licensors fail to maintain the patents and patent applications covering or otherwise protecting our product candidates, it could materially harm our business. In addition, to the extent that we have responsibility for taking any action related to the prosecution or maintenance of patents or patent applications in-licensed from a third party, any failure on our part to maintain the in-licensed intellectual property could jeopardize our rights under the relevant license and may expose us to liability.

 

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

 

Even if the patent applications we own or license are issued, competitors may infringe these patents. 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 licensors is not valid, is unenforceable and/or is not infringed, 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 our patents or our licensors’ patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

 

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Interference proceedings 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 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 litigation or interference proceedings 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 licensors, 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 common shares.

 

Issued patents covering palovarotene or any other product candidate could be found invalid or unenforceable if challenged in court.

 

If we or one of our licensing partners initiated legal proceedings against a third party to enforce a patent covering palovarotene or any other product candidate, the defendant could counterclaim that the patent covering palovarotene or any other product candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace.

 

Grounds for a validity challenge include alleged failures to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for unenforceability assertions include allegations that someone connected with prosecution of the patent withheld relevant information from the U.S. PTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review and equivalent proceedings in foreign jurisdictions, e.g. opposition proceedings. Such proceedings could result in revocation or amendment of our patents or our licensors’ patents in such a way that they no longer cover palovarotene or any other product candidate or competitive products. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on palovarotene or any other product candidate. Such a loss of patent protection would have a material adverse impact on our business.

 

We may not be able to protect our intellectual property rights throughout the world.

 

Filing, prosecuting and defending patents on product candidates in all countries and jurisdictions throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States could be less extensive than those offered in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions.

 

Competitors may use our technologies in jurisdictions where we do not have, or where we do not pursue and obtain, patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our product and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from so competing.

 

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Further, 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. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to biotechnology. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.

 

Moreover, proceedings to enforce our patent rights, or those of our licensors or partners, in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our in-licensed patents, or any patents that we may own in the future, at risk of being invalidated or interpreted narrowly, could put our owned or in-licensed patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

 

If we do not obtain additional protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent term and obtaining data exclusivity for our product candidates, our business may be materially harmed.

 

Depending upon the timing, duration and specifics of FDA marketing approval of palovarotene or any other product candidate, one or more of the U.S. patents we may own or license may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a restoration of patent term for one patent of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, we may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our ability to generate revenues could be materially adversely affected.

 

Changes in either U.S. or foreign patent law or interpretation of such laws could diminish the value of patents in general, thereby impairing our ability to protect our products.

 

As is the case with other biotechnology companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biotechnology industry involve both technological and legal complexity, and it therefore is costly, time-consuming and inherently uncertain. In addition, on September 16, 2011, the Leahy-Smith America Invents Act (AIA), was signed into law. The AIA includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation.

 

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An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the U.S. PTO after that date but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party. This will require us to be cognizant going forward of the time from invention to filing of a patent application.

 

Among some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and providing opportunities for third parties to challenge any issued patent in the U.S. PTO. This applies to all of our U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard necessary to invalidate a patent claim in U.S. PTO proceedings compared to the evidentiary standard in United States federal court, a third party could potentially provide evidence in a U.S. PTO proceeding sufficient for the U.S. PTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the U.S. PTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action.

 

Depending on decisions by the United States Congress, the federal courts, the U.S. PTO, or similar authorities in foreign jurisdictions, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing in-licensed patents and patents that we might obtain in the future.

 

We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

 

Some of our employees have been previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We also engage advisors and consultants who are concurrently employed at universities or who perform services for other entities.

 

Although we are not aware of any claims currently pending against us, we may be subject to claims that we or our employees, advisors or consultants have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third party. We may be subject to claims that an employee, advisor or consultant performed work for us that conflicts with that person’s obligations to a third party, such as an employer, and thus, that the third party has an ownership interest in the intellectual property arising out of work performed for us. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our current and future product candidates, which would materially adversely affect our commercial development efforts.

 

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General Company-Related Risks

 

We will need to develop and expand the size and scope of our Company, and we may encounter difficulties in managing this development and expansion, which could disrupt our operations.

 

As of December 31, 2018, we had 45 full-time employees and in connection with operating as a public company and advancing our growth plans, we expect to increase our number of employees and the scope of our operations. To manage our anticipated development and expansion, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Also, our management may need to divert a disproportionate amount of its attention away from its day-to-day activities and devote a substantial amount of time to managing these development activities. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. This 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. The physical expansion of our operations may lead to significant costs and may divert financial resources from other projects, such as the development of palovarotene and any other product candidates. If our management is unable to effectively manage our expected development and expansion, our expenses may increase more than expected, our ability to generate or increase our revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize our product candidates, if approved, and compete effectively will depend, in part, on our ability to effectively manage the future development and expansion of our Company.

 

We have limited experience operating internationally, are subject to a number of risks associated with our international activities and operations and may not be successful in our efforts to expand internationally.

 

We have collaboration, clinical trial and other relationships outside the United States, but we currently have limited operations outside of the United States and Canada. In order to meet our long-term goals, we would need to grow our international operations significantly. Consequently, we are and will continue to be subject to additional risks related to operating in foreign countries, including:

 

the fact that we have limited experience operating our business internationally;
local, economic and political conditions, including inflation, geopolitical events, such as war and terrorism, foreign currency fluctuations and exchange risks, which could result in increased or unpredictable operating expenses and reduced revenues and other obligations incident to doing business in, or with a company located in, another country;
our customers’ ability to obtain reimbursement for palovarotene or any other product candidate in foreign markets, and unexpected changes in reimbursement and pricing requirements, tariffs, trade barriers and regulatory requirements;
different medical practices and customs in foreign countries affecting acceptance in the marketplace;
longer lead times for shipping and longer accounts receivable collection times;
the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute;
reduced protection of intellectual property rights in some foreign countries or the existence of additional potentially relevant third-party intellectual property rights; and
compliance with foreign or U.S. laws, rules and regulations, including data privacy requirements, labor relations laws, tax laws, accounting requirements, anti-competition regulations, import, export and trade restrictions, anti-bribery/anti-corruption laws, regulations or rules, which could lead to actions by us or our licensees, distributors, manufacturers, other third parties who act on our behalf or with whom we do business in foreign countries or our employees who are working abroad that could subject us to investigation or prosecution under such foreign or U.S. laws.

 

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

 

The use of our product candidates in clinical trials and the sale of our product candidates, if approved, exposes us to the risk of product liability claims. Product liability claims might be brought against us by patients, healthcare providers or others selling or otherwise coming into contact with our product candidates. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, including as a result of interactions with alcohol or other drugs, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we become subject to product liability claims and cannot successfully defend ourselves against them, we could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in, among other things:

 

withdrawal of patients from our clinical trials;
substantial monetary awards to patients or other claimants;
decreased demand for our product candidates or any future product candidates following marketing approval, if obtained;
damage to our reputation and exposure to adverse publicity;
increased FDA warnings on product labels;
litigation costs;
distraction of management’s attention from our primary business;
loss of revenue; and
the inability to successfully commercialize our product candidates or any future product candidates, if approved.

 

We maintain product liability and clinical trial insurance coverage in the U.S., Canada, United Kingdom (UK), France, Italy, Argentina, Spain, Germany, Belgium, the Netherlands, Sweden, Japan, Turkey, Brazil and Australia for our clinical trials with annual aggregate coverage limits in varying amounts up to $20 million. Nevertheless, our insurance coverage may be insufficient to reimburse us for any expenses or losses we may suffer. Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses, including if insurance coverage becomes increasingly expensive. If and when we obtain marketing approval for our product candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we may not be able to obtain this product liability insurance on commercially reasonable terms. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. The cost of any product liability litigation or other proceedings, even if resolved in our favor, could be substantial, particularly in light of the size of our business and financial resources. A product liability claim or series of claims brought against us could cause our stock price to decline and, if we are unsuccessful in defending such a claim or claims and the resulting judgments exceed our insurance coverage, our financial condition, business and prospects could be materially adversely affected.

 

Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel, including qualified accounting and financial personnel with appropriate public company experience.

 

We are highly dependent on the principal members of our executive team listed in Item 6A “Directors and Senior Management” located elsewhere in this document, the loss of whose services may adversely impact the achievement of our objectives. Any of our executive officers 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 clinical trials may make it more challenging to recruit and retain qualified personnel. The inability to recruit key executives or the loss of the services of any executive or key employee might impede the progress of our development and commercialization objectives.

 

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Further, as a newly public company, we may need to hire additional accounting and financial personnel with appropriate public company experience and technical accounting knowledge, and it may be difficult to recruit and maintain such personnel. Even if we are able to hire appropriate personnel, our existing operating expenses and operations will be impacted by the direct costs of their employment and the indirect

consequences related to the diversion of management resources from product development efforts.

 

We incur increased costs as a result of operating as a public company, and our management team will be required to devote substantial time to compliance initiatives.

 

As a public company, and particularly after we are no longer an “emerging growth company,” we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the U.S. Securities and Exchange Commission (SEC) and The Nasdaq Global Select Market have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly.

 

After we are no longer an emerging growth company, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404), we will be required to furnish an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To maintain compliance with Section 404, we will continue to be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal and external resources to continue assessing and documenting the adequacy of internal control over financial reporting pursuant to the Committee of Sponsoring Organizations of the Treadway Commission 2013, continue steps to improve control processes as appropriate, continue to validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting.

 

Changes in our effective income tax rate could adversely affect our results of operations.

 

We are subject to income taxes in the Unites States and Canada and may be subject to income taxes in various foreign jurisdictions in the future, and our domestic and foreign tax liabilities are largely dependent upon the distribution of pre-tax earnings among these different jurisdictions. Various factors may have favorable or unfavorable effects on our effective income tax rate. These factors include, but are not limited to, interpretations of existing tax laws, changes in tax laws and rates, the accounting for stock options and other share-based compensation, changes in accounting standards, future levels of research and development spending, changes in the mix and level of pre-tax earnings by taxing jurisdiction, the outcome of examinations by the U.S. Internal Revenue Service, Canadian Revenue Agency and related provincial tax authorities, and other jurisdictions, the accuracy of our estimates for unrecognized tax benefits, the realization of deferred tax assets, or by changes to our ownership or capital structure. The impact on our income tax provision resulting from the above-mentioned factors and others may be significant and could adversely affect our results of operations.

 

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Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.

 

In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended (the Code) a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating loss carryforwards (NOLs) to offset future taxable income. Similarly, where control of a corporation has been acquired by a person or group of persons, subsection 111(5) of the Canadian Income Tax Act (Canadian Tax Act), and equivalent provincial income tax legislation restrict the corporation’s ability to carry forward noncapital losses from preceding taxation years. We have not performed a detailed analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code or an acquisition of control for the purposes of subsection 111(5) of the Canadian Tax Act has occurred after each of our previous issuances of common shares, preferred shares and convertible debt. In addition, if we undergo an ownership change or acquisition of control, our ability to utilize NOLs and non-capital losses could be limited by Section 382 of the Internal Revenue Code and subsection 111(5) of the Canadian Tax Act. As of December 31, 2018, we had Canadian federal and provincial net operating loss carry forwards of $136.1 million and $134.5 million, respectively, and unused federal tax credits of $1.7 million, all of which are set to expire over time to 2038. We also had Canadian federal and provincial research and development expenditure pools of $9.8 million and $11.3 million, respectively, without time limitations. We also had US unused orphan drug tax credits of $4.0 million as at December 31, 2018, which are set to expire over time to 2038 and Massachusetts R&D tax credits of $1.1 million, which are set to expire in 2038. The U.S. Tax Cuts and Jobs Act of 2017 generally reduced the amount of the orphan drug tax credit available in the U.S. and further limited the ability of taxpayers to claim such credit with respect to the costs of testing outside the United States. In addition, future changes in our share ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code or an acquisition of control for the purposes of subsection 111(5) of the Canadian Tax Act. Furthermore, our ability to utilize NOLs, credits and non-capital losses of companies that we may acquire in the future may be subject to limitations.

 

We may become a “controlled foreign corporation,” which may have adverse U.S. federal income tax consequences for a U.S. investor that owns substantial amounts of our common shares.

 

Although we believe we qualified as a controlled foreign corporation (CFC) in prior years, based on our current ownership structure, we do not believe we are currently a CFC for U.S. federal income tax purposes for the taxable year ending December 31, 2018. Given our ownership concentration, however, it is possible we could become a CFC if U.S. persons, each of whom own, directly or indirectly, including through non-U.S. persons (or is considered to own under applicable constructive ownership rules of the Code), 10% or more of the total combined voting power of all our classes of stock entitled to vote (U.S. Shareholders), together own more than 50% of the total vote or value of our stock. In such case, U.S. Shareholders may be subject to current U.S. federal income tax on certain types of income (generally passive income) regardless of whether corresponding cash distributions are made by us. In addition, gains recognized by U.S. Shareholders on the sale of our common shares may be reclassified, in whole or in part, as a dividend. The treatment of dividends paid or deemed paid by CFCs to certain U.S. persons has changed under the U.S. Tax Cuts and Jobs Act of 2017 and the CFC rules remain complex. Investors are urged to consult their own tax advisors regarding the possible application of the CFC rules in their particular circumstances. See the section entitled “Material U.S. Federal Income Tax Considerations—Controlled Foreign Corporation Considerations” under Item 10E “Taxation”.

 

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Transfer pricing rules may adversely affect our income tax expense.

 

Many of the jurisdictions in which we will conduct business have detailed transfer pricing rules which require that all transactions with non-resident related parties be priced using arm’s length pricing principles. Contemporaneous documentation must exist to support this pricing. The taxation authorities in these jurisdictions could challenge our arm’s length related party transfer pricing policies. International transfer pricing is an area of taxation that depends heavily on the underlying facts and circumstances and generally involves a significant degree of judgment. If any of these taxation authorities are successful in challenging our transfer pricing policies, our income tax expense may be adversely affected and we could also be subjected to interest and penalty charges. Any increase in our income tax expense and related interest and penalties could have a significant impact on our future earnings and future cash flows.

 

Our deductions and credits in respect of scientific research and experimental development expenditures may be challenged by the Canadian tax authorities.

 

The Canadian taxation authorities may not necessarily agree with our determinations of the expenses and tax credits claimed by us, including research and development expenses and related tax credits. If the Canadian taxation authorities successfully challenge such expenses or the correctness of such income tax credits claimed, our operating results could be materially adversely affected. Furthermore, if the Canadian taxation authorities reduce the tax credit either by reducing the rate of the credit or the eligibility of some research and development expenses in the future, our operating results will be materially adversely affected.

 

Our orphan drug tax credits may be challenged by the U.S. tax authorities.

 

The U.S. taxation authorities may not necessarily agree with our determinations of the tax credits claimed by us, including our orphan drug tax credits. If the U.S. taxation authorities successfully challenge such tax credits claimed, our operating results could be materially adversely affected. Furthermore, if the U.S. taxation authorities further reduce the tax credit either by reducing the rate of the credit or the eligibility of certain clinical testing expenses in the future, our operating results will be materially adversely affected. As part of the 2017 U.S. tax reform, the orphan drug tax credit has been reduced from 50% to 25% of qualified clinical testing expenses for the tax year beginning January 1, 2018 and further limited the ability of taxpayers to claim such credit with respect to the costs of testing outside the United States. This rate reduction and other changes will decrease our future U.S. orphan drug tax credits available to be claimed.

 

We are likely a “passive foreign investment company,” which may have adverse U.S. federal income tax consequences for U.S. investors.

 

U.S. investors should be aware that we believe that we qualified as a passive foreign investment company (PFIC) for our taxable year ended December 31, 2018. We can give no assurance that we will not continue to be a PFIC for the taxable year-ended December 31, 2019. If we are a PFIC for any taxable year during a U.S. investor’s holding period of our common shares, a U.S. investor generally will be required to treat any gain realized upon a disposition of our common shares, or any so-called “excess distribution” received on our common shares, as ordinary income (not capital gain) earned over the U.S. investor’s holding period of our common shares, and to pay applicable taxes on such ordinary income as well as an interest charge on the gain or distribution as if the resulting taxes had been earned (and resulting tax due) ratably over the holding period. A U.S. investor may make certain elections (such as a “mark-to-market” election or a “qualified electing fund” election) to mitigate certain of the adverse U.S. federal income tax consequences of owning PFIC stock, but such elections have their own set of consequences and may not be available in certain circumstances. The PFIC rules are complex and they and any available elections may have a significant effect on U.S. investors. U.S. investors are urged to consult their own tax advisors regarding all aspects of the PFIC rules that may be applicable. See the section entitled “Material U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Considerations” under Item 10E “Taxation”.

 

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We may acquire businesses or products, or form strategic alliances, in the future, and we may not realize the benefits of such acquisitions.

 

We may acquire additional businesses or products, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing business. If we acquire businesses with promising products or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to successfully integrate them with our existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing and marketing any new products resulting from a strategic alliance or acquisition that delay or prevent us from realizing their expected benefits or enhancing our business. We cannot assure you that, following any such acquisition, we will achieve the expected synergies to justify the transaction.

 

Risks Related To Our Common Shares

 

Market volatility may affect our stock price and the value of your investment.

 

The market price for securities of biotechnology companies generally are likely to be volatile. In addition, the market price of our common shares may fluctuate significantly in response to a number of factors, most of which we cannot control, including, among others:

 

plans for, progress of or results from non-clinical studies and clinical trials of palovarotene and any other product candidates;
the FDA’s approval of or failure to approve palovarotene or any other product candidate;

announcements of new products, technologies, commercial relationships, acquisitions or other events by us or our competitors;
the success or failure of other FOP or MO therapies;
regulatory or legal developments in the United States and other countries;
failure of palovarotene or any other product candidates, if approved, to achieve commercial success;
fluctuations in stock market prices and trading volumes of similar companies;
general market conditions and overall fluctuations in U.S. equity markets;
variations in our operating results;
changes in our financial guidance or securities analysts’ estimates of our financial performance;
changes in accounting principles;
our ability to raise additional capital and the terms on which we can raise it;
sales of large blocks of our common shares, including sales by our executive officers, directors and significant stockholders;
additions or departures of key personnel;
discussion of us or our stock price by the press and by online investor communities; and
other risks and uncertainties described in these risk factors.

 

We are an “emerging growth company,” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common shares may be less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act, and we have chosen to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. If we continue to choose not to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, our auditors will not be required to attest to the effectiveness of our internal control over financial reporting. As a result, investors may become less comfortable with the effectiveness of our internal controls and the risk that material weaknesses or other deficiencies in our internal controls go undetected may increase. If we continue to choose to provide reduced disclosures in our periodic reports and proxy statements while we are an emerging growth company, investors will have access to less information and analysis about our executive compensation, which may make it difficult for investors to evaluate our executive compensation practices. We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our stock price may be more volatile.

 

 46 

 

As a foreign private issuer, we are not subject to certain U.S. securities law disclosure requirements that apply to domestic U.S. issuers, which may limit the information publicly available to our shareholders, and we may lose such status in the future.

 

As a foreign private issuer, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Securities and Exchange Act of 1934 (Exchange Act) and therefore there may be less publicly available information about us than if we were a U.S. domestic issuer. For example, we are not subject to the proxy rules in the United States and disclosure with respect to our annual meetings will be governed by Canadian requirements. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules thereunder. Therefore, our shareholders may not know on a timely basis when our officers, directors and principal shareholders purchase or sell our shares. Furthermore, as a foreign private issuer, we may take advantage of certain provisions in the Nasdaq listing rules that allow us to follow Canadian law for certain governance matters.

 

We may also lose our status as a foreign private issuer. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter, and, accordingly, the next determination will be made with respect to us on June 30, 2019. We would lose our foreign private issuer status if, for example, more than 50% of our common shares are directly or indirectly held by residents of the United States on June 30, 2019 and we fail to meet additional requirements necessary to maintain our foreign private issuer status. More than 50% of our common shares are currently held by U.S. shareholders. We nonetheless currently meet the definition of a foreign private issuer as we have determined that a majority of our executive officers and directors are not, for purposes of this test, U.S. citizens or U.S. residents, a majority of our assets are not located in the U.S. and our business is administered principally in Canada. If we lose our foreign private issuer status on this date, we will be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms beginning on January 1, 2020, which are more detailed and extensive than the forms available to a foreign private issuer. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, we will lose our ability to rely upon exemptions from certain corporate governance requirements under the listing rules of The Nasdaq Global Select Market. As a U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal, accounting and other expenses that we will not incur as a foreign private issuer, and accounting, reporting and other expenses in order to maintain a listing on a U.S. securities exchange. These expenses will relate to, among other things, the obligation to prepare our financial information in accordance with U.S. generally accepted accounting principles in the future.

 

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If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common shares.

 

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm when required, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retrospective changes to our consolidated financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common shares.

 

We had two material weaknesses in internal controls over financial reporting identified as of December 31, 2016 prior to our IPO, which were subsequently remediated or became not applicable.

 

Despite our efforts to maintain effective internal controls or due to the possibility of material weaknesses being identified, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

 

Our charter documents and certain Canadian legislation could delay or deter a change of control, limit attempts by our shareholders to replace or remove our current management and limit the market price of our common shares.

 

Our authorized preferred shares are available for issuance from time to time at the discretion of our board of directors, without shareholder approval. Our articles grant our board of directors the authority, subject to the Canada Business Corporations Act (CBCA), to determine the special rights and restrictions granted to or imposed on any unissued series of preferred shares, and those rights may be superior to those of our common shares.

 

Any of the foregoing could prevent or delay a change of control and may deprive or limit strategic opportunities to our shareholders to sell their shares.

 

In addition, provisions in the CBCA and in our articles of incorporation and by-laws, as amended and restated in connection with our IPO, may have the effect of delaying or preventing changes in our management, including provisions that:

 

require that any action to be taken by our shareholders be effected at a duly called annual or special meeting and not by written consent;
establish an advance notice procedure for shareholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;
prohibit cumulative voting in the election of directors; and
require the approval of our board of directors and of our shareholders to amend our by-laws and the approval of our board of directors or the holders of a supermajority of our outstanding share capital to amend the provisions of our articles of incorporation.

 

These provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our board of directors, which is responsible for appointing the members of our management.

 

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Our executive officers, directors, principal stockholders and their affiliates continue to exercise significant control over our Company, which limits your ability to influence corporate matters and could delay or prevent a change in corporate control.

 

The existing holdings of our executive officers, directors, principal stockholders and their affiliates, including OrbiMed Private Investments IV, LP (OrbiMed), BDC Capital Inc. (BDC), and New Enterprise Associates, Inc. (NEA) and its affiliates represent beneficial ownership, in the aggregate, of a majority of our outstanding common shares. As a result, these stockholders, if they act together, will have significant influence over our management and affairs and control the outcome of matters submitted to our stockholders for approval, including the election of directors and any sale, merger, consolidation, or sale of all or substantially all of our assets. These stockholders acquired their common shares for substantially less than the current trading price of the common shares and these stockholders may have interests, with respect to their common shares, that are different from other investors and the concentration of voting power among these stockholders may have an adverse effect on the price of our common shares. In addition, this concentration of ownership might adversely affect the market price of our common shares by:

 

delaying, deferring or preventing a change of control of us;
impeding a merger, consolidation, takeover or other business combination involving us; or
discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

 

See Item 7 “Major Shareholders and Related Party Transactions” in this Annual Report for more information regarding the ownership of our outstanding common shares by our executive officers, directors, principal stockholders and their affiliates.

 

Limitations on the ability to acquire and hold our common shares may be imposed under the Hart-Scott Rodino Act, the Competition Act (Canada) and other applicable antitrust legislation.

 

Limitations on the ability to acquire and hold our common shares may be imposed under the Hart-Scott Rodino Act, the Competition Act (Canada) and other applicable antitrust legislation. Such legislation generally permits the relevant governmental authority to review any acquisition of control over or of a significant interest in us, and grants the authority to challenge or prevent an acquisition on the basis that it would, or would be likely to, result in a substantial prevention or lessening of competition. In addition, the Investment Canada Act subjects an “acquisition of control” of a “Canadian business” (as those terms are defined therein) by a non-Canadian to governmental review if the book value of the Canadian business’ assets as calculated pursuant to the legislation exceeds a threshold amount. A reviewable acquisition may not proceed unless the relevant minister is satisfied that the investment is likely to be of net benefit to Canada. Any of the foregoing could prevent or delay a change of control and may deprive our shareholders of the opportunity to sell their common shares at a control premium.

 

Future sales and issuances of our common shares or rights to purchase common shares, including pursuant to additional financings or our equity incentive plans could result in additional dilution of the percentage ownership of our stockholders and could cause our stock 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 stockholders may experience substantial dilution. We may sell common shares, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common shares, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. These sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing stockholders.

 

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The terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The incurrence of indebtedness would result in increased fixed payment obligations and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborative partners or at an earlier stage than otherwise would be desirable and we may be required to relinquish rights to some of our technologies or palovarotene or any other product candidate or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects.

 

Moreover, pursuant to the stock option plan, our board of directors are authorized to grant stock options and other equity-based awards to our employees, directors and consultants. The number of shares available for future grant under the 2017 Omnibus Plan will automatically increase by an annual amount to be added the first day of each fiscal year, subject to the ability of our board of directors to take action to reduce the size of the increase in any given year. On January 1, 2019, the number of shares available for future grant under the 2017 Omnibus Plan was automatically increased by 1,514,563. However, the increased number of shares available for issuance under the stock option plan has not been registered as at the date of this Annual Report. If our board of directors elects to increase the number of shares available for future grant by the maximum amount each year, our stockholders may experience additional dilution, which could cause our stock price to fall.

 

We may be at an increased risk of securities class action litigation.

 

Historically, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and pharmaceutical companies have experienced significant stock price volatility in recent years. If we were to be sued, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

 

We are governed by the corporate laws of Canada which in some cases have a different effect on shareholders than the corporate laws of Delaware.

 

We are governed by the CBCA, and other relevant laws, which may affect the rights of shareholders differently than those of a company governed by the laws of a U.S. jurisdiction, and may, together with our charter documents, have the effect of delaying, deferring or discouraging another party from acquiring control of our Company by means of a tender offer, a proxy contest or otherwise, or may affect the price an acquiring party would be willing to offer in such an instance. The material differences between the CBCA and Delaware General Corporation Law (DGCL), that may have the greatest such effect include but are not limited to the following: (i) for material corporate transactions (such as mergers and amalgamations, other extraordinary corporate transactions or amendments to our articles) the CBCA generally requires a two-thirds majority vote by shareholders, whereas DGCL generally only requires a majority vote; and (ii) under the CBCA a holder of 5% or more of our common shares can requisition a special meeting of shareholders, whereas such right does not exist under the DGCL.

 

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U.S. civil liabilities may not be enforceable against us, our directors, our officers or certain experts named in this Annual Report.

 

We are governed by the CBCA and our principal place of business is in Canada. Many of our directors and officers, as well as certain experts named herein, reside outside of the U.S., and all or a substantial portion of their assets as well as all or a substantial portion of our assets are located outside the U.S. As a result, it may be difficult for investors to effect service of process within the U.S. upon us and such directors, officers and experts or to enforce judgments obtained against us or such persons, in U.S. courts, in any action, including actions predicated upon the civil liability provisions of U.S. federal securities laws or any other laws of the U.S. Additionally, rights predicated solely upon civil liability provisions of U.S. federal securities laws or any other laws of the U.S. may not be enforceable in original actions, or actions to enforce

judgments obtained in U.S. courts, brought in Canadian courts, including courts in the Province of Quebec.

 

We do not intend to pay dividends on our common shares and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common shares.

 

We have never declared or paid any cash dividend on our common shares and do not currently intend to do so in the foreseeable future. We currently anticipate that we will retain future earnings, if materialized, for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. Therefore, the success of an investment in our common shares will depend upon any future appreciation in their value. There is no guarantee that our common shares will appreciate in value or even maintain the price at which you purchased them.

 

If securities or industry analysts do not publish or cease publishing research or reports or publish misleading, inaccurate or unfavorable research about us, our business or our market, our stock price and trading volume could decline.

 

The trading market for our common share will be influenced by the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. While we currently have research coverage by securities and industry analysts, there is no guarantee that we will be maintain such research coverage. If no or few securities or industry analysts cover our Company, the trading price and volume of our stock would likely be negatively impacted. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, or provides more favorable relative recommendations about our competitors, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

 

Risks Relating to the Plan of Arrangement

 

Completion of the Arrangement is subject to several conditions that must be satisfied or waived.

 

The completion of the Arrangement is subject to a number of conditions precedent, some of which are outside of the control of the Company and the Purchaser Parties, including approval of the shareholders and the granting of the Final Order by the Superior Court of Québec pursuant to section 192 of the CBCA. In addition, the completion of the Arrangement by the Purchaser Parties is conditional on, among other things, dissent rights not having been exercised by the holders of more than 10% of the issued and outstanding shares and no Material Adverse Effect (as defined in the Arrangement Agreement) having occurred since the date of the Arrangement Agreement. There can be no certainty, nor can the Company or the Purchaser Parties provide any assurance, that these conditions will be waived or satisfied or, if satisfied, when they will be satisfied. Moreover, a substantial delay in obtaining satisfactory approvals could result in the Arrangement not being completed. If the Arrangement is not completed for any reason, there are risks that the announcement of the Arrangement and the dedication of substantial resources of the Company to the completion thereof could have a negative impact on the Company's current business relationships and could have a material adverse effect on the current and future operations, financial condition and prospects of the Company. In addition, failure to complete the Arrangement for any reason could materially negatively impact the trading price of the shares. If the Arrangement is not completed and the board of directors decides to seek an alternative transaction, there can be no assurance that it will be able to find a party willing to pay consideration for the shares that is equivalent to, or more attractive than, the consideration payable pursuant to the Arrangement.

 

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The Arrangement Agreement may be terminated in certain circumstances, in which case an alternative transaction may not be available.

 

Each of the Company, the Purchaser and Ipsen has the right to terminate the Arrangement Agreement in certain circumstances. Accordingly, there is no certainty that the Arrangement Agreement will not be terminated by the Company, the Purchaser or Ipsen before the completion of the Arrangement. Failure to complete the Arrangement could materially negatively impact the trading price of the shares. If the Arrangement Agreement is terminated, there is no guarantee that equivalent or greater purchase prices for the shares will be available from an alternative party.

 

The Company will incur costs and may have to pay a termination fee or an expense reimbursement fee.

 

Certain costs relating to the Arrangement, such as legal, accounting and certain financial advisor fees, must be paid by the Company even if the Arrangement is not completed. If the Arrangement is not completed for certain reasons, the Company may also be required to pay the termination fee of $35,000,000 or an expense reimbursement fee of $4,000,000 to the Purchaser. If the Company is required to pay the termination fee or the expense reimbursement fee under the Arrangement Agreement, the financial condition and ability of the Company to fund current operations could be materially adversely affected.

 

The termination fee may discourage other parties from proposing a significant business transaction with the Company.

 

Under the Arrangement, the Company is required to pay the termination fee in the event that the Arrangement Agreement is terminated in circumstances related to a possible alternative transaction to the Arrangement. The termination fee may discourage other parties from attempting to propose a business transaction, even if such a transaction could provide better value to shareholders than the Arrangement.

 

Shareholders will no longer hold an interest in the Company following the Arrangement.

 

Following the Arrangement, shareholders will no longer hold any of the shares and shareholders will forego any future increase in value that might result from future growth and the potential achievement of the Company's long-term plans.

 

The Company's business relationships may be subject to disruption due to uncertainty associated with the Arrangement.

 

Parties with which the Company currently does business or may do business in the future may experience uncertainty associated with the Arrangement, including with respect to current or future business relationships with the Company or the Purchaser Parties. Such uncertainty could have a material and adverse effect on the business, financial condition, results of operations or prospects of the Company.

 

 52 

 

While the Arrangement is pending, the Company is restricted from taking certain actions.

 

The Arrangement Agreement restricts the Company from taking specified actions until the Arrangement is completed without the consent of the Purchaser. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the Arrangement.

 

Interests of Certain Persons in the Arrangement.

 

Certain directors and officers of the Company may have interests in the Arrangement that may be different from, or in addition to, the interests of shareholders.

 

Clementia may be the target of legal claims, securities class action, derivative lawsuits and other claims.

 

Securities class action lawsuits and derivative lawsuits are often brought against companies that have entered into an agreement to be acquired. Third parties may also attempt to bring claims against Clementia seeking to restrain the Arrangement or seeking monetary compensation or other redress, which could delay or prevent consummation of the Arrangement. Even if the lawsuits are without merit or unsuccessful, defending against these claims can result in substantial costs and divert management time and resources.

 

Risks Relating to the CVRs

 

Holders of CVRs may never receive a payment in respect of the CVRs.

 

The entitlement to payment resulting from the CVRs will be reduced to nil if the milestone set out in the CVR Agreement (Milestone) is not achieved. There can be no guarantee that the Milestone will be achieved. If the Milestone is not achieved, the associated payment will never be made. No payment will be made in respect of the Milestone if the Milestone is not achieved on or prior to December 31, 2024. Even if the FDA accepts the submission an NDA for palovarotene as developed under IND 135403 based on the results of the phase II/III Clinical Trials which were being conducted by the Company as of the date of the Arrangement Agreement for the treatment of MO, there can be no guarantee that it will do so on or prior to December 31, 2024. In addition, no payment will be made in respect of the Milestone if any additional phase II or phase III clinical trial (other than any post-approval trial) is required for the submission of the NDA, and there can be no guarantee that no such additional phase II or phase III clinical trial (other than any post-approval trial) will be required.

 

CVRs may not be assigned or transferred except in very limited circumstances, limiting the ability for CVR holders to monetize the CVRs.

 

The CVRs will not be listed on any securities exchange and may not be transferred, pledged, encumbered or in any other manner transferred or disposed of, in whole or in part other than (i) upon the death of a holder, by will or intestacy; (ii) pursuant to a court order; (iii) by operation of law (including by consolidation or merger) or without consideration in connection with the dissolution, liquidation or termination of any corporation, limited liability company, partnership or other entity; (iv) in the case of CVRs held through book-entry or other similar nominee form, from a nominee to the beneficial owner and, if applicable, through an intermediary, to the extent allowable by the Depository Trust Company (DTC); or (v) pursuant to a CVR holder's right to abandon a CVR or the deemed acquisition of CVRs by the Purchaser or the Company in connection with the repayment of the after-tax proceeds attributable to options granted by the Company to certain key employees on February 18, 2019. This means that a CVR holder may not have any ability to recognize the value of any payment to be made in accordance with the CVR Agreement prior to the receipt of such a payment, if any.

 

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Any payments in respect of the CVRs under the guarantee rank at parity with Ipsen's other unsecured indebtedness.

 

Ipsen has guaranteed the CVR payouts contemplated by the CVR Agreement. This guarantee represents an unsecured obligation of Ipsen and will rank equally in right of payment to all existing and future unsecured indebtedness of Ipsen. Any CVR payout under the guarantee will effectively be subordinated in right of payment to all of Ipsen's secured obligations to the extent of the collateral securing such obligations. In the event of a shortfall of funds after payment is made on such secured obligations, CVR holders will not receive the full CVR payout they may otherwise have been entitled to.

 

The treatment of CVRs for Canadian federal income tax purposes is unclear.

 

The Canadian federal income tax consequences to a shareholder in respect of the receipt of CVRs and the payments thereunder, and the reporting of amounts in respect thereof for Canadian federal income tax purposes, are not entirely clear. Shareholders are urged to consult their own tax advisors regarding the consequences to them of the receipt of CVRs and the payments thereunder.

 

The treatment of CVRs for U.S. federal income tax purposes is unclear.

 

There is no legal authority directly addressing the U.S. federal income tax treatment of CVRs received pursuant to the Arrangement. Accordingly, the amount, timing and character of any gain, income or loss with respect to the CVRs are uncertain. U.S. Holders should consult their tax advisors concerning the recognition of income, gain or loss, if any, resulting from the receipt of a CVR or the receipt of any payment in respect of a CVR.

  

Item 4.Information on the Company

  

A.History and Development of the Company

 

Clementia Pharmaceuticals Inc. was incorporated under the CBCA on November 5, 2010. The principal executive offices of Clementia Pharmaceuticals Inc. are currently located at 1000 de la Gauchetière West, Montreal, Quebec, Canada H3B 4W5. Our telephone number is (514) 940-3600.

 

Clementia Pharmaceuticals Inc. has two wholly-owned subsidiaries, Clementia Pharmaceuticals USA Inc., which was incorporated in the state of Delaware, with a registered office located at 275 Grove Street, Suite 2-400, Auburndale, Massachusetts 02466 USA, and Clementia Pharmaceuticals France SARL, which was incorporated in France, with a registered office located at 4 Rue De Marivaux, 75002 Paris, France.

 

On April 10, 2013, the Company closed a $22.5 million Class A financing led by OrbiMed, with a participation from an existing investor, BDC. On October 7, 2014, the Company secured an additional $10.2 million from its current investors to support the development of its lead compound palovarotene for the treatment of FOP thus bringing the total amount raised in the Class A financing to $32.7 million.

 

On June 22, 2015, the Company entered into a Class B share subscription agreement with new and existing investors and completed a $60 million round of financing to further support the ongoing development of its lead compound palovarotene for the treatment of FOP.

 

On March 16, 2017, the Company completed a $10 million Class C financing with a new investor.

 

In July 2017, the Company amended its articles of incorporation to effect a 11.99-for-1 stock-split of all of the Company’s outstanding shares. The stock-split became effective on July 19, 2017 and, as a result, all issued and outstanding common shares, preferred shares, stock options and per share amounts contained in this Annual Report have been retrospectively adjusted to reflect this stock-split for all periods presented.

 

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In August 2017, immediately prior to its IPO, all of the outstanding Class A, B and C redeemable convertible preferred shares were converted on a one-for-one basis into 20,076,224 common shares of the Company. In connection therewith, in the third quarter of 2017 the Company i) included the original stated capital of the preferred shares in share capital, ii) included the excess of the total carrying value of the preferred shares and the embedded derivative liabilities over the original stated capital of the preferred shares in contributed surplus and iii) eliminated the contributed surplus created by the conversion of the preferred shares into common shares and recorded a corresponding reduction in deficit (as resolved by the Company’s board of directors).

 

On August 7, 2017, the Company amended and restated its articles so that the Company is authorized to issue an unlimited number of common shares, without nominal or par value, and an unlimited number of preferred shares issuable in series, without nominal or par value.

 

In August 2017, the Company completed its IPO and issued 9,191,000 common shares at $15 per share, including the underwriters’ over-allotment option, for total gross proceeds of approximately $137.9 million. The Company’s common shares are listed and traded on the Nasdaq Global Select Market under the symbol CMTA.

 

In October 2018, the Company completed a follow-on offering and issued 6,095,000 common shares at $13.25 per share, including the underwriters’ over-allotment option, for total gross proceeds of approximately $80.8 million.

 

In October 2018, the Company also filed an At-The-Market (ATM) offering prospectus for $40 million of additional common shares for a period of 24 months. The ATM allows the Company to sell common shares, having an aggregate offering price of up to $40 million, from time to time at prevailing market rates. The underwriters’ commission will be 3% of the amount of funds raised. There were no draws on this ATM offering prospectus as of the date of this Form 20-F.

 

A description of the Company’s principal capital expenditures and acquisitions of material assets can be found in our management’s discussion and analysis (MD&A) and in the notes to our financial statements included elsewhere in this Annual Report.

  

Plan of Arrangement

 

On February 24, 2019, the Company entered into an agreement with Ipsen, a global specialty-driven biopharmaceutical group organized under the laws of France and listed in Paris (Euronext: IPN), and the Purchaser, pursuant to which Ipsen would acquire, through the Purchaser, all outstanding shares of Clementia for a purchase price of US$25.00 per share in cash upfront, plus a contingent value right (CVR) of US$6.00 per share related to the MO indication for a total transaction value of up to US$1.31 billion.

 

Completion of the transaction is anticipated to occur in the second quarter of 2019, subject to satisfaction or waiver of all closing conditions. The acquisition is expected to proceed by way of a court-approved plan of arrangement pursuant to the CBCA and will require, at the special meeting of Clementia shareholders expected to be held on April 9, 2019, the approval of at least 66 2/3% of the votes cast by Clementia’s shareholders present in person or represented by proxy as well as the approval of a majority of the votes cast by Clementia’s disinterested shareholders present in person or represented by proxy. A proxy circular relating to the special meeting of shareholders of Clementia and containing further details regarding the Arrangement and the Arrangement Agreement has been mailed to Clementia’s shareholders and made available on SEDAR and EDGAR.

 

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In addition to shareholders’ and court approvals, the Arrangement is also subject to other customary closing conditions. The Arrangement Agreement is subject to customary “fiduciary out” provisions, and a right in favor of Ipsen to match any superior proposal. A termination fee of $35 million is payable to Ipsen in certain specific circumstances, including if it fails to exercise its right to match in the context of a superior proposal supported by Clementia.

 

The estimated fees, costs and expenses of the Company in connection with the Plan of Arrangement contemplated including, without limitation, financial advisors’ fees, filing fees, legal and accounting fees, proxy solicitation fees and printing and mailing costs, but excluding payments made by the Company pursuant to the Plan of Arrangement in respect of outstanding stock options and DSUs, are anticipated to be approximately $25.7 million.

 

As of the date of this Form 20-F, the Arrangement contemplated in the agreement has not yet been approved or completed. Refer to “Risk Factors” above.

 

B.Business Overview

 

Overview

 

We are a clinical-stage biopharmaceutical company innovating treatments for people with ultra-rare bone disorders and other diseases. Our lead product candidate, palovarotene, is an oral small molecule that binds and activates retinoic acid receptor gamma (an RARγ agonist) and has shown potent activity in preventing abnormal new bone formation as well as scar tissue formation (or fibrosis) in a variety of tissues. We are developing palovarotene for the treatment of Fibrodysplasia Ossificans Progressiva (FOP) and Multiple Osteochondromas (MO), as well as other diseases. For FOP, we are preparing for a New Drug Application (NDA), which we intend to submit to the U.S. Food and Drug Administration (FDA) in the second half of 2019, and subject to approval, a U.S. commercial launch in mid-2020. We also completed enrollment in our Phase 3 MOVE trial in FOP in August 2018 with two interim data read-outs planned in 2019. For MO, we enrolled the first patient in our Phase 2 clinical trial in April 2018, and we expect an interim data read-out in 2020. We believe that, if approved in FOP or MO, palovarotene could become the standard of care in either or both of these indications.

 

FOP is an ultra-rare, chronic and severely disabling disease of abnormal bone formation, or heterotopic ossification (HO). A 2011 Nature Medicine paper showed that palovarotene potently inhibited HO in animal models of FOP. As a result, we exclusively in-licensed palovarotene from Roche to form the basis of Clementia, and we have also secured additional IP related to palovarotene. FOP is characterized by painful, recurrent episodes of soft tissue swelling (flare-ups) that result in bone formation in areas of the body where bone is not normally present, such as muscles, tendons and ligaments. Recurrent flare-ups and new bone formation progressively restrict movement by locking joints, leading to cumulative loss of function, disability and early death. FOP is caused by a mutation of the bone morphogenetic protein (BMP) Type I receptor or ACVR1 (also known as ALK2) that leads to excess BMP signaling and new bone formation. We estimate that the prevalence of FOP is approximately 1.3 individuals per million lives, or approximately 9,000 globally. As of October 2016, there were known to be 800 diagnosed FOP patients worldwide. There are currently no approved medical treatment options to prevent the formation of heterotopic bone in FOP. However, the FDA recently agreed with us that our available Phase 2 data on the treatment of flare-ups with episodic palovarotene dosing would support an NDA submission for palovarotene for the prevention of HO associated with flare-up symptoms in patients with FOP. We held a pre-NDA meeting with the FDA in the February 2019, and we continue to expect to submit our NDA in the second half of 2019. Our ongoing Phase 3 MOVE Trial, which is evaluating a chronic daily dosing in addition to the episodic flare-up dosing, will continue and is expected to report final results in 2020 with two planned interim read-outs in 2019. We believe that, if successful, the data from the MOVE Trial may provide the basis for a supplemental NDA for an additional treatment regimen option for patients with FOP.

 

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MO, also called multiple hereditary exostoses, is an ultra-rare genetic disease of new bone formation in children which, like FOP, is mediated by excess BMP signaling. Patients with MO develop multiple benign bone tumors, also known as osteochondromas (OCs) or exostoses, on bones. We estimate that MO affects approximately 20 individuals per million lives, or approximately 150,000 globally, which is approximately 15 times greater than that of FOP. Patients suffer from substantial morbidities that worsen over time until they reach skeletal maturity. We have generated pre-clinical data demonstrating that palovarotene inhibits the number of OCs by approximately 80% in an animal model of MO as compared to vehicle-treated animals. Based on our knowledge of the safety and tolerability profile of palovarotene and our pre-clinical animal model data, we initiated a global, placebo-controlled Phase 2 study (the MO-Ped Trial) of palovarotene in MO. We expect to report results for this trial in 2021 with a planned interim read-out in 2020.

 

We also believe that RARγ agonists have great potential as inhibitors of BMP signaling in other indications. Palovarotene has been shown to exert multiple effects in various tissues including in ocular tissues, where RARγ agonists generally demonstrate anti-fibrotic properties. Pre-clinical proof-of-concept studies in dry eye disease that we conducted show that an eye drop formulation of palovarotene can potently increase tear production and decrease corneal damage. In October 2018, we initiated and enrolled the first subject in a Phase 1 trial being conducted in Canada that will evaluate the safety, tolerability, and pharmacokinetic profile of single and multiple ascending doses of palovarotene ophthalmic solution in healthy volunteers. This trial was completed in February 2019 and final results are pending, but based on preliminary top line results, we expect to utilize the data obtained in this study to inform the design of a proof of concept efficacy trial evaluating palovarotene in dry eye disease, which is expected to begin in 2019. We are also focused on developing other RARγ agonists that we have in-licensed from Galderma. We are currently in the process of characterizing these second generation RARγ agonists in animal models.

 

In July 2014, the FDA granted Orphan Drug Designation for palovarotene as a treatment for FOP, and in November 2014, we were granted orphan drug status in the EU. Orphan Drug Designation by the FDA allows for seven years of market exclusivity in the U.S. upon approval of the drug for the indication for which it was designated except in certain limited circumstances. In Europe, marketing authorization for an orphan drug generally leads to a ten-year period of market exclusivity. In November 2014, we received Fast Track Designation from the FDA, which allows for more frequent interactions with the FDA during the drug development and review process. In July 2017, the FDA granted Breakthrough Therapy Designation to palovarotene for the prevention of HO in patients with FOP, which allows for intensive guidance on efficient drug development, organizational commitment involving senior management, and rolling review of our application. Also, in February 2019, the FDA granted Rare Pediatric Disease Designation to palovarotene for the treatment of FOP. The Rare Pediatric Disease Designation is an essential element for obtaining a Rare Pediatric Disease Voucher (PRV). The company plans to request a PRV in the NDA submission for palovarotene for the treatment of FOP, and the FDA will determine whether to grant the PRV. The PRV Program is intended to encourage development of therapies to prevent and treat rare pediatric diseases. The PRV can be redeemed to receive a priority review of a subsequent marketing application or sold to a third party. In November 2017, the FDA granted Orphan Drug Designation for palovarotene as a treatment for MO, and in May 2018, the EMA granted Orphan Drug Designation for palovarotene for the treatment of MO.

 

Our Programs

 

Our programs currently focus on diseases involving tissue transformation via retinoic acid receptors (RARs). RARs are expressed in a variety of tissues and are involved in the growth, shape and maintenance of tissues (morphogenesis). In particular, the RARγ receptor sub-type is expressed in cells that produce cartilage and plays a role in biological pathways responsible for endochondral bone formation (the process of new bone formation which occurs via cartilage formation). RARγ is also present in multiple other cells and tissues where it mediates the growth and differentiation of specific cell types, including those involved in fibrosis.

 

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Our lead product candidate, palovarotene, is a RARγ selective agonist that has shown potent activity in preventing chondrogenesis (cartilage formation) as well as fibrosis in a variety of tissues. RARγ agonists, such as palovarotene, are thought to exert their action on bone formation through regulation of the BMP pathway. RARγ receptors are expressed in chondrogenic cells and chondrocytes and repress certain genes even in the absence of ligand. BMPs are part of the transforming growth factor 13 (TGF-13) family of extracellular signaling proteins. They regulate various cellular activities including differentiation and proliferation and are particularly involved in fibrosis. BMP signaling induces the complete pathway of endochondral bone formation during embryonic development and skeletal formation in children.

 

Mechanism of Action

 

 

As illustrated, the BMP pathway begins with the binding of any of several extracellular BMP ligands such as BMP 2, 4, 7 and 9 to the BMP receptor which is membrane-bound. The receptor is comprised of two BMP Type II subunits and two BMP Type I subunits (also known as ACVR1 or ALK2), which when activated by ligands, recruit, bind and phosphorylate cytoplasmic signal transduction proteins called Smads 1/5/8. When Smads 1/5/8 become phosphorylated, they are able to bind to Smad 4, which together travel to the nucleus where they regulate the transcription of many genes including all those necessary for new bone formation.

 

Our lead indication, FOP, is caused by excess BMP signaling and is an example of the inappropriate activation of this pathway.

 

Approximately 97% of patients with FOP have the R206H mutation in the ALK2 receptor which is believed to make the receptor overactive both on its own and in the presence of ligands. The mutated, overactive receptor leads to excess phosphorylation of Smads 1/5/8 and enhanced signals to the nucleus to form heterotopic bone. The result is that the abnormal gene sends signals to the body’s muscles and soft tissues instructing the muscles to repair themselves by forming bone rather than muscle or scar tissue. RARγ agonists reduce the level of phosphorylated Smads 1/5/8 and the overall protein levels of Smads 1/5/8 and thereby repress excess BMP signaling.

 

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Our second indication, MO, is also a disease believed to be mediated by excess BMP signaling. In this case, mutations in the Ext1 and Ext2 genes are believed to cause decreases in the heparan sulfate chains on proteoglycans and indirectly cause local increases in BMP at the surface of certain cells. Cell surface heparan sulfate is believed to act as a kind of reservoir for growth factors including BMP and their absence has been shown to result in local increases in BMP signaling and intracellular phosphorylated Smad levels. Since palovarotene has been shown to act directly on this pathway in FOP, we hypothesize that palovarotene could also be a potential treatment in MO.

 

Palovarotene’s unique mechanism of action confers upon it the ability to repress bone formation and fibrosis and is potentially suited to a variety of indications beyond those currently in development.

 

We believe that RARγ agonists, such as palovarotene, have the potential for therapeutic use in a broad range of conditions, including diseases like FOP and MO that involve pathological bone formation as well as other indications characterized by excessive fibrosis or scarring such as dry eye disease.

 

 

 

 

 

 

 

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The following table summarizes our development programs:

 

 

Palovarotene for FOP

 

In 2014, we initiated the first ever Phase 2 study in FOP and since then have tested multiple dosing regimens evaluating multiple imaging and functional endpoints in approximately 150 individuals. The outcomes observed at 12 weeks following episodic palovarotene treatment were recently presented at ASBMR 2018. In these studies, 92 palovarotene-treated flare-ups in 62 patients across three different dosing regimens were evaluated compared to 46 placebo or untreated flare-ups in 41 patients from the Company’s natural history study. Patients treated with palovarotene at the time of a flare-up demonstrated a greater than 70% reduction in mean new HO volume at 12 weeks compared to the untreated group. Further, the reduction in mean new HO volume among patients treated with the episodic 20/10 mg dosing regimen (20 mg for 4 weeks starting at the time of a flare-up followed by 10 mg for 8 weeks) was statistically significant (p=0.02). Palovarotene was generally well tolerated across all dosing regimens of the Phase 2 clinical program. There were dose-related increases in retinoid-associated adverse events (AEs) with most being mild or moderate in severity, and only one patient discontinued participation in the study because of an AE.

 

In recent interactions between Clementia and the FDA, including a Type B meeting held as part of palovarotene’s Breakthrough Therapy Designation, the FDA has agreed that available data would support filing of an NDA for palovarotene for the prevention of HO associated with flare up symptoms in patients with FOP. Following the completion of standard non-clinical, clinical pharmacology and CMC studies to be agreed upon with the agency, we plan to submit an NDA in the second half of 2019 to seek approval of the palovarotene 20/10 mg episodic dosing regimen. If successful, we could be ready for commercial launch in the U.S. in the first half of 2020.

 

Our Phase 3 MOVE Trial is evaluating a chronic dosing regimen of palovarotene in FOP (5 mg daily) with increased episodic doses during flare-ups (20 mg for four weeks followed by 10 mg for eight weeks). The primary endpoint of the MOVE Trial is the annualized change in new HO volume as assessed by low-dose whole body CT scans (WBCTs), compared to untreated patients from the natural history study, which is being used as the external control and is described below. The MOVE Trial is fully enrolled, and we expect to report full data in 2020 with interim read-outs in 2019 and 2020. If successful, we plan to submit a supplemental New Drug Application (sNDA) for the combination dosing regimen that includes both chronic dosing and episodic dosing at time of flare-ups.

 

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In parallel with our interventional trials, we have also completed enrollment in a first of its kind natural history study with 114 patients worldwide to characterize the progression of FOP across numerous outcomes. This study is tracking new HO formation across the body using WBCTs as well as other measures of mobility and functional impairment. Cross-sectional data indicates a strong correlation between losses in physical function with age and with total body volume of HO and functional outcomes. The findings of this study have been instrumental in establishing that HO is a clinically meaningful endpoint in FOP.

  

Palovarotene for MO

 

We have generated pre-clinical data demonstrating that palovarotene inhibits the number of OCs by approximately 90% in an animal model of MO as compared to vehicle-treated animals. We initiated patient enrollment in a global, placebo-controlled Phase 2 study (the MO-Ped Trial) of palovarotene in MO in April 2018 and expect to complete enrollment in mid- 2019. The MO-Ped Trial will enroll up to 240 patients at approximately 25-30 clinical sites worldwide, comprised of pediatric patients from 2 to 14 years of age, to assess palovarotene’s effect on osteochondroma formation and other related outcomes. We expect to report clinical data for this Phase 2 trial in 2021 with an interim read-out in the first half of 2020.

  

Palovarotene for Dry Eye Disease

 

Palovarotene has been shown to exert multiple effects in various tissues including in ocular tissues, where RARγ agonists generally demonstrate anti-fibrotic properties. As a result, we have conducted pre-clinical proof-of-concept studies in dry eye disease that show that an eye drop formulation of palovarotene can potently increase tear production and decrease corneal damage. Following the completion of these studies and IND-enabling toxicity studies of an ophthalmologic formulation, we began a Phase 1 clinical trial in Canada in October 2018 in healthy volunteers to evaluate the safety of palovarotene eye drops as a potential treatment for dry eye disease. This study has been completed and final results are pending, but based on top line data, we expect to submit an IND to FDA and advance our eye drop formulation into a proof of concept efficacy trial evaluating palovarotene in dry eye disease, which is expected to begin in 2019.

 

Other RARγ Agonists

 

We are also developing other RARγ agonists in-licensed from Galderma in other indications involving fibrosis. Should these studies be successful, we plan to initiate the pre-IND activities necessary to initiate clinical trials in these new indications.

  

Our Strategy

 

We strive to become a leading fully-integrated biopharmaceutical company that innovates and commercializes new treatments for people with ultra-rare bone disorders and other diseases. We are rapidly developing our lead product candidate, palovarotene, to treat FOP and MO as well as other diseases. To achieve our goals, we are executing the following strategy:

  

Obtain regulatory approval for our lead product candidate, palovarotene, in FOP. We believe that our recent interactions with the FDA suggest a path to NDA submission in the second half of 2019. We believe that, if successful, this NDA may lead to FDA approval of palovarotene to treat children and adults with FOP using an episodic treatment regimen at the time of a flare-up. We also believe that if the NDA is accepted, we may receive priority review and be in a position to launch commercial sales in the first half of 2020. Our Phase 3 MOVE Trial, if successful, may substantially form the basis of an sNDA for an additional dosing regimen, one which includes a chronic daily administration of palovarotene in addition to flare-up-based episodic treatment. We also expect to engage in regulatory discussions for palovarotene approval in Europe and Japan starting next year.

 

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Complete development and obtain regulatory approval for palovarotene in MO. We believe that the positive Phase 2 results we have generated with palovarotene in FOP along with the pre-clinical data demonstrating proof-of-concept in an animal model of MO suggest that palovarotene may also demonstrate biological activity in the ongoing Phase 2 MO-Ped Trial in MO. Enrollment in this trial was initiated in April 2018 and we expect to be fully enrolled by mid-2019. If successful, we believe this trial could potentially serve as a single pivotal study and could form the basis of FDA approval of palovarotene for MO. We expect to submit for worldwide regulatory approvals of palovarotene in MO including in the United States, Europe and Japan after generating the relevant clinical data, for which we expect data read outs in 2020 and 2021, respectively.

 

Independently commercialize palovarotene and improve patient care in FOP and MO. We intend to establish our own commercial organization and have begun to develop a global commercial plan. Our plan includes establishing the sales, marketing and reimbursement functions required to commercialize palovarotene in global markets. In response to requests from the patient community, we are evaluating mechanisms for allowing access to palovarotene in advance of regulatory approval in those jurisdictions where this is permitted by the applicable laws.

  

Advance the development of an eye drop formulation of palovarotene for Dry Eye Disease. We initiated a Phase 1 clinical trial in October 2018 to evaluate the safety, tolerability, and pharmacokinetic profile of single and multiple ascending doses of palovarotene ophthalmic solution in healthy volunteers. This trial was completed in February 2019 and based on top line data, we will submit an IND to the FDA and advance our eye drop formulation into a proof of concept efficacy trial evaluating palovarotene in dry eye disease, which is expected to begin in 2019.

 

Expand our RARγ agonists platform. We are also investigating other RARγ agonists in-licensed from Galderma in other indications involving fibrosis. Should these studies be successful, we plan to initiate the pre-IND activities for these other RARgamma agonists necessary to initiate clinical trials in these new indications.

 

Evaluate opportunities to expand our leadership in FOP and other areas of expertise. As the leaders in FOP drug development, we intend to maintain this leadership via collaborations with others who have programs which may enhance functional outcomes in persons with FOP. We may also selectively form collaborative alliances to expand our capabilities and product offerings into new therapeutic areas and potentially accelerate commercialization in select geographic markets. Additionally, we may pursue the acquisition or in-licensing of product candidates, particularly in our core focus area of rare bone diseases.

 

Our Team

 

We have assembled a team of highly skilled and experienced employees, directors and consultants with broad capabilities in drug discovery, development, regulation and commercialization and particular expertise in orphan diseases. A majority of our employees possess advanced scientific degrees. Our management team has substantial industry experience in the orphan disease space with a successful track record of developing and commercializing drug candidates. Our board members include the former CEOs and the former CCO of companies that developed Yescarta®, Gattex®, Natpara® and Strensiq®, the latter two drugs indicated for the treatment of rare bone diseases. We continue to leverage this specialized expertise and experience to rapidly pursue the development and commercialization of palovarotene in multiple indications.

 

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Manufacturing

 

Palovarotene drug substance synthesis was originally developed and optimized by Roche. Clementia further optimized this synthesis route due to the availability of novel chemistries. Our drug substance is currently manufactured by one manufacturer. It has demonstrated greater than two years stability under ambient conditions protected from light. Our drug product consists of a hard-shell capsule, which can be opened by patients and sprinkled on food for those with locked jaws and pediatric subjects. Multiple dosage strengths are available to account for all potential doses administered in the clinic, including for weight-based dosing in children. We monitor stability of our drug substance and drug product according to ICH compliant stability programs.

 

Competition

 

Currently, there are no therapies that have been specifically approved for the treatment of FOP. To our knowledge, palovarotene is the only orally available RARγ agonist that has been clinically tested in FOP. However, products approved for other indications, for example, corticosteroids and non-steroidal anti-inflammatory drugs, are used off-label to manage FOP symptoms during flare-ups. None of these medications has been shown to prevent HO.

 

Regeneron Pharmaceuticals Inc. has completed a Phase 1 trial in Belgium with an antibody against Activin A. As an antibody, it is administered via intravenous infusion. Regeneron is currently enrolling a Phase 2 clinical trial in adult FOP patients.

 

Blueprint Medicines Corporation, Keros Therapeutics, La Jolla Pharmaceutical Company and BioCryst Pharmaceuticals Inc. have disclosed ALK2 inhibitors in development for FOP. To our knowledge, these kinase inhibitors being developed for FOP are at the pre-clinical stage, but Phase 1 trials are planned for this year. A number of academic groups are also pursuing ALK2 kinase inhibitors and to our knowledge, these are also at the pre-clinical stage in FOP.

 

Regeneron Pharmaceuticals Inc. and La Jolla Pharmaceutical Company have been granted orphan drug designation for their respective approaches in FOP.

 

GRI Bio Inc. is developing an RARγ selective agonist, GRI-0621, in a Phase 2 clinical trial in chronic liver disease in South Africa.

 

License Agreements

 

We have entered into exclusive license agreements to help support our development efforts.

 

Roche Agreement

 

In January 2013, we entered into a license agreement with Roche for the composition of matter of palovarotene, for which we have the worldwide rights to develop and commercialize. We are obligated to pay Roche certain clinical/regulatory/sales milestones and royalties on products developed from this technology. Termination of our license agreement with Roche would have a material adverse impact on our ability to develop and commercialize palovarotene.

 

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Pursuant to the terms of the agreement, we were granted the exclusive worldwide right to research, develop, make, have made, use, sell, have sold, offer for sale and import palovarotene, any other compounds covered by certain Roche patents, and any pharmaceutical or therapeutic products containing either palovarotene or such other licensed compounds, for all human pharmaceutical uses and indications. Additionally, Roche transferred to us certain regulatory information on the licensed compounds, including palovarotene, pursuant to the license agreement.

 

The Roche license also grants us a right to sublicense our licensed rights to third parties, provided each sublicensee enters into a written agreement with us with terms consistent with our agreement with Roche.

 

The license agreement requires us to use commercially reasonable efforts to develop, obtain regulatory approval of, and commercialize a product containing palovarotene. The license agreement includes commitments to pay Roche (i) a total of $1.0 million in milestone payments upon the achievement of certain clinical milestones, (ii) up to a total of $11.0 million in milestone payments upon the achievement of certain regulatory milestones in connection with the three clinical trial programs currently underway with an additional $1 million in milestone payments upon the achievement of certain regulatory milestones in connection with each subsequent indication, if any, and (iii) up to a total of $37.5 million in milestone payments upon the achievement of certain sales milestones. We achieved the clinical milestone in December 2017 and paid Roche the $1.0 million milestone in January 2018. With the Company planning to file a new drug application with the FDA for palovarotene in FOP in the second half of 2019, the Company expects to incur a $2 million regulatory milestone. The agreement also requires us to pay Roche a royalty rate in the low teens based on net sales of products containing palovarotene or the other licensed compounds during the royalty term. The Roche agreement provides that the royalty rate will be adjusted significantly downward on a country-by-country basis if generic versions of the licensed products are introduced and sold in the relevant country and the sale of such generic versions have a certain impact on our net sales. Under the agreement, we are also required to pay any consideration owed to third parties related to such third parties’ intellectual property rights covering the licensed technology, though such payments may be at least partially offset by a reduction in royalties payable to Roche.

 

The Roche Agreement will expire on a licensed product-by-product and country-by-country basis upon the later of (i) the date of expiration of the last to expire patent having a valid claim relating to such licensed product in a particular country, or (ii) 10 years after the first commercial sale of a licensed product in such country. Either party may terminate the agreement for the material breach or insolvency of the other party. In the event the agreement is terminated by Roche for our material breach or insolvency, the rights and licenses granted to us under the agreement would terminate. In addition, upon termination under certain circumstances, rights in regulatory filings and certain other intellectual property may revert to Roche. Termination of our rights under the Roche license would have a material adverse effect on us.

 

The Roche Agreement was amended in 2018 so that Clementia will reimburse Roche for the maintenance of certain Roche Patents. All other terms of the agreement are unchanged.

  

Thomas Jefferson University (TJU) Agreement

 

In February 2014, we entered into a license agreement with TJU to use palovarotene for treating muscle tissue damage. We are obligated to pay TJU certain clinical/regulatory/sales milestones and royalties on the sales of certain licensed products and processes. Termination of our license agreement with TJU would have a material adverse impact on our ability to develop and commercialize palovarotene in its current

formulation.

 

Pursuant to the terms of the agreement, we were granted the exclusive worldwide right to make and have made, to use and have used, to sell and have sold, to offer for sale, to import, to export, to research, develop and improve upon methods for muscle repair and regeneration comprising administering therapeutically effective amounts of RAR agonists (such as palovarotene) for treating muscle tissue damage. The TJU license also grants us a right to sublicense our licensed rights to third parties, provided that our license from TJU is exclusive at the time of the granting of the sublicense and that each sublicensee enters into a written agreement with us with terms consistent with our agreement with TJU.

 

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The license agreement requires us to use commercially reasonable diligent efforts to effect introduction of a product containing palovarotene into the commercial market as soon as practicable. At any time after three (3) years from the effective date of the TJU license, TJU may terminate the agreement or render the license non-exclusive if, in TJU’s reasonable judgment, the progress reports provided by us substantially demonstrate our failure to satisfy certain diligence obligations.

 

The agreement requires us to make a total of $0.1 million in milestone payments upon the achievement of certain clinical milestones and a total of $0.25 million in milestone payments upon the achievement of certain regulatory milestones, in each case in connection with the first licensed product or licensed process that meets the relevant milestones. We achieved the clinical milestone and paid TJU the $0.1 million milestone in December 2017. The agreement also requires us to pay TJU a low single digit royalty rate on the amount of total net sales of licensed products or licensed processes during the term of the agreement. We must also pay TJU a low double-digit royalty rate on the amount of non-royalty sub-license income we receive from a sub-licensee if we sub-license our license under the TJU agreement and we receive a revenue stream under the sub-license. Under the agreement, non-royalty sublicense income shall include the amount paid to us by a sublicensee pursuant to the sublicense, including but not limited to license fees, milestone payments and the fair market value in cash of any non-cash consideration of any kind for such sublicense.

 

The term of the license agreement remains in effect until the last patent or patent application containing a valid claim in the patent rights under the license have expired or been abandoned. Either party may terminate the agreement for the material breach or insolvency of the other party. In the event the agreement is terminated by TJU for our material breach or insolvency or on account of their determination that our progress reports substantially demonstrate that we neither used commercially reasonable efforts to put the licensed subject matter into commercial use and/or are not keeping it reasonably available to the public, nor engaged in research, development, manufacturing, marketing or sublicensing activity to achieve the above, the rights and licenses granted to us under the agreement would terminate. Termination of our rights under the TJU license would have a material adverse effect on us.

 

Upon the expiration of the TJU patent portfolio, our license agreement with, and our license payment obligations to, TJU will terminate and we will have a fully-paid, royalty-free, sublicensable license.

 

Yamaguchi University Agreement

 

In April 2015, we entered into a license agreement with Yamaguchi University for a patent family titled “Therapeutic agent for keratoconjunctive disorders” and a patent family titled “Inhibitor for Retinochoroidal disorders.” We are obligated to pay Yamaguchi University certain clinical/regulatory milestones and royalties on sales of certain licensed products and processes. Termination of our license agreement with Yamaguchi University would have a material adverse impact on our ability to develop and commercialize palovarotene for the treatment of certain ocular disorders.

 

Pursuant to the terms of the agreement, we were granted the exclusive worldwide right to make and have made, to use and have used, to sell and have sold, to offer for sale, to import, to export, to research, develop and improve upon therapeutic agents for keratoconjunctive disorders and related patents. The Yamaguchi University license also grants us a right to sublicense our licensed rights to third parties, provided each sublicensee enters into a written agreement with us with terms consistent with our agreement with Yamaguchi University.

 

The agreement requires us to use commercially reasonable efforts to effect introduction of the licensed products into the commercial market as soon as practicable. The agreement requires us to make a total of $0.075 million in milestone payments upon the achievement of certain clinical milestones and a total of $0.15 million in milestone payments upon the achievement of certain regulatory milestones, in each case in connection with the first licensed product that meets the relevant milestones. The agreement also requires us to pay Yamaguchi University a low single digit royalty rate on the amount of total net sales of licensed products during the term of the agreement. We also have a royalty buy-out option pursuant to which we can terminate at any time in our sole discretion our obligation to pay royalties and make milestone payments, as well as our reporting obligations, in exchange for a one-time payment to Yamaguchi University.

 

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The Yamaguchi University agreement will expire on a licensed product-by-product and country-by-country basis upon the later of (i) the date of expiration of the last to expire patent having a valid claim relating to such licensed product in a particular country, or (ii) 10 years after the first commercial sale of a licensed product in such country. Yamaguchi University can terminate the agreement for our material breach or insolvency. In the event the agreement is terminated by Yamaguchi University for our material breach or insolvency, the rights and licenses granted to us under the agreement would terminate. We can terminate the license agreement upon 90 days’ notice.

 

Galderma Agreement

 

In March 2017, we exercised our option to enter into an exclusive license agreement with Galderma for certain retinoic acid receptor gamma agonists compounds. In accordance with this agreement, we have paid a one-time license fee of $1 million, which was recorded as an intangible asset. We are committed to make certain future payments based on the successful achievement of specific development and commercialization milestones related to the licensed Galderma compounds.

 

Pursuant to the terms of the agreement, we have been granted an exclusive worldwide right in certain fields and subject to certain exceptions, to (i) develop, make and use the retinoic acid receptor gamma agonists compounds in order to research, develop, manufacture and commercialize products that incorporate such compounds and (ii) research, develop, manufacture and commercialize such products. The Galderma license also grants us a right to sublicense our licensed rights to third parties, provided that, in case of (i), each sublicensee shall enter into a written agreement with Galderma, and, in case of (ii), we will not be relieved from our obligations under the agreement with Galderma and will secure all covenants, obligations, and rights of the sublicensee.

 

The license agreement requires us to use commercially reasonable efforts to develop at least one of the compounds as well as to commercialize the products incorporating the compounds. The agreement requires us to pay Galderma a total of $2.0 million in milestone payments upon the achievement of certain clinical milestones and up to a total of $25.5 million in milestone payments upon the achievement of certain regulatory milestones, in each case in connection with the first product that meets the relevant milestones. The agreement also requires us to pay Galderma a single digit royalty rate that varies based on the amount of total worldwide net sales of licensed products during the term of the agreement (including a royalty on the net sales by sublicensees).

 

The license agreement will remain in effect as long as we develop or commercialize the licensed product. Either party has a right to terminate the agreement for the material breach or insolvency of the other party. Termination by Galderma for our material breach or insolvency causes termination of the rights and licenses that are granted to us under the agreement. We have the right to terminate the agreement upon 90 days prior written notice to Galderma both without cause and because of our decision to discontinue development or commercialization.

 

In December 2018 the license agreement was amended to further expand Clementia’s rights to additional fields and to grant Clementia additional time to evaluate the compounds. Following the amendment Clementia will manage the patent portfolio relating to the Galderma compounds at its expense.

 

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Intellectual Property

 

We strive to protect the proprietary technology that we believe is important to our business, including seeking and maintaining patents intended to cover our product candidates and compositions, their methods of use and processes for their manufacture, and any other aspects of inventions that are commercially important to the development of our business. We also rely on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.

 

We plan to continue to expand our intellectual property estate by filing patent applications directed to compositions, formulations and methods of treatment created or identified from our ongoing development of our product candidates. Our success will depend on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions and know-how related to our business, defend and enforce our patents, preserve the confidentiality of our trade secrets and operate without infringing the valid and enforceable patents and proprietary rights of third parties. We also rely on know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position. We seek to obtain domestic and international patent protection, and endeavor to promptly file patent applications for new commercially valuable inventions.

 

The patent positions of biopharmaceutical companies like us are generally uncertain and involve complex legal, scientific and factual questions. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and patent scope can be reinterpreted by the courts after issuance. Moreover, many jurisdictions permit third parties to challenge issued patents in administrative proceedings, which may result in further narrowing or even cancellation of patent claims. We cannot predict whether the patent applications we or our strategic partners are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient protection from competitors.

 

Because patent applications in the United States and certain other jurisdictions are maintained in secrecy for 18 months or potentially even longer, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain of the priority of inventions covered by pending patent applications. Moreover, we may have to participate in interference proceedings or derivation proceedings declared by the U.S. PTO, to determine priority of invention.

 

Clementia Licensed Intellectual Property

 

We have exclusively licensed patents claiming palovarotene as a composition of matter from Roche (the Roche patent portfolio), which has a statutory expiration date in 2021. We have an exclusive worldwide license to patents claiming the use of palovarotene for treating muscle tissue damage from TJU (the TJU patent portfolio), which has a statutory expiration date in 2031. We have an exclusive worldwide license to patents claiming the use of certain RARγ agonists, including palovarotene, for treating keratoconjunctive disorders and claiming the use of palovarotene for treating retinochoroidal disorders from Yamaguchi University (the Yamaguchi University patent portfolio), which have a statutory expiration date in 2033 or 2034.

 

The licensed Galderma RARγ agonists include lead compounds from four distinct structural families. Two families are claimed in recently filed patent applications; one with an expected statutory patent expiry date of February 2037 and a second with an expected statutory patent expiry date of December 2035. The third family includes lead compounds that have not been publicly disclosed, nor has any patent specifically claiming these compounds been filed. The fourth structural family includes lead compounds that are disclosed in expired Galderma patents.

 

The Roche patent portfolio includes granted patents in over 45 countries, including the United States, Canada and the primary countries of the European Union (26 countries). The Roche patent portfolio includes a United States patent that is scheduled to expire in 2021, without taking into account any potential patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Act. The Roche patent portfolio includes a European patent, validated in numerous European jurisdictions, that has a statutory expiration date in 2021, absent any adjustments or extensions.

 

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The TJU patent portfolio includes granted patents issued in the United States, Australia, Japan, New Zealand and South Africa, and pending patent applications in Brazil, Canada, China, Europe, the United States, and other countries. The TJU patent portfolio includes a United States patent that has a statutory expiration date in 2031, without taking into account any potential patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Act. The TJU patent portfolio includes a European patent application that, if granted, would have a statutory expiration date in 2031, absent any adjustments, extensions or supplementary protections.

 

The Yamaguchi University patent portfolio includes granted U.S. patents and patent applications pending in Canada, China, Europe, Japan, the United States, and other countries.

 

Clementia Owned Intellectual Property

 

Pending patent applications filed by and assigned to Clementia:

 

National phase applications corresponding to Patent Cooperation Treaty (PCT) application (filed June 2017) with claims directed to therapeutic treatment regimens for treating heterotopic ossification in FOP using palovarotene including in the U.S., Europe, Canada, Japan, China, South Korea, Australia and Mexico;

Patent Cooperation Treaty (PCT) application (filed November 2017) with claims directed to the use of RARγ agonists, including palovarotene, for treating MO; and
Patent Cooperation Treaty (PCT) application (filed December 2018) with claims directed to therapeutic treatment regiments and combination therapies for treating heterotopic ossification or preventing flare-ups in FOP using palovarotene (assignment to Clementia in process).

  

Government Regulation

 

FDA Approval Process

 

In the United States, pharmaceutical products are subject to extensive regulation by the FDA. The Federal Food, Drug, and Cosmetic Act (the FDC Act) and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending NDAs, warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties, and criminal prosecution.

 

Pharmaceutical product development for a new product or certain changes to an approved product in the U.S. typically involves pre-clinical laboratory and animal tests, the submission to the FDA of an IND, which must become effective before clinical testing may commence, and adequate and well- controlled clinical trials to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought. Satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity, and novelty of the product or disease.

 

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Pre-clinical tests include laboratory evaluation of product chemistry, formulation, and toxicity, as well as animal trials to assess the characteristics and potential safety and efficacy of the product. The conduct of the pre-clinical tests must comply with federal regulations and requirements, including good laboratory practices. The results of pre-clinical testing are submitted to the FDA as part of an IND along with other information, including information about product chemistry, manufacturing and controls, and a proposed clinical trial protocol. Long term pre-clinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND is submitted.

 

A 30-day waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has neither commented on nor questioned the IND within this 30-day period, the clinical trial proposed in the IND may begin.

 

Clinical trials involve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be conducted: (i) in compliance with federal regulations; (ii) in compliance with good clinical practice (GCP), an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators, and monitors; as well as (iii) under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.

 

The FDA may order the temporary, or permanent, discontinuation of a clinical trial at any time, or impose other sanctions, if it believes that the clinical trial either is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The study protocol and informed consent information for patients in clinical trials must also be submitted to an IRB for approval. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.

 

Clinical trials to support NDAs for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In Phase 1, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics, pharmacological actions, side effects associated with increasing doses, and, if possible, early evidence on effectiveness. Phase 2 usually involves trials in a limited patient population to determine the effectiveness of the drug for a particular indication, dosage tolerance, and optimum dosage, and to identify common adverse effects and safety risks. If a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken to obtain the additional information about clinical efficacy and safety in a larger number of patients, typically at geographically dispersed clinical trial sites, to permit FDA to evaluate the overall benefit-risk relationship of the drug and to provide adequate information for the labeling of the drug. In most cases FDA requires two adequate and well-controlled Phase 3 clinical trials to demonstrate the efficacy of the drug. A single Phase 3 trial with other confirmatory evidence may be sufficient in rare instances where the study is a large multi-center trial demonstrating internal consistency and a statistically very persuasive finding of a clinically meaningful effect on mortality, irreversible morbidity or prevention of a disease with a potentially serious outcome and confirmation of the result in a second trial would be practically or ethically impossible.

 

Pursuant to the 21st Century Cures Act, the manufacturer of an investigational drug for a serious or life-threatening disease is required to make available, such as by posting on its website, its policy on evaluating and responding to requests for expanded access.

 

After completion of the required clinical testing, an NDA is prepared and submitted to the FDA. FDA approval of the NDA is required before marketing of the product may begin in the U.S. The NDA must include the results of all pre-clinical, clinical, and other testing and a compilation of data relating to the product’s pharmacology, chemistry, manufacture, and controls. The cost of preparing and submitting an NDA is substantial. The submission of most NDAs is additionally subject to a substantial application user fee, currently exceeding $2,580,000 for Fiscal Year 2019. Under an approved NDA, the applicant is also subject to an annual program fee, currently exceeding $300,000 for each prescription product. These fees typically increase annually. An NDA for a drug that has been designated as an orphan drug is not subject to an application fee, unless the NDA includes an indication for other than a rare disease or condition. Additionally, an approved orphan-designated drug is exempt from the annual program fee if the applicant and its affiliates had less than $50 million in gross worldwide revenue during the previous year.

 

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The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review of new drug applications. Most such applications for standard review drug products are reviewed within ten to twelve months; most applications for priority review drugs are reviewed in six to eight months. Priority review can be applied to drugs that the FDA determines offer major advances in treatment, or provide a treatment where no adequate therapy exists. For biologics, priority review is further limited only for drugs intended to treat a serious or life-threatening disease relative to the currently approved products. The review process for both standard and priority review may be extended by FDA for three additional months to consider certain late-submitted information, or information intended to clarify information already provided in the submission.

 

The FDA may also refer applications for novel drug products, or drug products that 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. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilities at which the drug is manufactured. FDA will not approve the product unless compliance with cGMP is satisfactory and the NDA contains data that provide substantial evidence that the drug is safe and effective in the indication studied.

 

After FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete response letter. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing, or information, in order for the FDA to reconsider the application. If, or when, those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included.

 

An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of NDA approval, the FDA may require a risk evaluation and mitigation strategy (REMS) to help ensure that the benefits of the drug outweigh the potential risks. REMS can include medication guides, communication plans for healthcare professionals, and elements to assure safe use (ETASU). ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patient registries. The requirement for a REMS can materially affect the potential market and profitability of the drug. Moreover, product approval may require substantial post- approval testing and surveillance to monitor the drug’s safety or efficacy. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.

 

Changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA approval of a new NDA or NDA supplement before the change can be implemented. An NDA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDA supplements as it does in reviewing NDAs.

 

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Pediatric Information

 

Under the Pediatric Research Equity Act (PREA), NDAs or supplements to NDAs 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 drug is safe and effective. The FDA may grant full or partial waivers, or deferrals, for submission of data. Unless otherwise required by regulation, PREA generally does not apply to a drug for an indication for which orphan designation has been granted; however, beginning in 2020, PREA will apply to NDAs for orphan-designated drugs if the drug is molecularly targeted cancer product intended for the treatment of an adult cancer and is directed at a molecular target that FDA has determined is substantially relevant to the growth or progression of a pediatric cancer. The Best Pharmaceuticals for Children Act (BPCA) provides NDA holders a six-month extension of any exclusivity—patent or non-patent—for a drug if certain conditions are met. Conditions for exclusivity include the FDA’s determination that information relating to the use of a new drug in the pediatric population may produce health benefits in that population, FDA making a written request for pediatric studies, and the applicant agreeing to perform, and reporting on, the requested studies within the statutory timeframe. Applications under the BPCA are treated as priority applications, with all of the benefits that designation confers.

 

Orphan Drugs

 

Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition—generally a disease or condition that affects fewer than 200,000 individuals in the U.S. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the generic identity of the drug and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. The first NDA applicant to receive FDA approval for a particular active ingredient to treat a particular disease with FDA orphan drug designation is entitled to a seven-year exclusive marketing period in the U.S. for that product, for that indication. During the seven-year exclusivity period, the FDA may not approve any other applications to market the same drug for the same disease, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity. Orphan drug exclusivity does not prevent FDA from approving a different drug for the same disease or condition, or the same drug for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA application user fee.

 

Fast Track Designation and Accelerated Approval

 

FDA is required to facilitate the development, and expedite the review, of drugs that are intended for the treatment of a serious or life-threatening disease or condition for which there is no effective treatment and which demonstrate the potential to address unmet medical needs for the condition. Under the fast track program, the sponsor of a new drug candidate may request that FDA designate the drug candidate for a specific indication as a fast track drug concurrent with, or after, the filing of the IND for the drug candidate. FDA must determine if the drug candidate qualifies for fast track designation within 60 days of receipt of the sponsor’s request. Under the fast track program and FDA’s accelerated approval regulations, FDA may approve a drug for a serious or life-threatening illness that provides meaningful therapeutic benefit to patients over existing treatments based upon a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments.

 

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In clinical trials, a surrogate endpoint is a measurement of laboratory or clinical signs of a disease or condition that substitutes for a direct measurement of how a patient feels, functions or survives. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. A drug candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of Phase 4 or post-approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies, or confirm a clinical benefit during post-marketing studies, will allow FDA to withdraw the drug from the market on an expedited basis. All promotional materials for drug candidates approved under accelerated regulations are subject to prior review by FDA.

 

In addition to other benefits such as the ability to use surrogate endpoints and engage in more frequent interactions with FDA, FDA may initiate review of sections of a fast track drug’s NDA before the application is complete. This rolling review is available if the applicant provides, and FDA approves, a schedule for the submission of the remaining information and the applicant pays applicable user fees. However, FDA’s time period goal for reviewing an application does not begin until the last section of the NDA is submitted. Additionally, the fast track designation may be withdrawn by FDA if FDA believes that the designation is no longer supported by data emerging in the clinical trial process.

 

Breakthrough Therapy Designation

 

FDA is also required to expedite the development and review of the application for approval of drugs that are intended to treat a serious or life-threatening disease or condition where preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. Under the breakthrough therapy program, the sponsor of a new drug candidate may request that FDA designate the drug candidate for a specific indication as a breakthrough therapy concurrent with, or after, the filing of the IND for the drug candidate. FDA must determine if the drug candidate qualifies for breakthrough therapy designation within 60 days of receipt of the sponsor’s request.

 

Rare Pediatric Disease Priority Review Voucher Program

 

Under the Rare Pediatric Disease Priority Review Voucher program, FDA may award a priority review voucher to the sponsor of an approved marketing application for a product that treats or prevents a rare pediatric disease. The voucher entitles the sponsor to priority review of one subsequent marketing application.

 

A voucher may be awarded only for an approved rare pediatric disease product application. A rare pediatric disease product application is an NDA for a product that treats or prevents a serious or life-threatening disease in which the serious or life-threatening manifestations primarily affect individuals aged from birth to 18 years; in general, the disease must affect fewer than 200,000 such individuals in the U.S.; the NDA must be deemed eligible for priority review; the NDA must not seek approval for a different adult indication (i.e., for a different disease/condition); the product must not contain an active ingredient that has been previously approved by FDA; and the NDA must rely on clinical data derived from studies examining a pediatric population such that the approved product can be adequately labeled for the pediatric population. Before NDA approval, FDA may designate a product in development as a product for a rare pediatric disease, but such designation is not required to receive a voucher.

 

To receive a rare pediatric disease priority review voucher, a sponsor must notify FDA, upon submission of the NDA, of its intent to request a voucher. If FDA determines that the NDA is a rare pediatric disease product application, and if the NDA is approved, FDA will award the sponsor of the NDA a voucher upon approval of the NDA. FDA may revoke a rare pediatric disease priority review voucher if the product for which it was awarded is not marketed in the U.S. within 365 days of the product’s approval.

 

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The voucher, which is transferable to another sponsor, may be submitted with a subsequent NDA or BLA and entitles the holder to priority review of the accompanying NDA or BLA. The sponsor submitting the priority review voucher must notify FDA of its intent to submit the voucher with the NDA or BLA at least 90 days prior to submission of the NDA or BLA and must pay a priority review user fee in addition to any other required user fee ($2,457,140 in Fiscal Year 2019). FDA must take action on an NDA or BLA under priority review within six months of receipt of the NDA or BLA.

 

The Rare Pediatric Disease Priority Review Voucher program was reauthorized in the 21st Century Cures Act, allowing a product that is designated as a product for a rare pediatric disease prior to October 1, 2020 to be eligible to receive a rare pediatric disease priority review voucher upon approval of a qualifying NDA prior to October 1, 2022.

 

Disclosure of Clinical Trial Information

 

Sponsors of clinical trials of FDA-regulated products, including drugs, are required to register and disclose certain clinical trial information. Information related to the product, patient population, phase of investigation, trial sites and investigators, and other aspects of the clinical trial is then made public as part of the registration. Sponsors are also obligated to discuss the results of their clinical trials after completion. Disclosure of the results of these trials can be delayed in certain circumstances for up to two years after the date of completion of the trial. Competitors may use this publicly-available information to gain knowledge regarding the progress of development programs.

 

Post-Approval Requirements

 

Once an NDA is approved, a product will be subject to certain post-approval requirements. For instance, FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling.

 

AE reporting and submission of periodic reports is required following FDA approval of an NDA. The FDA also may require post-marketing testing, known as Phase 4 testing, REMS and surveillance to monitor the effects of an approved product, or the FDA may place conditions on an approval that could restrict the distribution or use of the product. In addition, quality-control, drug manufacture, packaging and labeling procedures must continue to conform to cGMPs after approval. Drug manufacturers and certain of their subcontractors are required to register their establishments with FDA and certain state agencies. Registration with the FDA subjects entities to periodic unannounced inspections by the FDA, during which the agency inspects manufacturing facilities to assess compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money and effort in the areas of production and quality-control to maintain compliance with cGMPs. Regulatory authorities may withdraw product approvals or request product recalls if a company fails to comply with regulatory standards, if it encounters problems following initial marketing, or if previously unrecognized problems are subsequently discovered.

 

The Hatch-Waxman Act

 

Orange Book Listing

 

In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent whose claims cover the applicant’s product. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential generic competitors in support of approval of an abbreviated new drug application (ANDA). An ANDA provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed drug and has been shown through bioequivalence testing to be therapeutically equivalent to the listed drug. Other than the requirement for bioequivalence testing, ANDA applicants are not required to conduct, or submit results of, pre-clinical or clinical tests to prove the safety or effectiveness of their drug product. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug, and can often be substituted by pharmacists under prescriptions written for the original listed drug.

 

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The ANDA applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book. Specifically, the applicant must certify that (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new product. The ANDA applicant may also elect to submit a section viii statement certifying that its proposed ANDA label does not contain (or carve out) any language regarding the patented method-of-use rather than certify to a listed method-of-use patent. If the applicant does not challenge the listed patents, the ANDA application will not be approved until all the listed patents claiming the referenced product have expired. A certification that the new product will not infringe the already approved product’s listed patents, or that such patents are invalid, is called a Paragraph IV certification. If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit, or a decision in the infringement case that is favorable to the ANDA applicant.

 

The ANDA application also will not be approved until any applicable non-patent exclusivity listed in the Orange Book for the referenced product has expired.

 

Exclusivity

 

Upon NDA approval of a new chemical entity (NCE), which is a drug that contains no active moiety that has been approved by FDA in any other NDA, that drug receives five years of marketing exclusivity during which FDA cannot receive any ANDA seeking approval of a generic version of that drug. Certain changes to a drug, such as the addition of a new indication to the package insert, are associated with a three-year period of exclusivity during which FDA cannot approval an ANDA for a generic drug that includes the change. An ANDA may be submitted one year before NCE exclusivity expires if a Paragraph IV certification is filed. If there is no listed patent in the Orange Book, there may not be a Paragraph IV certification, and, thus, no ANDA may be filed before the expiration of the exclusivity period.

 

Patent Term Extension

 

After NDA approval, owners of relevant drug patents may apply for up to a five-year patent extension. The allowable patent term extension is calculated as half of the drug’s testing phase (the time between IND application and NDA submission) and all of the review phase (the time between NDA submission and approval up to a maximum of five years). The time can be shortened if FDA determines that the applicant did not pursue approval with due diligence. The total patent term after the extension may not exceed 14 years and only one patent may be extended.

 

For patents that might expire during the application phase, the patent owner may request an interim patent extension. An interim patent extension increases the patent term by one year and may be renewed up to four times. For each interim patent extension granted, the post-approval patent extension is reduced by one year. The director of the United States Patent and Trademark Office must determine that approval of the drug covered by the patent for which a patent extension is being sought is likely. Interim patent extensions are not available for a drug for which an NDA has not been submitted.

 

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Anti-Kickback, False Claims Laws

 

In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain general business and marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback statutes, false claims statutes and other statutes pertaining to healthcare fraud and abuse. 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 Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (PPACA) amended the intent element of the federal statute so that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to commit a violation. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of the anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor.

 

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, or knowingly making, or causing to be made, a false statement to have a false claim paid. This includes claims made to programs where the federal government reimburses, such as Medicaid, as well as programs where the federal government is a direct purchaser, such as when it purchases off the Federal Supply Schedule. Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. Additionally, PPACA amended the federal Anti-Kickback Statute such that a violation of that statute can serve as a basis for liability under the federal False Claims Act. The majority of states also have statutes or regulations similar to the federal Anti-Kickback Statute and False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.

 

Other federal statutes pertaining to healthcare fraud and abuse include the civil monetary penalties statute, which prohibits the offer or payment of remuneration to a Medicaid or Medicare beneficiary that the offeror or payor knows or should know is likely to influence the beneficiary to order a receive a reimbursable item or service from a particular supplier, and the additional federal criminal statutes created by the Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items or services.

 

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Other Federal and State Regulatory Requirements

 

Pursuant to PPACA, the Centers for Medicare & Medicaid Services (CMS) issued a final rule that requires manufacturers of prescription drugs to collect and report information on certain payments or transfers of value to physicians and teaching hospitals, as well as investment interests held by physicians and their immediate family members. The reports must be submitted on an annual basis and the reported data are posted in searchable form on a public website on an annual basis. Failure to submit required information may result in civil monetary penalties. Effective January 1, 2022, we will also be required to report on transfers of value to physician assistants, nurse practitioners or clinical nurse specialists, certified registered nurse anesthetists, and certified nurse-midwives.

 

In addition, several states now require prescription drug companies to report certain expenses relating to the marketing and promotion of drug products and to report gifts and payments to individual healthcare practitioners in these states. Other states prohibit various marketing-related activities, such as the provision of certain kinds of gifts or meals. Still other states require the posting of information relating to clinical studies and their outcomes. Some states require the reporting of certain pricing information, including information pertaining to and justifying price increases, or prohibit prescription drug price gouging. In addition, states such as California, Connecticut, Nevada, Massachusetts require pharmaceutical companies to implement compliance programs and/or marketing codes. Additional jurisdictions, such as the City of Chicago and the District of Columbia, require pharmaceutical sales representatives to be licensed and meet continuing education requirements. Several additional states are considering similar proposals. Compliance with these laws is difficult and time-consuming, and companies that do not comply with these state laws face civil penalties.

 

We may also 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 and Clinical Health Act (HITECH), and their respective implementing regulations, including the Final Omnibus Rule published on January 25, 2013, imposes specified requirements on certain types of people and entities 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,” defined as independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or 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. In addition, many state laws 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.

 

If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, exclusion from participation in federal and state healthcare programs and imprisonment, contractual damages, reputation harm, and diminished profits or future earnings, any of which could adversely affect our ability to operate our business and our financial results.

 

Also, the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. We cannot assure you that our internal control policies and procedures will protect us from reckless or negligent acts committed by our employees, future distributors, partners, collaborators or agents. Violations of these laws, or allegations of such violations, could result in fines, penalties or prosecution and have a negative impact on our business, results of operations and reputation.

 

 

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European Union Drug Development

 

In the European Union, our future products may also be subject to extensive regulatory requirements. As in the United States, medicinal products can only be marketed if a marketing authorization from the competent regulatory agencies has been obtained.

 

Similar to the United States, the various phases of non-clinical and clinical research in the European Union are subject to significant regulatory controls. Although the EU Clinical Trials Directive 2001/20/EC has sought to harmonize the EU clinical trials regulatory framework, setting out common rules for the control and authorization of clinical trials in the EU, the EU Member States have transposed and applied the provisions of the Directive differently. This has led to significant variations in the member state regimes. Under the current regime, before a clinical trial can be initiated it must be approved in each of the EU countries where the trial is to be conducted by two distinct bodies: the National Competent Authority (NCA), and one or more Ethics Committees (ECs). Under the current regime all suspected unexpected serious adverse reactions to the investigated drug that occur during the clinical trial have to be reported to the NCA and ECs of the Member State where they occurred.

 

The EU clinical trials legislation is currently undergoing a revision process mainly aimed at harmonizing and streamlining the clinical trials authorization process, simplifying adverse event reporting procedures, improving the supervision of clinical trials, and increasing their transparency.

 

European Union Drug Review and Approval

 

In the European Economic Area, (EEA), (which is comprised of the 27 Member States of the European Union (excluding Croatia) plus Norway, Iceland and Liechtenstein), medicinal products can only be commercialized after obtaining a Marketing Authorization (MA). There are two types of marketing authorizations:

 

The Community MA is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committee for Medicinal Products for Human Use (CHMP), of the European Medicines Agency (EMA), and is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products, and medicinal products containing a new active substance indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the EU.

 

National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory, are available for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for marketing in a Member State of the EEA, this National MA can be recognized in another Member States through the Mutual Recognition Procedure. If the product has not received a National MA in any Member State at the time of application, it can be approved simultaneously in various Member States through the Decentralized Procedure. Under the Decentralized Procedure an identical dossier is submitted to the competent authorities of each of the Member States in which the MA is sought, one of which is selected by the applicant as the Reference Member State. The competent authority of the Reference Member State prepares a draft assessment report, a draft summary of the product characteristics (SPC) and a draft of the labeling and package leaflet, which are sent to the other Member States (referred to as the Member States Concerned) for their approval. If the Member States Concerned raise no objections, based on a potential serious risk to public health, to the assessment, SPC, labeling, or packaging proposed by the Reference Member State, the product is subsequently granted a national MA in all the Member States (i.e., in the Reference Member State and the Member States Concerned).

 

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Under the above described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

 

Rest of the World Regulation

 

For other countries outside of the European Union and the United States, 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 the clinical trials must be conducted in accordance with cGCP requirements and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.

 

If we 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.

 

Healthcare Payor Reimbursement

 

Sales of our products will depend, in part, on the extent to which our products will be covered by third-party payors, such as government health programs, commercial insurance and managed healthcare organizations. In the United States no uniform policy of coverage and reimbursement for drug products exists. Accordingly, decisions regarding the extent of coverage and amount of reimbursement to be provided for any of our products will be made on a payor by payor basis. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our product candidates to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained.

 

In addition, in some foreign countries, 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 European Union 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 European Union do not follow price structures of the United States and generally prices tend to be significantly lower.

  

C.Organizational Structure

 

We were incorporated under the CBCA on November 5, 2010. We have two wholly-owned subsidiaries, Clementia Pharmaceuticals USA Inc., which is incorporated in the state of Delaware, and Clementia Pharmaceuticals France SARL, which is incorporate in France.

  

D.Property, Plant and Equipment

 

We lease our office space, which consists of approximately 19,950 square feet, in Montreal, Quebec, Canada. We also lease office space, which currently consists of approximately 2,850 square feet, in Newton, Massachusetts, USA. This lease will expire in 2019 and we have entered into a new lease for office space as of May 2019, which will consist of approximately 9,075 square feet, in Newton, Massachusetts, US.

 

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Item 4a.Unresolved Staff Comments

 

Not applicable.

 

Item 5.Operating and Financial Review and Prospects

 

The following was prepared by management with information available as at March 28, 2019 and should be read in conjunction with our audited consolidated financial statements for the years ended December 31, 2018, 2017 and 2016 and notes thereto, included under Item 18 of this Annual Report.

 

The Company’s Annual Report and additional information regarding Clementia is available on our website at www.clementiapharma.com or at www.sec.gov or on www.sedar.com.

 

A.Operating Results

 

Revenue

 

We have not generated any revenues from product sales since our inception and do not expect to generate any significant revenues from the sale of products in the near future. If our development efforts result in clinical success and regulatory approval or collaboration agreements with third parties for our product candidates, we may generate revenue from those product candidates.

 

Research and development expenses

 

Research and development (R&D) expenses consist primarily of costs associated with our product research and development efforts, and predominantly include:

 

·personnel costs, including salaries, benefits, bonuses, stock-based compensation expenses and related travel for employees engaged in scientific research and development functions;
·expenses incurred under agreements with contract research organizations, or CROs and investigative sites that conduct our clinical and non-clinical studies;
·expenses associated with manufacturing clinical study materials and developing external manufacturing capabilities;
·costs of outside consultants, including their fees and related travel expenses;
·other expenses related to non-clinical studies and expenses related to regulatory activities; and
·milestone payments made under our third-party licensing agreements.

  

Research and development costs are generally expensed as incurred unless they meet specific criteria for recognition as internally-generated intangible assets as per IFRS. We have not recognized any internally-generated intangible asset to date.

 

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Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.

 

We have been focused on developing palovarotene, our product candidate for the treatment of patients with FOP and MO. Our research and development expenses consist principally of external costs, such as start-up fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical and non-clinical studies, and costs related to acquiring and manufacturing clinical study materials. We do not allocate personnel-related costs, depreciation or other indirect costs to specific programs, as they are deployed across various projects under development and, as such, are separately classified as personnel and other expenses.

 

The following table summarizes our research and development expenses by program before tax credits:

 

   Years ended December 31, 
   2018   2017*   2016* 
   (in thousands) 
Palovarotene for FOP R&D expenses  $19,316   $13,579   $11,422 
Palovarotene for MO R&D expenses   6,495    2,847    369 
Palovarotene for ocular R&D expenses   1,864    1,609    229 
Manufacturing of palovarotene   6,881    3,070    1,592 
Other R&D expenses   922    532    149 
Total direct R&D expenses   35,478    21,637    13,761 
                
Personnel-related costs   7,157    4,476    2,353 
Facility and other expenses   1,269    1,293    738 
Total personnel, facility and other expenses   8,426    5,769    3,091 
                
Total research and development expenses  $43,904   $27,406   $16,852 

*Certain amounts have been reclassified for presentation purposes.

 

Research and development activities are central to our business. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. From inception through December 31, 2018, we incurred approximately $112 million in research and development expenses. We expect that our research and development expenses will continue to increase in the foreseeable future as we pursue later stages of clinical development of our product candidates.

 

We cannot determine with certainty the duration and completion costs of the current or future clinical studies of our product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs, and timing of clinical studies and development of our product candidates will depend on a variety of factors, including:

 

·the scope, rate of progress, and expense of our ongoing clinical studies as well as any additional clinical studies and other research and development activities;
·future clinical study results;
·uncertainties in clinical study enrollment rate or design;
·significant and changing government regulation; and
·the timing and receipt of any regulatory approvals.

 

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A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA, or another regulatory authority were to require us to conduct clinical studies beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any of our clinical studies, significant additional time and financial resources could be required for the completion of clinical development.

 

General and administrative expenses

 

General and administrative expenses consist primarily of personnel costs, including salaries, related benefits, bonuses, stock-based compensation and travel expenses for our executive, finance, commercial, business and corporate development and other administrative functions. General and administrative expenses also include facilities and other expenses, including rent, depreciation, maintenance of facilities, information technology infrastructure and security, insurance and supplies; and professional fees for accounting, tax and legal services, including legal expenses to pursue patent protection of our intellectual property, as well as pre-commercial related activities.

 

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the anticipated growth in our research and development activities and the potential commercialization of our product candidates. We also anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with our public listing on The Nasdaq Global Select Market and SEC requirements, director and officer insurance premiums, and investor relations costs. Additionally, if and when we believe a regulatory approval of palovarotene or any other product candidate appears likely, we anticipate an increase in personnel and related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of palovarotene or any other product candidate.

 

Interest income and financial expenses (income)

 

Interest income consists of interest earned on our cash and investments. Our interest income has increased during the second half of 2017 due largely to current interest rates earned on the net proceeds from our August 2017 IPO and October 2018 follow-on offering.

 

Financial expenses (income) consist mainly of losses on the re-measurement of embedded derivatives at fair value at each reporting date, accretion expense and foreign exchange gains and losses. Accretion expense consists of accreted interest expense related to our Class A, Class B and Class C redeemable convertible preferred shares to bring the debt components of our preferred shares back to their face value over time. Our IPO, which was completed in August 2017, resulted in the conversion of all classes of our preferred shares on a one-for-one basis into common shares and as such, gains or losses on the re-measurement of embedded derivatives at fair value and accretion expense have ceased during the third quarter of 2017. Foreign exchange gains and losses consist of the realized and unrealized net gains and losses from holding cash in foreign currency and foreign currency-denominated other current assets and accounts payable.

 

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Comparison of the three-months ended December 31, 2018 and 2017

 

The following table summarizes our results of operations for the three-months ended December 31, 2018 and 2017:

 

Three-month periods ended December 31,  2018   2017   Increase (decrease) 
   (in thousands) 
Expenses:            
Research and development expenses  $14,779   $10,592   $4,187 
Tax credits   (320)   (1,025)   705 
    14,459    9,567    4,892 
General and administrative expenses   5,287    2,408    2,879 
Interest income   (736)   (578)   (158)
Financial expenses (income)   90    (3)   93 
Income tax expense   250    395    (145)
Net loss and comprehensive loss  $(19,350)  $(11,789)  $(7,561)

 

Research and development expenses

 

Research and development expenses were $14.8 million for the three-month period ended December 31, 2018, compared to $10.6 million for the three-month period ended December 31, 2017. The $4.2 million increase was primarily due to:

 

$3.5 million net increase in clinical studies and CRO related activities as a result of ongoing costs in the MOVE study and the MO-Ped study and the initiation of the dry eye study, partially offset by lower ongoing costs in the Phase II open-label extension study in FOP;
$1.9 million increase in manufacturing activities in order to meet clinical supply requirements of the MOVE and MO-Ped trials, as well as the dry eye study;
$0.6 million increase in personnel related expenses in support of increased development activities;
$1.1 million decrease in milestone payments to licensors upon achievement of clinical milestones;
$0.9 million decrease in pre-clinical research activities for ocular studies and other potential indications; and
$0.2 million increase in other expenses in support of increased development activities.

 

Tax credits

 

Tax credits were $0.3 million for the three-month period ended December 31, 2018, compared to $1.0 million for the three-month period ended December 31, 2017. The decrease in tax credits is due to estimated orphan drug tax credits receivable as a result of direct research and developments activities undertaken from 2014 to 2017 previously unclaimed by the Company and recorded in the fourth quarter of 2017.

 

General and administrative expenses

 

General and administrative expenses were $5.3 million for the three-month period ended December 31, 2018, compared to $2.4 million for the three-month period ended December 31, 2017. The increase of $2.9 million in expenses was primarily due to a $0.5 million increase in non-cash share-based compensation expense, a $0.7 million increase in pre-commercial marketing activities as projects were undertaken in 2018, a $0.7 million increase in personnel costs to support the growth of the Company, as well as a $1.0 million increase in other general and administrative support activities.

 

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Interest income

 

Interest income was $0.7 million for the three-month period ended December 31, 2018, compared to $0.6 million for the three-month period ended December 31, 2017. The increase in interest income relates to higher returns on higher operating cash balances, partially offset by lower interest on lower invested balances as investments matured.

 

Financial expenses (income)

 

Financial expense was $0.1 million for the three-month period ended December 31, 2018, compared to financial income of close to nil three-month period ended December 31, 2017. The $0.1 million increase in financial expenses was largely the result of foreign exchange losses as a result of fluctuations in foreign exchange rates.

 

Income tax expense

 

Income tax expense was $0.3 million for the three-month period ended December 31, 2018, compared to $0.4 million for the three-month period ended December 31, 2017. The decrease in income tax expense relates to lower taxable income in the United States.

 

Comparison of the twelve-months ended December 31, 2018 and 2017

 

The following table summarizes our results of operations for the twelve-month periods ended December 31, 2018 and 2017:

 

Twelve-month periods ended December 31,  2018   2017   Increase (decrease) 
   (in thousands) 
Expenses:            
Research and development expenses  $43,904   $27,406   $16,498 
Tax credits   (1,039)   (1,237)   198 
    42,865    26,169    16,696 
General and administrative expenses   16,492    9,287    7,205 
Interest income   (2,358)   (1,082)   (1,276)
Financial expenses (income)   161    80,438    (80,277)
Income tax expense   966    643    323 
Net loss and comprehensive loss  $(58,126)  $(115,455)  $57,329 

 

Research and development expenses

 

Research and development expenses were $43.9 million for the year ended December 31, 2018, compared to $27.4 million for the year ended December 31, 2017. The $16.5 million increase was primarily due to:

 

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$11.6 million net increase in clinical studies and CRO related activities as a result of ongoing costs in the MOVE study and the MO-Ped study and the initiation of the dry eye study, partially offset by lower ongoing costs in the natural history study in FOP;
$3.8 million increase in manufacturing activities in order to meet clinical supply requirements of the MOVE , MO-Ped and dry eye trials;
$1.7 million increase in personnel related expenses in support of increased development activities;
$0.8 million increase in non-cash share-based compensation expense as a result of a option grants throughout the period;
$0.2 million increase in other expenses in support of increased development activities;
$1.1 million decrease in milestone payments to licensors upon achievement of clinical milestones; and
$0.5 million net decrease in pre-clinical research activities for MO studies and ocular studies, partially offset by higher activities in other potential indications.

 

 

Tax credits

 

Tax credits were $1.0 million for the twelve-month period ended December 31, 2018, compared to $1.2 million for the twelve-month period ended December 31, 2017. The decrease in tax credits reflects estimated orphan drug tax credits receivable as a result of direct research and developments activities undertaken from 2014 to 2017 previously unclaimed by the Company and recorded in 2017.

 

General and administrative expenses

 

General and administrative expenses were $16.5 million for the twelve-month period ended December 31, 2018, compared to $9.3 million for the twelve-month period ended December 31, 2017. The increase of $7.2 million in expenses was primarily due to a $1.6 million increase in personnel cost, $1.9 million increase in non-cash share-based compensation, a $3.0 million increase in pre-commercial activities and a $0.7 million increase in other general and administrative support activities.

 

Interest income

 

Interest income was $2.4 million for the twelve-month period ended December 31, 2018, compared to $1.1 million for the twelve-month period ended December 30, 2017. The increase in interest income relates to higher invested balances as a result of our IPO proceeds.

 

Financial expenses

 

Financial expenses were $0.2 million for the twelve-month period ended December 31, 2018, compared to $80.4 million for the twelve-month period ended December 31, 2017. The $80.2 million decrease in financial expenses was primarily due to the re-measurement at fair value of the embedded derivative in our preferred shares in 2017, which resulted in a non-recurring loss of $77.9 million, and accretion expense on our preferred shares in 2017, which resulted in a non-recurring loss of $2.5 million. With the completion of our IPO in August 2017, all classes of our preferred shares have been converted on a one-for-one basis into common shares and as such, gains or losses on the re-measurement of embedded derivatives at fair value and accretion expense were eliminated going forward.

 

Income tax expense

 

Income tax expense was $1.0 million for the year ended December 31, 2018, compared to $0.6 million for the year ended December 31, 2017. The increase in income tax expense relates to higher taxable income in the United States.

 

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Comparison of the twelve-months ended December  31, 2017 and 2016

 

The following table summarizes our results of operations for the twelve-month periods ended December 31, 2017 and 2016:

 

Twelve-month periods ended December 31,  2017   2016   Increase (decrease) 
   (in thousands) 
Expenses:            
Research and development expenses  $27,406   $16,852   $10,554 
Tax credits   (1,237)   (139)   (1,098)
    26,169    16,713    9,456 
General and administrative expenses   9,287    3,406    5,881 
Interest income   (1,082)   (399)   (683)
Financial expenses (income)   80,438    37,646    42,792 
Income tax expense   643    146    497 
Net loss and comprehensive loss  $(115,455)  $(57,512)  $57,943 

 

Research and development expenses

 

Research and development expenses were $27.4 million for the twelve-month period ended December 31, 2017, compared to $16.9 million for the twelve-month period ended December 31, 2016. The $10.6 million increase was primarily due to:

 

$4.3 million net increase in clinical studies and CRO related activities as a result of initiating the MOVE study and preparatory activities for the MO-Ped study, partially offset by the completion of the Phase 2 clinical trial in FOP;
$1.1 million increase in milestone payments to licensors upon achievement of clinical milestones;
$1.1 million increase in pre-clinical research activities for ocular studies and other potential indications;
$1.5 million increase in personnel related expenses in support of increased development activities;
$1.5 million increase in manufacturing activities in order to meet clinical supply requirements of the MOVE and MO-Ped trials;
$0.6 million increase in non-cash share-based compensation expense as a result of a higher stock option valuation; and
$0.5 million increase in other expenses in support of increased development activities.

 

Tax credits

 

Tax credits were $1.2 million for the twelve-month period ended December 31, 2017, compared to $0.1 million for the twelve-month period ended December 31, 2016. The increase in tax credits reflects estimated orphan drug tax credits receivable as a result of direct research and developments activities undertaken from 2014 to 2017 previously unclaimed by the Company.

 

General and administrative expenses

 

General and administrative expenses were $9.3 million for the twelve-month period ended December 31, 2017, compared to $3.4 million for the twelve-month period ended December 31, 2016. The increase of $5.9 million in expenses was primarily due to $1.9 million increase in costs directly related to our IPO, a $1.4 million increase in non-cash share-based compensation, a $1.0 million increase in pre-commercial activities and a $1.6 million increase in other general and administrative support activities.

 

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Interest income

 

Interest income was $1.1 million for the twelve-month period ended December 31, 2017, compared to $0.4 million for the twelve-month period ended December 30, 2016. The increase in interest income relates to higher invested balances as a result of our IPO proceeds.

 

Financial expenses

 

Financial expenses were $80.4 million for the twelve-month period ended December 31, 2017, compared to $37.6 million for the twelve-month period ended December 31, 2016. The $42.8 million increase in financial expenses was primarily due to an increase in non-cash losses on the re-measurement at fair value of the embedded derivative in our preferred shares in the second and third quarter of 2017 as compared to the same period in 2016. With the completion of our IPO in August 2017, all classes of our preferred shares have been converted on a one-for-one basis into common shares and as such, gains or losses on the re-measurement of embedded derivatives at fair value and accretion expense have been eliminated going forward.

 

Income tax expense

 

Income tax expense was $0.6 million for the year ended December 31, 2017, compared to $0.1 million for the year ended December 31, 2016. The increase in income tax expense relates to higher taxable income in the United States.

 

B.Liquidity and Capital Resources

 

   Dec. 31, 2018   Dec. 31, 2017   Increase (decrease) 
   (in thousands) 
Cash  $94,973   $36,230   $58,743 
Short-term investments   75,000    30,000    45,000 
Long-term investments   -    75,000    (75,000)
Total liquidity  $169,973   $141,230   $28,743 

 

Sources of liquidity

 

We have funded our operations principally from the issuance of common shares, preferred shares and convertible notes to purchase common shares, IPO proceeds and follow-on offering proceeds. In addition, we have recorded tax credits of $2.9 million since inception. As of December 31, 2018, we had cash and investments of $170.0 million.

 

Cash in excess of immediate working capital requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our investments are held in term deposits with a Canadian chartered bank.

 

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The Company is not subject to any externally imposed restrictions, covenants or capital requirements and has no arranged sources of financing.

 

As of December 31, 2018, the Company’s liquidity had increased by $28.7 million since December 31, 2017.

 

Cash flows

 

Comparison of the three-month periods ended December 31, 2018 and 2017

 

The following table sets forth the primary sources and uses of cash for each of the periods set forth below:

 

Three-month periods ended December 31,  2018   2017   Increase (decrease) 
   (in thousands) 
Net cash provided by (used in)               
Operating activities  $(12,996)  $(11,253)  $(1,743)
Investing activities   20,212    10,260    9,952 
Financing activities   75,782    -    75,782 
Net increase (decrease) in cash  $82,998   $(993)  $83,991 

 

Operating activities

 

The use of cash in all periods resulted primarily from our net losses, adjusted for non-cash charges and changes in working capital. The increase in cash used in operating activities for the three-month period ended December 31, 2018, compared to the three-month period ended December 31, 2017, is due to an increase in research and development activities for new and on-going clinical trial activities primarily in FOP and MO.

 

During the three-month period ended December 31, 2018, operating activities used $13.0 million in cash, primarily resulting from our research and development and general and administrative expenses, partially offset by cash provided by changes in working capital. The significant items accounting for the change in working capital include an increase in accounts payable and accrued liabilities and a decrease in prepaid expenses.

 

During the three-month period ended December 31, 2017, operating activities used $11.3 million in cash, primarily resulting from our research and development and general and administrative expenses, partially offset by cash provided by changes in working capital. The significant items accounting for the change in working capital include a decrease in prepaid expenses and an increase in accounts payable and accrued liabilities, offset by an increase in income tax and tax credits receivable.

 

Investing activities

 

Net cash used in investing activities primarily consists of acquisition of investments, in-licensing of intellectual property and purchases of fixed assets. Net cash provided by investing activities primarily consist of investment maturities.

 

During the three-month period ended December 31, 2018, investing activities provided $20.2 million in cash arising primarily from the maturity of investments. Net cash provided by investment activities in the three-month period ended December 31, 2017 amounted to $10.3 million primarily from the maturity of investments.

 

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Financing activities

 

During the three-month period ended December 31, 2018, cash provided by financing activities amounted to $75.8 million as a result of net cash proceeds from the follow-on offering in October 2018. During the three-month period ended on December 31, 2017, no cash was provided or used by financing activities.

 

Comparison of the twelve-month periods ended December 31, 2018 and 2017

 

The following table sets forth the primary sources and uses of cash for each of the periods set forth below:

 

Twelve-month periods ended December 31,  2018   2017   Increase (decrease) 
   (in thousands) 
Net cash provided by (used in)               
Operating activities  $(49,145)  $(35,566)  $(13,579)
Investing activities   32,228    (75,206)   107,434 
Financing activities   75,782    137,531    (61,749)
Net increase (decrease) in cash  $58,865   $26,759   $32,106 

 

Operating activities

 

The use of cash in all periods resulted primarily from our net losses, adjusted for non-cash charges and changes in working capital. The increase in cash used in operating activities for the twelve-month period ended December 31, 2018, compared to the twelve-month period ended December 31, 2017, is due to an increase in general and administrative expenses and an increase in research and development activities for new and on-going clinical trial activities primarily in FOP and MO.

 

During the twelve-month period ended December 31, 2018, operating activities used $49.1 million in cash, primarily resulting from our research and development and general and administrative expenses, partially offset by cash provided by changes in working capital. The significant items accounting for the change in working capital include an increase in accounts payable and accrued liabilities and a decrease in prepaid expenses, partially offset by an increase in income tax and tax credits receivable.

 

During the twelve-month period ended December 31, 2017, operating activities used $35.6 million in cash, primarily resulting from our research and development and general and administrative expenses, as well as cash used by changes in working capital. The significant items accounting for the change in working capital include an increase in prepaid expenses and income tax and tax credits receivable, partially offset by an increase in accounts payable and accrued liabilities.

 

Investing activities

 

During the twelve-month period ended December 31, 2018, investing activities generated $32.2 million primarily from the maturity of investments and interest income generated. During the twelve-month period ended December 31, 2017, investing activities used $75.2 million primarily from investments made, partially offset by interest income generated.

 

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Financing activities

 

During the twelve-month period ended December 31, 2018, cash provided by financing activities amounted to $75.8 million as a result of net cash proceeds from the follow-on offering in October 2018. During the twelve-month period ended on December 31, 2017, cash provided by financing activities amounted to $137.5 million as a result of net cash proceeds from our IPO in August 2017.

 

Comparison of the twelve-month periods ended December 31, 2017 and 2016

 

The following table sets forth the primary sources and uses of cash for each of the periods set forth below:

 

Twelve-month periods ended December 31,  2017   2016   Increase (decrease) 
   (in thousands) 
Net cash provided by (used in)               
Operating activities  $(35,566)  $(18,828)  $(16,738)
Investing activities   (75,206)   (29,932)   (45,274)
Financing activities   137,531    -    137,531 
Net increase (decrease) in cash  $26,759   $(48,760)  $75,519 

 

Operating activities

 

The use of cash in all periods resulted primarily from our net losses, adjusted for non-cash charges and changes in working capital. The increase in cash used in operating activities for the twelve-month period ended December 31, 2017, compared to the twelve-month period ended December 31, 2016, is due to an increase in general and administrative expenses related to the IPO and an increase in research and development activities for new and on-going clinical trial activities primarily in FOP and MO.

 

During the twelve-month period ended December 31, 2017, operating activities used $35.6 million in cash, primarily resulting from our research and development and general and administrative expenses, as well as cash used for changes in working capital. The significant items accounting for the change in working capital include an increase in prepaid expenses for directors and officers (D&O) liability insurance related to the IPO and the initiation of clinical trial activities in FOP and MO and an increase in income tax and tax credits receivable, offset by a decrease in accounts payable and accrued liabilities.

 

During the twelve-month period ended December 31, 2016, operating activities used $18.8 million in cash, primarily resulting from research and development and general and administrative expenses. The significant items accounting for the change in working capital included an increase in accounts payable and accrued liabilities as well as increases in prepaid expenses and income tax and tax credits receivable.

 

Investing activities

 

During the twelve-month period ended December 31, 2017, investing activities used $75.2 million primarily for the acquisition of investments and the in-licensing of intellectual property. During the twelve-month period ended December 31, 2016, investing activities used $29.9 million in cash primarily for the acquisition of investments.

 

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Financing activities

 

During the twelve-month period ended December 31, 2017, net cash provided by financing activities was $137.5 million primarily resulting from the net cash proceeds from our IPO in August 2017 as well as the completion of our $10 million Class C redeemable convertible preferred share financing in the first quarter of 2017. During the twelve-month period ended December 31, 2016, no cash was provided by financing activities.

 

Funding Requirements and Planned Operations

 

Since our inception in November 2010, we have devoted substantially all of our resources to organizing and staffing our Company, business planning, raising capital, developing our product candidates, preparing and conducting clinical studies of our product candidates, providing general and administrative support for these operations and protecting our intellectual property. We have funded our operations primarily through issuances of common shares from our IPO and our follow-on offering, as well as issuances of redeemable convertible preferred shares and convertible notes. From our inception through December 31, 2018, we have received gross proceeds of $321.6 million from such transactions, of which $80.8 million was in the form of gross proceeds from our follow-on offering, $137.9 million was in the form of gross proceeds from our IPO, $102.2 million was in the form of gross proceeds from the sale of preferred shares, $0.5 million was in the form of gross proceeds from the sale of convertible notes and $0.2 million was in the form of gross proceeds from the sale of other common shares. In addition, we have recorded tax credits of $2.9 million since inception. As at December 31, 2018 we had cash and investments of $170.0 million. Cash in excess of immediate working capital requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our investments are held in term deposits with a Canadian chartered bank.

 

We have incurred net losses since our inception, the majority of which resulted from non-cash finance charges incurred in connection with the accounting of our preferred shares and embedded derivatives from 2014 to 2017, as well as research and development activities and general and administrative costs associated with our operations. As of December 31, 2018, we had an accumulated deficit of $149.5 million. In August 2017, all of the outstanding Class A, B and C redeemable convertible preferred shares were converted on a one-for-one basis into common shares of the Company. In connection therewith, the Company eliminated the approximate $173.3 million contributed surplus created by the conversion of the preferred shares into common shares, an amount equal to the excess of the carrying value of the preferred share liabilities and embedded derivatives liabilities immediately prior to the conversion over the amount that was accounted for as share capital, being the stated capital of the preferred shares, and reduced its deficit in the third quarter of 2017 by a corresponding amount of $173.3 million.

 

We expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses will increase substantially in connection with our ongoing activities, particularly as we advance clinical development of palovarotene by conducting clinical trials; continue research and development efforts to support clinical development of additional RARγ agonist candidates; continue to engage contract manufacturing organizations (CMOs) to manufacture our clinical study materials and to develop large-scale manufacturing capabilities; seek regulatory approval for our product candidates; add personnel to support our product development and future commercialization; add operational, financial and management information systems; maintain, leverage and expand our intellectual property portfolio; and continue to operate as a public company. We are subject to all of the risks incident in the development of new therapeutic products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business.

 

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We believe that our existing cash and investments as of December 31, 2018 will be sufficient to fund our anticipated operating expenses for at least the next twelve months from December 31, 2018. However, we will eventually require additional capital for the commercial development and potential working capital purposes related to our existing product candidates and we may also need to raise additional funds to pursue other development activities related to additional product candidates.

 

Until we can generate a sufficient amount of revenue from our products, if ever, we expect to finance future cash needs through public or private equity or debt offerings. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing stockholders, increased fixed payment obligations and these securities may have rights senior to those of our common shares. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.

 

We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for palovarotene or any other product candidate, which we expect will take a number of years and is subject to significant uncertainty. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing, and distribution. As a result, we may need additional financing to support our continuing operations. Until such time that we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. Arrangements with collaborators or others may require us to relinquish certain rights related to our technologies or product candidates. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

 

The Company is not subject to any externally imposed restrictions, covenants or capital requirements and has no arranged sources of financing.

 

Quarterly Financial Data

 

We have a history of operating losses and have not been profitable since our inception in 2010. We expect to continue to incur losses for at least the next several years as we pursue clinical trials and research and development efforts. See Item 3.D. “Risks Factors”.

 

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Selected financial information for the eight quarters ending December 31, 2018 are as follows:

 

 

 

   Revenue   Research and development expenses   Financial expenses (income)   Net loss and comprehensive loss   Basic and diluted loss per share 
   (in thousands, except per share data) 
Q4-2018  $-   $14,779   $90   $(19,350)  $(0.54)
Q3-2018  $-   $10,691   $4   $(14,777)  $(0.46)
Q2-2018  $-   $7,437   $28   $(10,768)  $(0.34)
Q1-2018  $-   $10,996   $40   $(13,231)  $(0.42)
Q4-2017  $-   $10,592   $(3)  $(11,789)  $(0.37)
Q3-2017  $-   $7,074   $29,416   $(39,006)  $(1.83)
Q2-2017  $-   $6,333   $14,678   $(23,324)  $(9.54)
Q1-2017  $-   $3,407   $36,347   $(41,337)  $(17.48)

 

It is important to note that historical patterns of expenditures cannot be taken as an indication of future expenditures. The amount and timing of expenditures and availability of capital resources vary substantially from period to period, depending on the level of research and development activities being undertaken at any one time and the availability of funding from investors and prospective commercial partners.

 

Financing expenses primarily reflect the revaluation of the preferred shares embedded derivative liabilities at fair value and underlying assumptions as well as accretion expenses on the preferred shares liabilities. With the completion of our IPO in August 2017, all classes of our preferred shares have been converted on a one-for-one basis into common shares and as such, gains or losses on the re-measurement of embedded derivatives at fair value and accretion expense were eliminated.

 

C.Research and development, patents and licenses, etc.

  

Refer to Items 4B “Business Overview”, 5A “Operating Results” and 5F “Tabular Disclosure of Contractual Obligations” for information on our research and development, patents and licences

  

D.Trend Information

 

Our results of operations and financial condition may be affected by various trends and factors discussed in Item 3D “Risk Factors”, including pricing regulations, third-party coverage and reimbursement policies, healthcare reform initiatives and the eventual degree of market acceptance of our product candidates in the healthcare field.

  

E.Off-balance Sheet Arrangements

 

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

  

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F.Tabular disclosure of Contractual Obligations

 

The following table summarizes our contractual obligations at December 31, 2018.

 

   Less than
1 year
   1 to 3
years
   3 to 5
years
   More than 5 years   Total 
   (in thousands) 
Operating lease obligations   153    -    -    -    153 
Others   75    75    -    -    150 
   228    75    -    -    303 

 

Other items not reflected in the above table include:

 

In October 2018, the Company terminated its head office lease at 4150 Sainte-Catherine Street West, Suite 550, in Montreal, Quebec, Canada originally expiring in June 2020, effective January 31, 2019. A lease termination fee of $0.1 million accrued for as rent expense as at December 31, 2018, was paid in January 2019. In December 2018, the Company entered into a new lease commitment for head office space at 1000 de la Gauchetière street, Suite 1200, Montreal, Quebec, Canada, effective January 2019 and expiring October 2023. Lease commitments related to this new lease are not included in the above table and represent approximately a $0.4 million commitment per year starting February 2019.

 

The Company’s current lease at 275 Grove Street, Suite 2-400 in Newton, Massachusetts, USA expires in April 2019. In March 2019, the Company extended its current lease to expire in July 2019, with monthly payments of approximately $0.05 million due from May 1, 2019 to July 31, 2019 (not reflected in the above table). In February 2019, the Company entered into a new lease commitment for office space at 275 Grove Street, Suite 2-130 in Newton, Massachusetts, USA, expiring in May 2024. Lease commitments related to this new lease are not included in the above table and represent approximately a $0.5 million commitment per year over a period of 5 years starting May 2019.

 

We expect to fund our existing commitments with current working capital.

 

We also have obligations to make future payments to third parties that become due and payable on the achievement of certain development, regulatory and commercial milestones. We have not included these commitments on our statement of financial position or in the table above because the achievement and timing of these milestones is not fixed or determinable. These commitments include:

 

In accordance with an exclusive licensing agreement with Hoffman-La Roche, we are committed to pay Roche (i) a total of $1 million in milestone payments upon the achievement of certain clinical milestones, (ii) up to a total of $11 million in milestone payments upon the achievement of certain regulatory milestones in connection with the three clinical trial programs currently underway with an additional $1 million in milestone payments upon the achievement of certain regulatory milestones in connection with each subsequent indication, if any, and (iii) up to a total of $37.5 million in milestone payments upon the achievement of certain sales milestones. We achieved the clinical milestone in December 2017 and paid Roche the $1 million milestone in January 2018. With the Company planning to file a new drug application with the FDA for palovarotene in FOP in the second half of 2019, the Company expects to incur a $2 million regulatory milestone. Future royalty payments in the low teens based on net sales are also stipulated in the licensing agreement. The likelihood and timing of these payments is not known at this time.

 

In accordance with an exclusive licensing agreement with Thomas Jefferson University, we are committed to make a total of $100,000 in milestone payments upon the achievement of certain clinical milestones and a total of $250,000 in milestone payments upon the achievement of certain regulatory milestones, in each case in connection with the first licensed product or licensed process that meets the relevant milestones. We achieved the clinical milestone and paid TJU the $0.1 million milestone in December 2017. Future low single digit royalty payments based on net sales are also stipulated in the licensing agreement. Annual license maintenance royalty payments are also required as per the terms of the licensing agreement. Such maintenance royalty payments are non-refundable, but can be applied to royalties owing on sales per calendar year. The likelihood and timing of these payments is not known at this time.

 

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In accordance with an exclusive licensing agreement with Yamaguchi University, we are committed to make a total of $75,000 in milestone payments upon the achievement of certain clinical milestones and a total of $150,000 in milestone payments upon the achievement of certain regulatory milestones, in each case in connection with the first licensed product that meets the relevant milestones. Future low single digit royalty payments based on net sales are also stipulated in the licensing agreement. We also have a royalty buy-out option pursuant to which we can terminate our obligation to pay royalties to Yamaguchi University under the license agreement at any time and at our sole discretion upon payment of a certain amount to Yamaguchi University. The likelihood and timing of these payments is not known at this time.

 

In March 2017, we entered into an exclusive licensing agreement with Galderma to obtain access to RARγ agonists and were granted exclusive rights to use these RARγ agonists in non-dermatological indications. In accordance with this agreement with Galderma, we are committed to pay Galderma a total of $2,000,000 in milestone payments upon the achievement of certain clinical milestones and up to a total of $25,500,000 in milestone payments upon the achievement of certain regulatory milestones, in each case in connection with the first product that meets the relevant milestones. Future single digit royalty payments based on net sales are also stipulated in the licensing agreement. The likelihood and timing of these payments is unknown at this time.

 

We enter into contracts in the normal course of business with CROs for pre-clinical research and clinical studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable contracts and not included in the table of contractual obligations and commitments.

 

G.Safe Harbor

 

Please see “Forward Looking Statements” beginning on page 1 above.

  

Item 6.Directors, Senior Management and Employees

  

A.Directors and Senior Management

 

Executive Officers

 

The following table sets forth the name, age (as of March 28, 2019) and position of individuals who currently serve as the executive officers of Clementia Pharmaceuticals Inc. The following also includes certain information regarding our officers’ individual experience, qualifications, attributes and skills.

  

Name  Age   Positions
Clarissa Desjardins   52   President, Chief Executive Officer, Director
Steve Forte   40   Chief Financial Officer, Corporate Secretary
Donna Roy Grogan   62   Chief Medical Officer
Jeffrey Packman   52   Chief Development Officer

 

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Dr. Clarissa Desjardins co-founded Clementia in 2010 and has served as our President since inception and as Chief Executive Officer since June 2012. Prior to founding Clementia, Dr. Desjardins served as Chief Executive Officer at the Centre d’excellence en médecine personnalisée, a Montreal-based federally and privately funded non-profit enterprise created to promote personalized medicine, from 2009 until 2012. Dr. Desjardins is an award-winning entrepreneur with more than 18 years of biotechnology experience. She has founded three successful biotech companies, leading all aspects of company creation including conception and financing. Dr. Desjardins founded Advanced Bioconcept, a research reagent and diagnostics company which was sold to NEN Life Sciences (Perkin Elmer) in 1998. Dr. Desjardins also cofounded Caprion Pharmaceuticals Inc. in 1998, a biotechnology company focused on proteomic biomarker discovery and drug development, where she was executive vice-president of corporate development from 1998 until 2007. Dr. Desjardins is the recipient of the 2018 Bloom Burton Award for her contribution to Canada’s innovative healthcare industry and the BRIO award for outstanding contributions to the biotechnology industry from the Quebec Biotechnology Association. Dr. Desjardins currently sits on the board of BELLUS Health and has been a board member of numerous companies, including the scientific advisory council of the Canadian Academy of Sciences. Dr. Desjardins earned a doctorate in neurology and neurosurgery from McGill University’s Faculty of Medicine and was a Medical Research Council postdoctoral fellow at the Douglas Hospital Research Centre. We believe Dr. Desjardins provides significant leadership and operational experience to our board of directors as our Chief Executive Officer.

 

Steve Forte has served as our Chief Financial Officer since August 2018, when he joined Clementia. He is a senior finance leader with broad experience managing complex, large-scale finance environments. Mr. Forte’s experience includes nearly a decade at Aptalis Pharma Inc., where he was responsible for the overall corporate controllership function of a multinational pharmaceutical company with approximately $700 million in annual revenue, six operating companies, five manufacturing sites and 40 subsidiaries. Mr. Forte was responsible for SEC reporting and led the preparation of an SEC S-1 registration statement for a U.S. IPO on NASDAQ prior to the successful sale of the company to Forest Labs. Mr. Forte also led the financial due diligence efforts leading to several acquisitions, including that of a key competitor worth $650 million that transformed the company. Most recently, Mr. Forte was Chief Financial Officer of Thinking Capital Financial Corporation, a leading Canadian financial technology firm, where he helped lead the firm through rapid growth and ultimately to a successful sale of the company to Purpose Investments. Mr. Forte received his Bachelor of Commerce in Accountancy from Concordia University and is a Certified Professional Accountant in the Province of Quebec and a Certified Information Systems Auditor with ISACA.

 

Dr. Donna Roy Grogan has served as our Chief Medical Officer since September 2013, when she joined Clementia. As Chief Medical Officer, Dr. Grogan is responsible for implementing the Company’s clinical strategy and the design of Clementia’s clinical trials for its lead product candidate. Since June 2014 Dr. Grogan has also served as a President of Clementia Pharmaceuticals USA Inc. Dr. Grogan is a board certified Internal Medicine physician with over 15 years of experience in clinical medicine and the pharmaceutical industry. She has been responsible for numerous INDs, the design and execution of clinical development programs and new drug applications across multiple therapeutic areas, including respiratory, cardiovascular and orphan diseases. Dr. Grogan has been involved with multiple high-profile product approvals including Lunesta®, Xopenex HFA®, BrovanaTM and most recently the EMA authorization of Vyndaqel® (tafamidis) for the treatment of rare neurologic disease transthyretin familial amyloid polyneuropathy. Dr. Grogan was a key presenter at the FDA’s Division of Neurology Advisory Committee Meeting on tafamidis. Dr. Grogan has extensive experience with international regulatory authorities, including the FDA, EMA and the PMDA. Prior to joining Clementia, from March 2012 to August 2013, Dr. Grogan was Chief Medical Officer at Health Care Ventures Focused Companies. From August 2011 to March 2012, Dr. Grogan was an independent consultant, and from February 2007 to August 2011, she was Chief Medical Officer at FoldRx Pharmaceuticals. Dr. Grogan received her BA in Psychology from College of the Holy Cross in Massachusetts, and her MD from the University of Illinois College of Medicine.

 

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Jeffrey Packman has served as our Chief Development Officer since November 2013, when he joined Clementia. Mr. Packman has more than two decades of international experience in regulatory affairs, manufacturing, clinical operations management and orphan drug development. Mr. Packman has led drug development efforts at several biotechnology companies. From January 2012 to October 2013, Mr. Packman served as Chief Development Officer of Apofore Corporation, a start-up company focused on the development of novel diabetes therapeutics. Prior to Apofore, Mr. Packman was vice president of drug development operations at FoldRX Pharmaceuticals, which was acquired by Pfizer in October 2010. From October 2010 to June 2011, he was development team leader for Vyndaqel® (tafamidis), now approved for the treatment of the rare disease transthyretin familial amyloid polyneuropathy. Mr. Packman also headed development operations at Oscient Pharmaceuticals and worldwide business operations for the regulatory affairs division of PAREXEL International Corporation. Since 1996, Mr. Packman has been a director of Recycline, Inc. Mr. Packman earned his BA in biology from Colby College and an MBA with highest honors from the F. W. Olin Graduate School of Business Administration at Babson College in Massachusetts.

 

Directors

 

The following table sets forth the name, age (as of March 28, 2019) and position of individuals who currently serve as the directors of Clementia Pharmaceuticals Inc. The following also includes certain information regarding our directors’ individual experience, qualifications, attributes and skills, and brief statements of those aspects of our directors’ backgrounds that led us to conclude that they should serve as directors.

 

Name  Age   Positions
David P. Bonita(1)(3)   43   Chairman of the Board of Directors
Robert Heft(2)   64   Director
Allan Mandelzys(1)(2)   54   Director
François Nader(3)   62   Director
Pierre Legault(1)(3)(4)   58   Director
Shawn Tomasello(2)(5)   60   Director
Clarissa Desjardins   52   President, Chief Executive Officer, Director
(1)Member of the Audit Committee. Mr. Pierre Legault is Chair of this Committee.
(2)Member of the Compensation Committee. Dr. Allan Mandelzys is Chair of this Committee.
(3)Member of the Corporate Governance and Nominating Committee. Dr. François Nader is Chair of this Committee.
(4)Mr. Pierre Legault was appointed to the Company’s board of directors on January 30, 2018.
(5)Ms. Tomasello was appointed to the Company’s board of directors on July 5, 2018.

 

Dr. David P. Bonita has served as Chairman of our Board since June 2013 and served as a director since April 2013. Since June 2013, Dr. Bonita has held the position of Private Equity Partner at OrbiMed, an affiliate of one of our principal shareholders. From June 2004 to June 2013, Dr. Bonita held other positions at OrbiMed. Within the past five years, Dr. Bonita held directorships with the following companies: Acutus Medical, Ambit Biosciences Corporation, CardiAQ Valve Technologies, Cryterion Medical Inc., Enobia Pharma Inc., Keystone Heart Ltd., Kyn Therapeutics Inc., Loxo Oncology Inc., Prelude Therapeutics Inc., Si-Bone Inc., Tricida Inc. and ViewRay Inc. Dr. Bonita has also worked as a corporate finance analyst in the healthcare investment banking groups of Morgan Stanley and UBS. He has published scientific articles in peer-reviewed journals based on signal transduction research performed at the Harvard Medical School. Dr. Bonita received his BA in Biological Sciences from Harvard University and his joint MD/MA from Columbia University. We believe Dr. Bonita provides significant scientific and industry knowledge to our board of directors, as well as valuable experience gained from prior board service.

 

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Dr. Robert Heft has served as a director since June 2013. Dr. Heft is Chief Executive Officer and a director of Zingenix Ltd. He also holds directorships with the following companies: Ra Pharma, VisionGate Inc., Parvus Therapeutics Inc. and Lumos Pharma Inc. Dr. Heft is a member of the advisory board of Sectoral Asset Management Inc. Prior to Clementia, Dr. Heft served as Chief Executive Officer, and a member of the board of directors of Enobia Pharma Inc. from 2005 until February 2012, when Enobia was sold to Alexion Pharmaceuticals. From 2001 until 2004, Dr. Heft held several senior positions with Biomarin Pharmaceuticals. Prior to that, Dr. Heft founded IBEX Pharmaceuticals in 1986, where he served as its President, Chief Scientist, and director until 2001. Dr. Heft received his PhD in Genetic Engineering/Radiological Sciences from the Massachusetts Institute of Technology and was a Neurology Fellow at the Massachusetts General Hospital. He has also received a Masters degree in Nuclear Engineering from Cornell University and a Bachelor of Mechanical Engineering from McGill University. We believe Dr. Heft provides significant executive and business skills, and scientific and industry knowledge to our board of directors, as well as valuable experience gained from prior and current board service.

 

Dr. Allan Mandelzys has served as a director since June 2013. He also serves as a director of Matrizyme Pharma Corp. and is President and a director of 8569975 Canada Inc. and 9639439 Canada Inc., companies involved in corporate and business development consulting for the pharmaceutical and biotechnology industries. From August 2014 to September 2015, Dr. Mandelzys served as a director of Bedrocan Cannabis Corporation and acted as chairman of the Special Committee of the Board leading to its acquisition by Tweed Marijuana Inc. Dr. Mandelzys was the Chief Executive Officer and a director of Thallion Pharmaceuticals Inc. from January 2010 to July 2013, when Thallion was sold to Bellus Health Inc. Prior to that, Dr. Mandelzys served as Executive Vice President of Licensing & Corporate Development at Thallion and from 2000-2006, Vice President of Business Development at Labopharm Inc., where he helped to transform the drug delivery company into a product development company with commercial sales via multiple distribution partners. He earned his PhD in physiology and MBA from McGill University. Dr. Mandelzys also holds a BSc from the University of Toronto and received his post-doctoral training at the Roche Institute of Molecular Biology. We believe Dr. Mandelzys provides significant executive and business skills, and scientific and industry knowledge to our board of directors, as well as valuable experience gained from prior and current board service.

 

Dr. François Nader has served as a director since February 2014. Since February 2015, Dr. Nader has been the Chief Executive Officer of Jesra Advisors LLC. Prior to that Dr. Nader was President, Chief Executive Officer and a member of the board of directors of NPS Pharmaceuticals from 2008 until 2015, when NPS was acquired by Shire. He joined NPS in 2006 as Chief Medical and Commercial Officer, and was promoted to Chief Operating Officer in 2007. Before NPS, from 2004 to 2006, he was a CMO and venture partner at Care Capital. Prior to that, he served on the North America Leadership Team of Aventis and its predecessor companies holding a number of executive positions. Dr. Nader was recognized as the Ernst and Young National Life Science Entrepreneur of the Year in 2013. Dr. Nader is the Chairman of the Board of BioNJ, a trade association representing the biotechnology industry in New Jersey. Dr. Nader currently serves as chairman of the board of directors of Acceleron Pharma Inc. and as a director of Alexion Pharmaceuticals Inc. From 2015 to 2016, he served as a director at Baxalta Inc. and from 2014 to 2015, as director of Trevena. Dr. Nader is a board member of the Biotechnology Industry Organization and the New Jersey Chamber of Commerce. Dr. Nader earned his French Doctorate in Medicine from St. Joseph University in Lebanon and his Physician Executive MBA from the University of Tennessee. We believe Dr. Nader provides significant executive and business skills, and scientific and industry knowledge to our board of directors, as well as valuable experience gained from prior and current board service.

 

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Pierre Legault has served as a director since his appointment on January 30, 2018. He is currently the chairman of Poxel and Aritios and serves on the board of directors for Syndax Pharmaceuticals and UROVANT. Previously Mr. Legault served on the board of Armo Biosciences, Tobira Therapeutics, NPS Pharmaceuticals, Forest Laboratories, Regado Biosciences, Iroko Pharmaceuticals, Cyclacel Pharmaceuticals, Eckerd Pharmacy and Nephrogenex where he was chairman and CEO. Prior to that, Mr. Legault served as the CEO of Prosidion Ltd, CFO and treasurer of OSI Pharmaceuticals, president of Eckerd Pharmacies and senior executive vice president and chief administration officer of the Rite Aid Corporation. He was also president, CEO and CFO at legacy companies of the Sanofi group. Mr. Legault holds an MBA in marketing from McGill University and a bachelor’s degree from HEC (University of Montreal) and also studied at Harvard Business School. We believe Mr. Legault provides significant executive and business skills and industry knowledge to our board of directors, as well as valuable experience gained from prior and current board service.

 

Shawn Tomasello has served as a director since her appointment on July 5, 2018. She currently serves on the board of directors of Diplomat Pharmacy, Centrexion Therapeutics and Oxford BioTherapeutics. Previously, she served as chief commercial officer of Kite Pharma and was instrumental in building Kite, leading to its acquisition for $11.9 billion by Gilead Pharmaceuticals in 2017. Prior to joining Kite Pharma, Ms. Tomasello served as the chief commercial officer of commercial and medical affairs at Pharmacyclics, and was previously the president of the Americas, hematology and oncology for Celgene Corporation where she led the company through five successful product launches encompassing eleven indications. Previously, Ms. Tomasello served in leading commercial roles with Genentech and other major pharmaceutical companies. Ms. Tomasello received her bachelor of science in marketing from the University of Cincinnati and her MBA from Murray State University in Kentucky.

 

B.Compensation

 

Determining Compensation

 

Radford, part of Aon Hewitt (a business unit of Aon plc), was retained by the compensation committee to conduct a competitive review and assessment of Clementia’s director and executive compensation program and recommend go-forward strategies. The compensation committee was involved in and approved the adoption of the following procedures during Radford’s assessment:

 

(1)Establishing the public company peer group used in the director and executive compensation assessment;
(2)Reviewing the detailed assessment of Clementia’s director compensation program versus the market, approving and implementing certain recommendations;
(3)Reviewing the detailed assessment of Clementia’s executive compensation program versus the market, approving and implementing certain recommendations;
(4)Reviewing Clementia’s equity incentive program, approving and implementing certain recommendations; and
(5)Reviewing equity ownership levels, and approving and implementing certain recommendations.

 

The compensation committee has and will continue to utilize these strategies when contemplating director and executive compensation matters.

 

 

 

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Executive Compensation

 

For the years ended December 31, 2018, 2017 and 2016, our named executive officers (NEOs) received compensation for services, as follows:

 

Name and Principal Position   Salary earned(1) Non-equity incentive plan compensation(1)(2) Other compensation(1)(3) Total
Clarissa Desjardins, President, Chief Executive Officer, President(4)
    2018 $500,000 $250,000 $3,430,920 $4,180,920
    2017 $377,447 $184,909 $398,668 $961,024
    2016 $265,335 $69,732 - $335,067
Steve Forte, Chief Financial Officer, Corporate Secretary(5)
    2018 $130,128 $44,973 $1,608,593 $1,783,694
    2017 - - - -
    2016 - - - -
Michael Singer, Chief Financial Officer, Corporate Secretary(6)
    2018 $202,011 - - $202,011
    2017 $235,413 $65,957 $462,454 $763,824
    2016 $191,989 $40,845 - $232,834
Donna Roy Grogan, Chief Medical Officer(7)
    2018 $368,425 $128,949 $859,758 $1,357,132
    2017 $361,201 $102,942 - $464,143
    2016 $356,566 $72,739 - $429,305
Jeffrey Packman, Chief Development Officer(8)
    2018 $308,600 $108,010 $694,400 $1,111,010
    2017 $275,760 $78,592 - $354,352
    2016 $262,181 $63,513 - $325,694
Eric Grinstead, Chief Commercial Officer(9)
    2018 $339,204 $71,800 $270,900 $681,904
    2017 $354,118 $95,612 - $449,730
    2016 $349,574 $80,227 - $429,801

 

(1)Compensation amounts paid in Canadian dollars have been converted to U.S. dollars for purposes of the table. For 2018, the U.S. dollar per Canadian dollar exchange rate used for such conversion was $0.7719 for salaries earned ($0.7703 in 2017 and $0.7581 in 2016), which was the Company’s average exchange rate for the year ended December 31, 2018 (December 31, 2017 and 2016), along with $0.7332 for non-equity inventive plan compensation ($0.7955 in 2017 and $0.7441 in 2016), which was the Company’s closing exchange rate at December 31, 2018 (December 31, 2017 and 2016), all based on Bloomberg Markets CADUSD:CUR spot exchange rates.
(2)Non-equity incentive plan compensation reflects annual bonuses earned with respect to fiscal 2018, 2017 and 2016, based on the achievement of corporate goals and objectives, as well as personal performance assessments.
(3)Other compensation reflects stock option awards in the year ended December 31, 2018 and 2017. No options were granted in the year ended December 31, 2016. In determining the fair value of these option-based awards, the Black-Scholes valuation methodology was used with the following weighted average assumptions, consistent with those reported in the Company’s audited consolidated financial statements: (i) expected life of 4.45 years (6 years in 2017), ii) volatility of 74.64% (75.01% in 2017), (iii) risk-free interest rate of 2.65% (1.96% in 2017), and (iv) dividend yield of nil. For 2018, stock option awards to Michael Singer and Eric Grinstead have not been included in the above table as these were forfeited upon their departure in 2018.

Also included in other compensation is a nine-month severance owing to Eric Grinstead, in the amount of $270,900, which has been accrued for at December 31, 2018 and will be paid out via salary continuance throughout 2019.

Furthermore, compensation amounts do not include taxable benefits for group health, dental, life insurance and disability insurance premiums paid by the Company on behalf of the named executive officers as these benefits are offered to all employees of the Company.

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(4)On January 1, 2019, Clarissa Desjardins’ annual base salary was increased to $514,000 and her non-equity inventive compensation was increased from 50% to 55% of base salary.

(5)Steve Forte joined the Company as Chief Financial Officer effective August 3, 2018 with an annual base salary of $350,000 and non-equity incentive plan compensation of 35% of base salary. On January 1, 2019, his annual base salary was increased to $405,300 and his non-equity incentive compensation was increased from 35% to 40%.
(6)Michael Singer resigned from his role as Chief Financial Officer effective August 9, 2018.
(7)On January 1, 2019, Donna Roy Grogan’s annual base salary was increased to $378,740.
(8)On January 1, 2019, Jeffrey Packman’s annual base salary was increased to $317,240.
(9)Eric Grinstead left his role as Chief Commercial Officer effective November 30, 2018.

 

Employment Agreements

 

In February 2019, the board of directors approved certain amendments to the existing employment agreements of our NEOs, which include the following terms. Copies of the employment agreements with our NEOs have been filed as Exhibits to this Annual Report on Form 20-F and are incorporated by reference herein.

 

Term of Employment

 

All of our NEOs are employed for an indefinite term, subject to termination in accordance with the terms of the Employment Agreements.

 

Base Salaries and Bonus Opportunities

 

The Employment Agreements establish a base salary for each of our NEOs, subject to annual review and possible increase by our board of directors. A decrease in the base salary of our NEOs by the board of directors is only allowed if implemented throughout the Company and is proportional to the decrease in base salaries of all the employees of the Company.

 

The annual base salaries for Ms. Desjardins, Ms. Grogan, and Mr. Packman were established at $500,000, $368,425 and $308,600, respectively on January 1, 2018. The annual base salary for Mr. Forte was established at $350,000 upon hire in August 2018. The annual base salaries for Mr. Singer and Mr. Grinstead were established at $320,000 and $361,200, respectively for 2018, but Mr. Singer and Mr. Grinstead left the Company in August and November 2018, respectively. Annual base salaries for Ms. Desjardins, Mr. Forte, Ms. Grogan, and Mr. Packman were increased to $514,000, $405,300, $378,740 and $317,240, respectively on January 1, 2019.

 

Our NEOs are also eligible for an annual bonus based on achievement of performance goals established for the employees and the Company at the beginning of each year and/or in accordance with the terms of the applicable bonus plan in effect from time to time. The maximum annual bonus that may be earned, expressed as a percentage of the NEO’s annual base salary, were 50% for Ms. Desjardins and 35% for each of Mr. Forte, Ms. Grogan, Mr. Grinstead, Mr. Singer and Mr. Packman. As of January 1, 2019, the maximum was increased to 55% for Ms. Desjardins and to 40% for Mr. Forte, with no change for others.

 

The Employment Agreements also provide that our NEOs are eligible to participate in any benefit plans made generally available to the Company’s similarly-situated employees.

 

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Severance

 

Each of the Employment Agreements provide that if the applicable NEO is terminated by the Company for cause or if his or her employment is terminated at such NEO’s initiative, the NEO will be entitled to the following standard payments: (i) base salary earned by her or him up to the date of termination; (ii) unused vacation pay calculated as of the date of termination and (iii) reimbursement of expenses up to and including the date of termination.

 

Each of the Employment Agreements also provide that if the applicable NEO is terminated by the Company other than for cause, in addition to the standard payments, the NEO will also be entitled to the following additional severance payments, subject to the execution of a general release and waiver: (i) base salary and (ii) health continuation coverage reimbursements, in each case during the severance period, which is equal to 15 months from the date of termination for Ms. Desjardins and 12 months from the date of termination for each of Mr. Forte, Ms. Grogan and Mr. Packman. In November 2018, Mr. Grinstead left the company and a nine-month severance has been accrued as at December 31, 2018, which will be paid out throughout 2019. No severance was paid to Mr. Singer upon his resignation in July 2018.

 

In the event any NEO is terminated by the Company for any reason other than a “good reason” (generally meaning (i) the assignment of responsibilities inconsistent with current position, subject to certain exceptions, (ii) a reduction in base salary or bonus other than as a result of a consistently applied board reduction across the entire employee population or (iii) requiring the NEO to be based at any office or location outside 50 km of the current location or other location previously agreed to) or for cause within 12 months after a change of control, in addition to the standard payments, the Employment Agreements provide that the NEO will also be entitled to the following change of control benefits, subject to the execution of a general release and waiver: (i) 1.75 times the target bonus for the year in which date of termination occurs, (ii) base salary and benefit continuation, in each case during the severance period, which is equal to 21 months from the date of termination and (iii) vesting of all outstanding equity grants including any outstanding stock options as of the date of termination for Ms. Desjardins and (i) 1.5 times the target bonus for the year in which date of termination occurs, (ii) base salary and benefit continuation, in each case during the severance period, which is equal to 18 months from the date of termination and (iii) vesting of all outstanding equity grants including any outstanding stock options as of the date of termination for each of Mr. Forte, Ms. Grogan and Mr. Packman.

 

Restrictive Covenants

 

Each of the Employment Agreements contain standard confidentiality, non-solicitation and non-competition restrictions.

 

The confidentiality obligations of Ms. Desjardins, Mr. Forte, Ms. Grogan and Mr. Packman are effective during the term of their employment and for 36 months following the date of termination (subject to limited exceptions pursuant to which their confidentiality obligations continue indefinitely). Confidentiality obligations of Mr. Eric Grinstead continue indefinitely after termination of his employment and continue for a period of 36 months after termination of employment for Mr. Singer.

 

Non-solicitation and non-competition restrictions pursuant to the Employment Agreements are effective during the term of each of our NEOs’ employment and remain in place during the severance period applicable to the respective NEO.

 

Potential Payments upon Termination or Change in Control

 

The table below reflects amounts payable by the Company to the NEOs as per the terms of their new employment agreements and assuming that their employment was terminated as of January 1, 2019, either without cause or upon change of control of the Company.

 

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Name  Severance   Continuation of
benefits(3)
   Bonus   Total without
cause
 
Clarissa Desjardins  $642,500   $8,579   $-   $651,079 
Steve Forte  $405,300   $6,065   $-   $411,365 
Donna Grogan  $378,740   $23,249   $-   $401,990 
Jeffrey Packman  $317,240   $32,957   $-   $350,198 

 

Name  Severance   Continuation of
benefits(3)
   Bonus(1)   Accelerated
vesting of
options(2)
   Total
upon
change in
control
 
Clarissa Desjardins  $899,500   $12,010   $494,725   $951,256   $2,119,522 
Steve Forte  $607,950   $9,098   $243,180   $-   $667,139 
Donna Grogan  $568,110   $34,874   $198,839   $882,513   $1,614,446 
Jeffrey Packman  $475,860   $49,436   $166,552   $661,876   $1,295,182 

 

(1)In the event of a Change in Control, NEOs will also receive the 1.75 times the target bonus for the year in which date of termination occurs for Ms. Desjardins and 1.5 times for other NEOs.
(2)In the event of a Change in Control, all of the NEO outstanding unvested equity awards will immediately vest in full on the date of such termination. Amounts included in the table above reflect the in-the-money value each NEO’s unvested options at January 1, 2019, based upon the difference between closing price per share of our stock on December 31, 2018, being $11.76, and the exercise price of the options. The actual value of the awards realized by each NEO, if any, will depend on the price of our common shares at the time of exercise.
(3)For purposes of calculating values in this column, amounts in Canadian dollars have been converted to U.S. dollars at an estimated exchange rate of $0.80.

 

Director Compensation

 

Prior to the effective date of our IPO, independent directors were compensated with quarterly cash retainers of C$5,000 per quarter or C$20,000 per annum. Directors appointed by investors to the Company’s board of directors received no compensation.

 

On March 31, 2017, our board of directors approved a director compensation program to be effective on the effective date of our IPO. Under this director compensation program, non-employee directors are paid a cash retainer for service on the board of directors and for service on each committee on which the director is a member, except for Jean-François Pariseau. The chairman of the board and of each committee receives higher retainers for such service. These fees are payable in arrears in four equal quarterly installments on the last day of each quarter, provided that the amount of such payment will be prorated for any portion of such quarter that the director is not serving on our board of directors and no fee shall be payable in respect of any period prior to the effective date of our IPO. The fees paid to non-employee directors for service on the board of directors and for service on each committee of the board of directors on which the director is a member are as follows:

 

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   Member Annual Fee   Chairman Annual Fee 
Board of Directors  $35,000   $60,000 
Audit Committee  $7,500   $15,000 
Compensation Committee   $5, 000   $10,000 
Nominating and Corporate Governance Committee  $3,750   $7,500 

 

The annual retainer fee, including fees for chairing the Board and committees, is paid in cash unless a director instead elects to receive the fair value equivalent in deferred share units (DSU). All directors received DSUs for the 2018 fiscal year and all directors except for Dr. Francois Nader, have elected to receive DSUs for the 2019 fiscal year.

 

We also continue to reimburse our non-employee directors for reasonable travel and other expenses incurred in connection with attending our board of directors and committee meetings.

 

We do not pay any compensation to our Chief Executive Officer in connection with her service on our board of directors. The compensation that we pay to our Chief Executive Officer is discussed previously in the “Executive Compensation” section.

 

For the year ended December 31, 2018, our directors received compensation for services, as follows:

 

Name and Principal Position  Director fees
earned(1)
   Other
compensation(1)(2)
   Total 
David P. Bonita, Chairman of the Board  $73,726   $93,029   $166,755 
Jean-François Pariseau, Chairman of the Compensation Committee, Director(3)   -    -    - 
Davit Mott, Director(4)  $7,083    -   $7,083 
Robert Heft, Director  $39,974   $93,029   $133,003 
Allan Mandelzys, Chairman of the Compensation Committee, Director  $51,848   $93,029   $144,877 
François Nader, Chairman of the Corporate Governance and Nominating Committee  $42,474   $93,029   $135,503 
Pierre Legault, Chairman of the Audit Committee, Director(5)  $41,016   $282,466   $323,482 
Shawn Tomasello, Director(6)  $19,986   $262.762   $282,748 
Clarissa Desjardins, President, Chief Executive Officer, Director   -    -    - 
                
(1)Direct fees earned were paid via a combination of cash or DSUs as per directors’ election. For 2018, all directors received DSUs, except for David Mott who received cash compensation and Jean Francois Pariseau and Clarissa Desjardins who were not compensated.
(2)Other compensation reflects stock option awards in the year ended December 31, 2018. In determining the fair value of these option-based awards, the Black-Scholes valuation methodology was used with the following weighted average assumptions, consistent with those reported in the Company’s audited consolidated financial statements: (i) expected life of 3.8 years, ii) volatility of 77.16% (iii) risk-free interest rate of 2.86 and (iv) dividend yield of nil.
(3)Jean-Francois Pariseau resigned as a director of the Company on July 5, 2018.
(4)David Mott resigned as a director of the Company on February 27, 2018.
(5)Pierre Legault was appointed as a director of the Company on January 31, 2018.
(6)Shawn Tomasello was appointed as a director of the Company on July 5, 2018.

 

On April 30, 2017, the board of directors approved a new stock option grant to each non-employee director, except for Jean-Francois Pariseau. Pursuant to this grant, each non-employee director, except for Jean-Francois Pariseau, received under the 2013 Stock Option Plan, an option to purchase 23,980 common shares at an exercise price of $10.04 per share. Each of these options will vest as to one-third of the shares of our common shares underlying such option on each anniversary date of our IPO until the third anniversary of our IPO, subject to the non-employee director’s continued service as a director. Further, each non-employee director, except for Jean-Francois Pariseau, also received under the 2013 Stock Option Plan, an option to purchase 11,990 common shares at an exercise price of $10.04 per share. Each of these options will vest in full on the one-year anniversary of our IPO, subject to the non-employee director’s continued service as a director.

 

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In addition, under our director compensation program which became effective on August 2, 2017 (closing of our IPO), each non-employee director will receive under the 2017 Omnibus Plan, upon his or her initial election to our board of directors, an option to purchase 23,980 common shares. Each of these options will vest as to one-third of the shares of our common shares underlying such option on each anniversary of the grant date until the third anniversary of the grant date, subject to the non-employee director’s continued service as a director. In 2018, Pierre Legault and Shawn Tomasello each received their election awards upon their appointment as directors. Further, on the date of the first board meeting held after each annual meeting of stockholders, each non-employee director will receive, under the 2017 Omnibus Plan, an option to purchase 11,990 common shares. Each of these options will vest in full on the one-year anniversary of the grant date unless otherwise provided at the time of grant, subject to the non-employee director’s continued service as a director. In 2018, all directors, except David Mott and Jean-Francois Pariseau, who resigned in 2018, and Clarissa Desjardins, who is not compensated, received an annual award of 11,990 stock options. All options issued to our non-employee directors under our director compensation program will be issued at exercise prices equal to the fair market value of our common shares on the date of grant and will become exercisable in full upon a change in control of our Company.

 

2013 Stock Option Plan

 

Our 2013 Stock Option Plan provides for the granting of stock options to officers, directors, employees and consultants of ours and our affiliates. The purpose of the 2013 Stock Option Plan is to develop the interest and incentive of our eligible employees, directors, officers and consultants in our growth and development by giving eligible participants an opportunity to purchase common shares of our stock, providing incentives thereby advancing our interests, enhancing the value of the common shares for the benefit of all the shareholders and increasing our ability to attract, motivate and retain skilled and motivated individuals.

 

The following is a summary only and is qualified in its entirety by the terms and conditions of the 2013 Stock Option Plan, a copy of which is included as Exhibit 10.8 to our Registration Statement on Form F-1/A filed with the SEC on July 21, 2017 and hereby incorporated by reference.

 

Administration by the Board of Directors

 

The 2013 Stock Option Plan is administered by our board of directors, which has sole and complete authority and discretion, subject to the express provisions of the 2013 Stock Option Plan, to interpret the 2013 Stock Option Plan, to prescribe, amend and rescind rules and regulations relating to it and to make all other determinations deemed necessary or advisable for the administration of the 2013 Stock Option Plan. This includes the discretion of our board of directors to decide who will participate in the 2013 Stock Option Plan, including directors, officers, employees or consultants (each a Participant). Our board of directors also has authority to delegate its duties to a committee of the board.

 

Expiry

 

Options granted under the 2013 Stock Option Plan (Options), are non-transferable. Unless an earlier termination date is specified by the board and/or stock option agreement, each Option expires on the earlier of the following: (i) on the tenth anniversary of its date of grant and (ii) the time immediately following the closing of a merger or consolidation or other transaction in which greater than or equal to 50% of the voting power of shareholders of Clementia is transferred to a third party or a sale, lease, license, transfer or other disposition of all or substantially all of the assets or intellectual property rights of Clementia (except to an affiliate) (a liquidity event).

 

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Exercise Price

 

Subject to the rules of any stock exchange upon which the Common Shares may become listed, the exercise price of common shares under any option will be determined by the Board.

 

Insider Participation Limit

 

The aggregate number of common shares issuable (or reserved for issuance) to Participants under the 2013 Stock Option Plan is 3,786,886, subject to adjustment as described in the plan.

 

Amendment Provisions

 

Our board of directors has the discretion to amend, suspend, or terminate the 2013 Stock Option Plan, although such changes may not alter or impair the rights or obligations arising from any Option previously granted.

 

Termination, Resignation, Death, etc.

 

Options granted under the 2013 Stock Option Plan are evidenced by a stock option agreement entered between us and the Participant. All vested and unvested options granted under the plan terminate immediately if a Participant is dismissed with cause. If, at any time, a Participant ceases to be an employee as a result of the Participant’s death, disability, or termination for any reason other than for cause, the Options granted to the Participant and vested as of the Termination Date (as defined therein) remain exercisable for 90 days after the Termination Date, unless such vested Options expire sooner in accordance with their terms. All unvested Options granted to the Participant will expire. Where, in the case of a consultant, the Participant’s consulting agreement terminates by reason of the Participant’s death, disability, termination for any reason other than for breach of the consulting agreement, or voluntary termination by the Participant, then any Options granted to the Participant and vested as of the Termination Date, or as of the date of the death or disability of the participant, as the case may be, remain exercisable for 30 days following the Termination Date, or the date of the death or disability of the Participant, as the case may be, unless such vested Options expire earlier in accordance with their terms. All unvested Options granted to the Participant will expire. Where, in the case of a consultant, the Participant’s consulting agreement is terminated for breach or for cause, then all vested and unvested Options granted to the Participant will expire. If a Participant ceases to be a director or officer, the Options granted to the Participant and vested as of the Termination Date may be exercised by the Participant pursuant to the same terms and conditions described above, as if the director or officer were a consultant unless such director or officer continues as a consultant or full-time employee of the company.

 

Change of Control

 

The 2013 Stock Option Plan provides that in the event that the Company or its shareholders accept an offer in respect of a transaction that will result in a Liquidity Event, the board of directors, without the consent of any Participant, shall take such steps as are necessary or desirable to cause the conversion or exchange of any outstanding Options into or for, rights or other securities of substantially equivalent value (or greater value), as determined by the board of directors in its discretion, in any entity participating in or resulting from a Liquidity Event (an Alternative Award). If no Alternative Awards are available, the board of directors shall, without the consent of any Participant, provide that all unvested options vest immediately prior to the consummation of the transaction constituting the Liquidity Event. Unless otherwise determined by the board of directors at or after the time of grant, any Participant whose service is terminated by his or her employer for any reason other than for Cause within 12 months following the consummation of a Liquidity Event, then with respect to all Options granted to the Participant prior to the date of the consummation of the Liquidity Event which were still outstanding at the time of such termination of service, all such unvested Options shall vest and to the extent exercisable shall remain exercisable until the earlier of the one-year anniversary of such termination of service or until the Option’s normal expiration date.

 

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Maximum Limit

 

The aggregate number of Common Shares that may be issued pursuant to the exercise of Options shall not exceed 3,786,886 Common Shares, subject to adjustments related to a reorganization of our capital, amalgamation, combination, merger, or similar events.

 

2017 Omnibus Plan

 

Following the adoption of our 2017 Omnibus Plan by our board in June 2017, all equity-based awards are now granted under the 2017 Omnibus Plan described below.

 

In June 2017, our board of directors adopted and our shareholders approved the 2017 Omnibus Plan. As of this date, all equity-based awards are granted under the 2017 Omnibus Plan. The following summary describes the terms of the 2017 Omnibus Plan. This summary of the 2017 Omnibus Plan is not a complete description of all provisions of the 2017 Omnibus Plan and is qualified in its entirety by reference to the 2017 Omnibus Plan, a copy of which is included as Exhibit 10.9 to our Registration Statement on Form F-1/A filed with the SEC on July 21, 2017 and hereby incorporated by reference.

 

Administration

 

The 2017 Omnibus Plan is administered by our compensation committee. Our compensation committee has the authority to, among other things, determine eligibility for awards to be granted, determine, modify or waive the type or types of, form of settlement (whether in cash, our common shares or other property) of, and terms and conditions of awards, to accelerate the vesting or exercisability of awards, to adopt rules, guidelines and practices governing the operation of the 2017 Omnibus Plan as the compensation committee deems advisable, to interpret the terms and provisions of the 2017 Omnibus Plan and any award agreement, and to otherwise do all things necessary or appropriate to carry out the purposes of the 2017 Omnibus Plan. The compensation committee’s decisions with respect to the 2017 Omnibus Plan and any award under the 2017 Omnibus Plan is binding upon all persons.

 

Eligibility

 

Our key employees and non-employee directors on our board of directors who, in the opinion of the compensation committee, have the capacity to contribute to our and our affiliates’ success are eligible to participate in the 2017 Omnibus Plan.

 

Authorized Shares

 

Subject to adjustment, as described below, the maximum number of our common shares that will be available for issuance under the 2017 Omnibus Plan was 3,659,308 shares as at December 31, 2018. Common shares issued under the 2017 Omnibus Plan may be shares held in treasury or authorized but unissued shares of the Company not reserved for any other purpose. The number of shares reserved for issuance under the 2017 Omnibus Plan will automatically increase by an annual amount to be added the first day of each fiscal year, beginning January 1, 2018 and continuing until, and including, the fiscal year ending December 31, 2027, equal to the lower of 4% of the number of shares of our common shares outstanding as of December 31 of the prior calendar year and an amount determined by our board of directors. The amount added on January 1, 2019 was established at 4% of the common shares outstanding at December 31, 2018, or 1,514,563, thus bringing the maximum number of common shares available for issuance under the 2017 Omnibus Plan to 5,173,871 as of January 1, 2019. The increase in the number of shares available for issuance under the stock option plan has not been registered as at the date of this Annual Report.

 

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Common shares subject to an award that for any reason expires without having been exercised, is cancelled, forfeited or terminated or otherwise is settled without the issuance of shares will again be available for grant under the 2017 Omnibus Plan. The grant of a tandem award of a stock option and a stock appreciation right (SAR) will reduce the number of our common shares available for awards under the 2017 Omnibus Plan by the number of shares subject to the related stock option (and not as to both awards). To the extent consistent with applicable legal requirements (including applicable stock exchange requirements), common shares issued under awards of an acquired company that are converted, replaced or adjusted in connection with the acquisition will not reduce the number of shares available for awards under the 2017 Omnibus Plan.

 

Types of Awards

 

The 2017 Omnibus Plan provides for awards of stock options, SARs, restricted stock, unrestricted stock, stock units (including RSUs), performance awards, deferred share units, elective deferred share units and other awards convertible into or otherwise based on our common shares. Eligibility for stock options intended to be ISOs will be limited to our employees. Dividend equivalents may also be provided in connection with an award under the 2017 Omnibus Plan.

 

Stock options and SARs. The exercise price of a stock option, and the base price against which a SAR is to be measured, may not be less than the fair market value (or, in the case of an ISO granted to a 10% shareholder, 110% of the fair market value) of our common shares on the date of grant. Our compensation committee will determine the time or times at which stock options or SARs become exercisable and the terms on which such awards remain exercisable. The maximum term of stock options and SARs is ten years, except that if a participant still holding an outstanding non-statutory stock option or SAR ten years from the date of grant (or in the case of such an award with a maximum term of less than ten years, such maximum term) is prohibited by applicable law or written policy of the Company applicable to similarly situated employees from engaging in any open-market sales of our common shares, and if at such time the stock is publicly traded, the maximum term of the award will instead by deemed to expire on the 30th day following the date the participant is no longer prohibited from engaging in such open market sales. A SAR that is granted in tandem with a stock option will become vested and exercisable on the same date or dates as the related stock option and may only be exercised upon the surrender of the right to exercise the related option for an equivalent number of our common shares.
Restricted and unrestricted stock. A restricted stock award is an award of our common shares subject to forfeiture restrictions, while an unrestricted stock award is not subject to such restrictions.
Restricted stock units. An RSU award is an award denominated in our common shares that entitles the participant to receive our common shares or cash measured by the value of our common shares in the future. The delivery of our common shares or cash under an RSU award may be subject to the satisfaction of performance conditions or other vesting conditions.
Performance awards. A performance award is an award the vesting, settlement or exercisability of which is subject to specified performance criteria.
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Deferred share units. A deferred share unit is an award of a notional investment in our common shares reflected on an unfunded, book-entry account maintained by the Company. Deferred share units may be subject to performance conditions or other vesting conditions. Each deferred share unit may be settled, at the compensation committee’s discretion, in a share of our common shares, cash measured by the value of a share of our common shares or a combination thereof.
Elective deferred share unit. An elective deferred share unit is an award of a notional investment in a share of our common shares reflected on an unfunded, book-entry account maintained by the Company, where the number of elective deferred share units awarded to a participant is determined by the amount of a participant’s elective deferral of his or her eligible compensation and/or bonus divided by the fair market value of a share of our common shares on the date of the payment of such amounts to be deferred, in accordance with and subject to the conditions of the 2017 Omnibus Plan. Elective deferred share units are at all times fully vested and may be settled, at the compensation committee’s discretion, in our common shares, cash measured by the value of our common shares or a combination thereof.
Other awards. Other awards are awards that are convertible into or otherwise based on our common shares.

 

Performance Awards

 

The 2017 Omnibus Plan provides for the grant of performance awards that will be made based upon, and subject to achieving, performance objectives. Performance objectives with respect to those awards that are intended to qualify as “performance-based compensation” for purposes of Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended (the Code), to the extent applicable, will be limited to an objectively determinable measure or measures of performance relating to any, or any combination, of the following (measured either in absolute terms or relative to the performance of one or more similarly situated companies or a published index covering the performance of a number of companies and determined either on a consolidated basis or, as the context permits, with respect to one or more business units, divisions, subsidiaries, products, projects or geographic locations, or on combinations thereof): stockholder return; sales; assets; expenses; earnings before or after deduction for all or any portion of interest, taxes, depreciation, amortization or equity expense, whether or not on a continuing operation or an aggregate or per share basis; return on equity, investment, capital, capital employed or assets; operating earnings; one or more operating ratios; operating income or profit, including on an after-tax basis; net earnings; net income; income; earnings per share; revenues; stock price; economic value added; cash flow; expenses; capital expenditures; working capital levels; borrowing levels, leverage ratios or credit rating; gross profit; market share; workplace safety goals; workforce satisfaction and diversity goals; employee retention; completion of key projects; implementation and achievement of synergy targets; joint ventures and strategic alliances, licenses or collaborations; sales of particular products or services; customer acquisition or retention; acquisitions and divestitures (in whole or in part); spin-offs, split-ups and the like; reorganizations; recapitalizations, restructurings, financings (issuance of debt or equity); or refinancings. When establishing performance objectives, the compensation committee may exclude any or all unusual items as determined by the board of directors, including, without limitation, the charges or costs associated with closures and restructurings of the Company or an affiliate, discontinued operations, extraordinary items, capital gains and losses, dividends, share repurchase, other unusual or non-recurring items, and the cumulative effects of accounting changes.

 

To the extent consistent with Section 162(m), if applicable, the compensation committee may provide that one or more performance objectives applicable to awards intended to qualify for the performance-based compensation exception under Section 162(m) will be adjusted in an objectively determinable manner to reflect events occurring during the performance period that affect the applicable performance objective.

 

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Individual Limits

 

The maximum aggregate number of our common shares subject to all awards under the 2017 Omnibus Plan (including stock options, SARs, restricted stock, unrestricted stock, RSUs, performance awards, deferred share units, elective deferred share units and any other award under the 2017 Omnibus Plan) that may be granted to any participant in the 2017 Omnibus Plan in any calendar year is 1,199,000 shares.

 

A participant who is a non-employee director on our board of directors, in any calendar year, may not receive initial awards with respect to the greater of an aggregate of 35,970 common shares, or $0.3 million and annual awards with respect to the greater of an aggregate of 23,980 common shares or $0.2 million in aggregate grant date fair value. In addition, the aggregate number of our common shares issuable under outstanding awards to non-employee directors, at any time, may not exceed 1% of our common shares that are issued and outstanding. These limitations, however, will not apply to any award or common shares granted pursuant to a non-employee director’s election to receive our common shares in lieu of cash fees.

 

Vesting; Termination of Employment or Service

 

Our compensation committee has the authority to determine the vesting schedule applicable to each award, and to accelerate the vesting or exercisability of any award. Our compensation committee will determine the effect of termination of employment or service on an award. Unless otherwise provided by our compensation committee, upon a termination of a participant’s employment or service under the following circumstances the following treatment will apply:

 

Death. All time-based awards will immediately vest and performance awards will vest at the target level of performance. Awards subject to exercise will remain exercisable until the earlier of the one-year anniversary of the participant’s death or the award’s normal expiration date.
Disability. All time-based awards will immediately vest and performance awards will remain eligible to vest to the extent the applicable performance goals are achieved. Awards subject to exercise will remain exercisable until the earlier of the one-year anniversary of the participant’s termination of employment or service due to disability or the award’s normal expiration date.
Retirement. All time-based awards will be deemed vested with respect to a portion of the award determined by multiplying the number of shares underlying the award by a fraction, the numerator of which is the number of days from the grant date to the date of retirement and the denominator of which is the number of days from the grant date to the final vesting date of the award. Performance awards will remain eligible to vest, to the extent the applicable performance goals are achieved, with respect to a portion of the award determined by multiplying the number of shares underlying the award by a fraction, the numerator of which is the number of days from the beginning of the applicable performance period through the date of retirement and the denominator of which is the number of days in the performance period. Awards subject to exercise will remain exercisable until the earlier of the one-year anniversary of the Participant’s “retirement” or the award’s normal expiration date. Unless otherwise defined in a participant’s employment or award agreement, under the 2017 Omnibus Plan, “retirement” means a termination of the participant’s employment or service at or after the time the participant reaches age 65.
Resignation by Participant. All unvested awards will be forfeited. Awards subject to exercise will remain exercisable until the earlier of the 90 day anniversary of the participant’s termination of employment or the award’s normal expiration date.
Termination by the Company for Cause. All stock options and SARs, whether vested or unvested, will be forfeited and all other awards, to the extent unvested, will be forfeited.
Termination by the Company other than for Cause. Awards other than RSUs, restricted stock awards and performance awards will be forfeited to the extent then unvested. Awards subject to exercise, to the extent vested, will remain exercisable until the earlier of the 90 day anniversary of the participant’s termination of service or the award’s normal expiration date. RSUs, restricted stock awards and performance awards will be deemed vested with respect to a portion of the award determined by multiplying the number of shares underlying the award by a fraction, the numerator of which is the number of days from the grant date to the six-month anniversary of the date of the participant’s termination of employment or service and the denominator of which is the number of days from the grant date to third anniversary of the grant date, with the vesting of such performance awards to be subject to performance assessed as of the date of such termination of employment or service.
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Termination by the Company other than for Cause within 12 months following a Change in Control. To the extent granted prior to the time of the change in control and then outstanding at the time of termination, all time-based awards will vest and performance awards will vest at the target level of performance. Awards subject to exercise will remain exercisable until the earlier of the one-year anniversary of the participant’s termination of employment or service due to disability or the award’s normal expiration date.

 

Non-Transferability of Awards

 

Awards under the 2017 Omnibus Plan may not be sold, assigned, transferred, pledged or otherwise encumbered other than by the laws of succession or descent and distribution or, in the case of awards other than ISOs, to a permitted assign (within the meaning of the National Instrument 45-106 Prospectus and Registration Exemptions of the Canadian Securities Administrators).

 

Recovery of Compensation

 

Our compensation committee may cancel, rescind, withhold or otherwise limit or restrict any award at any time under the 2017 Omnibus Plan if the participant is not in compliance with the provisions of the 2017 Omnibus Plan or any award thereunder or if the participant breaches any agreement with our Company with respect to non-competition, non-solicitation or confidentiality. Our compensation committee also may recover any award or payments or gain in respect of any award under the 2017 Omnibus Plan in accordance with any applicable Company recoupment policy or as otherwise required by applicable law or applicable stock exchange listing standards.

 

Change in Control

 

In the event of certain consolidations, mergers or similar transactions, certain sales or other disposition of our common shares, certain liquidations of the Company or sales or dispositions of all or substantially all of the Company’s assets, or members of our board of directors cease to constitute a majority of our board of directors or the board of directors of a successor entity, our compensation committee may provide for the conversion or exchange of outstanding awards for new awards, or, if no equivalent awards are available, for the accelerated vesting or delivery of shares under awards, or for a cash-out of outstanding awards.

 

Certain Adjustments

 

In the event of an extraordinary dividend, stock dividend, stock split or share combination (including a reverse stock split) or any recapitalization, business combination, merger, consolidation, spin-off, exchange of shares, liquidation or dissolution of the Company or other similar transaction affecting our common shares our board of directors will make adjustments as it determines in its sole discretion to the number and kind of shares available for issuance under the 2017 Omnibus Plan, the maximum number of shares that may be issued upon the exercise of ISOs, the annual per-participant share limits, the number, class, exercise price (base value), performance objectives applicable to outstanding awards and any other terms of outstanding awards affected by such transaction. Our compensation committee may also make adjustments of the type described in the preceding sentence to take into account distributions and events other than those listed above if it determines that adjustments are appropriate to avoid distortion in the operation of the 2017 Omnibus Plan.

 

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Term

 

The 2017 Omnibus Plan became effective on the date it was adopted by our board in June 2017 and will terminate on the tenth anniversary of such date, unless terminated earlier by our board of directors.

 

Amendment; Termination

 

Our compensation committee may amend the 2017 Omnibus Plan or outstanding awards, or terminate the 2017 Omnibus Plan as to future grants of awards, except that our compensation committee will not be able to alter the terms of an award if it would affect materially and adversely a participant’s rights under the award without the participant’s consent (unless expressly provided in the 2017 Omnibus Plan or the right to alter the terms of an award was expressly reserved by our compensation committee at the time the award was granted). Shareholder approval will be required for any amendment to the 2017 Omnibus Plan that increases the number of our common shares available for issuance under the 2017 Omnibus Plan or the individual award limitations specified in the 2017 Omnibus Plan (except with respect to certain adjustments described above), modifies the class of persons eligible for participation in the 2017 Omnibus Plan, allows options to be issued with an exercise price below fair market value on the date of grant, extends the term of any award granted under the 2017 Omnibus Plan beyond its original expiration date, permits an award to be exercisable beyond 10 years from its grant date (except where an expiration date would have fallen within a blackout period of the Company), permits awards to be transferred other than for normal estate settlement purposes, or deletes or reduces the range of amendments which require approval of the holders of voting shares of the Company, or to the extent required by law.

 

Option Grant Summary

 

The following table sets forth the outstanding option-based awards for each of our directors and officers as at December 31, 2018:

 

Name and Office Held  Number of securities underlying unexercised options   Option exercise price   Option expiration date  Value of unexercised in-the-money options(1) 
David P. Bonita, Chairman of the Board, Director(2) 
    35,970   $10.04   April 30, 2027  $61,868 
    11,990   $13.40   November 6, 2025   - 
Jean-François Pariseau, Chairman of the Compensation Committee, Director(2) 
    -    -   -   - 
David Mott, Director(2)                  
    -    -   -   - 
Robert Heft, Director(2)                  
    39,999   $0.29   June 17, 2023  $458,789 
    14,724   $0.29   August 27, 2024  $168,884 
    35,970   $10.04   April 30, 2027  $61,868 
    11,990   $13.40   November 6, 2025   - 
Allan Mandelzys, Chairman of the Compensation Committee, Director(2) 
    79,997   $0.29   June 17, 2023  $917,566 
    14,724   $0.29   August 27, 2024  $168,884 
    35,970   $10.04   April 30, 2027  $61,868 
    11,990   $13.40   November 6, 2025   - 

 

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François Nader, Chairman of the Corporate Governance and Nominating Committee, Director(2) 
    39,999   $0.29   February 20, 2024  $458,789 
    14,724   $0.29   August 27, 2024  $168,884 
    35,970   $10.04   April 30, 2027  $61,868 
    11,990   $13.40   November 6, 2025   - 
Pierre Legault, Chairman of the Audit Committee, Director(2) 
    23,890   $13.80   February 27, 2025   - 
    11,990   $13.40   November 6, 2025   - 
Shawn Tomasello, Director(2)                  
    23,890   $12.28   July 3, 2025   - 
    11,990   $13.40   November 6, 2025   - 
Clarissa Desjardins, President, Chief Executive Officer, President(3) 
    400,034   $0.29   June 17, 2023  $4,588,390 
    329,473   $0.29   August 27, 2024  $3,779,055 
    59,950   $10.04   April 30, 2027  $103,114 
    305,000   $13.80   February 27, 2025   - 
    100,000   $15.95   April 17, 2025   - 
Michael Singer, Chief Financial Officer, Corporate Secretary(4) 
    161,874   $0.69   March 31, 2019  $1,791,945 
    23,181   $10.04   March 31, 2019  $39,871 
Steve Forte, Chief Financial Officer, Corporate Secretary(5) 
    225,000   $11.86   July 12, 2025   - 
Donna Roy Grogan, Chief Medical Officer(6) 
    77,791   $0.29   September 23, 2023  $892,263 
    217,103   $0.29   August 27, 2024  $2,490,171 
    60,000   $13.80   February 27, 2025   - 
    40,000   $15.95   April 17, 2025   - 
Jeffrey Packman, Chief Development Officer(7) 
    22,913   $0.29   February 20, 2024  $262,812 
    145,966   $0.29   August 27, 2024  $1,674,230 
    40,000   $13.80   February 27, 2025   - 
    40,000   $15.95   April 17, 2025   - 
Eric Grinstead, Chief Commercial Officer(8) 
    133,353   $0.29   June 5, 2019  $1,529,559 
    151,616   $0.29   June 5, 2019  $1,739,035 

 

(1)Amounts included in the table above reflect the in-the-money value of unvested options at January 1, 2019, based upon the difference between closing price per share of our stock on December 31, 2018, being $11.76, and the exercise price of the options. An option is in-the-money if the market price of common shares is greater than the exercise price. The actual value of the awards realized by each of the directors and officers, if any, will depend on the price of our common shares at the time of exercise.
(2)On November 6, 2018, each non-employee director, except for David Mott and Jean Francois Pariseau who resigned in 2018, received an annual grant of 11,990 stock options at an exercise price of $13.40. Each of these options vest evenly over a twelve-month period, subject to the non-employee director’s continued service as a director. In addition, Pierre Legault and Shawn Tomasello each received a grant of 23,980 stock options upon their appointment as a director at exercise prices of $13.80 and $12.28, respectively. Each of these options will vest evenly over a period of three years, subject to the non-employee director’s continued service as a director.
(3)On February 27, 2018, Clarissa Desjardins received an equity-based award of 305,000 stock options at an exercise price of $13.80 under the 2017 Omnibus Plan. These stock options will expire 7 years after their initial grant date and will vest over a period of 4 years. On April 17, 2018, Clarissa Desjardins also received an equity-based award of 100,000 performance stock options at an exercise price of $15.95 under the 2017 Omnibus Plan. Following a modification to the milestone associated with these performance options approved subsequent to year-end December 31, 2018, these stock options will vest 50% upon the achievement of a milestone and 50% on the one-year anniversary of milestone achievement and will expire if the milestone is not achieved prior to December 31, 2019 or will expire 7 years after their initial grant date if the milestone is achieved. Management believes it is probable that the milestone event will be achieved.
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(4)Michael Singer resigned from his role as Chief Financial Officer effective August 9, 2018. Stock options granted to Michael Singer in 2018 were forfeited upon his departure. Stock options granted to Michael Singer prior to 2018 continued vesting until December 31, 2018 with unvested options being forfeited. All vested options will expire if not exercised prior to March 31, 2019.
(5)On July 12, 2018, Steve Forte received an equity-based award of 225,000 stock options at an exercise price of $11.86 under the 2017 Omnibus Plan. These stock options will expiry 7 years from their initial grant date and will vest over a period of 4 years from August 2018.
(6)On February 27, 2018, Donna Grogan received an equity-based award of 60,000 stock options at an exercise price of $13.80 under the 2017 Omnibus Plan. These stock options will expire 7 years after their initial grant date and will vest over a period of 4 years. On April 17, 2018, Donna Grogan also received an equity-based award of 40,000 performance stock options at an exercise price of $15.95 under the 2017 Omnibus Plan. Following a modification to the milestone associated with these performance options approved subsequent to year-end December 31, 2018, these stock options will vest 50% upon the achievement of a milestone and 50% on the one-year anniversary of milestone achievement and will expire if the milestone is not achieved prior to December 31, 2019 or will expire 7 years after their initial grant date if the milestone is achieved. Management believes it is probable that the milestone event will be achieved.
(7)On February 27, 2018, Jeffrey Packman received an equity-based award of 40,000 stock options at an exercise price of $13.80 under the 2017 Omnibus Plan. These stock options will expire 7 years after their initial grant date and will vest over a period of 4 years. On April 17, 2018, Jeffrey Packman also received an equity-based award of 40,000 performance stock options at an exercise price of $15.95 under the 2017 Omnibus Plan. Following a modification to the milestone associated with these performance options approved subsequent to year-end December 31, 2018, these stock options will vest 50% upon the achievement of a milestone and 50% on the one-year anniversary of milestone achievement and will expire if the milestone is not achieved prior to December 31, 2019 or will expire 7 years after their initial grant date if the milestone is achieved. Management believes it is probable that the milestone event will be achieved.
(8)Eric Grinstead left his role as Chief Commercial Officer effective November 30, 2018. Stock options granted to Eric Grinstead in 2018 were forfeited upon his departure. Unvested stock options granted prior to 2018 were forfeited. All vested options will expire if not exercise prior to June 5, 2019.

 

  

The following stock option grants were not included in the above table as they were not outstanding as at December 31, 2018:

 

·On February 19, 2019, Clarissa Desjardins, Steve Forte, Donna Grogan and Jeffrey Packman received an equity-based award of 463,300, 164,100, 104,500 and 104,500 stock options, respectively at an exercise price of $14.67 per share under the 2017 Omnibus Plan. These stock options will vest over a period of 4 years: 25% cliff vesting after one year with monthly vesting over the subsequent 36 months.

 

Under the plan of arrangement, each unvested option will be deemed to be vested as of the effective date of the arrangement and subsequently transferred in exchange for the purchase price less the applicable exercise price.

 

 

DSU Grant Summary

 

The following table sets forth the outstanding DSUs for each of our directors as at December 31, 2018:

 

Name and office held  Number of DSUs held 
David P. Bonita, Chairman of the Board, Director   5,817 
Robert Heft, Director   3,165 
Allan Mandelzys, Chair of the Compensation Committee, Director   4,090 
François Nader, Chairman of the Corporate Governance and Nominating Committee, Director   3,363 
Pierre Legault, Chairman of the Audit Committee, Director   3,387 
Shawn Tomasello, Director   1,746 

 

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In connection with the Plan of Arrangement, on February 24, 2019, the Company approved the issuance of 39,225 deferred share units (DSUs) to non-executive directors of the Company to replace long-term incentive grants which would otherwise have been made in 2019 to non-executive directors of the Company in the normal course of business.

  

Employee Share Purchase Plan

 

In June 2017, we adopted an employee share purchase plan (ESPP) pursuant to which eligible employees will be able to acquire our common shares at a discount from the average market price on the purchase date in a convenient and systematic manner through payroll deductions. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Code for employees who are United States taxpayers. The following discussion is qualified in its entirety by the full text of the ESPP, a copy of which is included as Exhibit 10.10 to our Registration Statement on Form F-1/A filed with the SEC on July 21, 2017 and hereby incorporated by reference. While adopted in June 2017, as of the date of this Form 20-F, we have not yet rolled out the ESPP.

 

Unless otherwise determined by our board of directors, participation in the ESPP will be open to our employees in Canada and the United States who are customarily employed for at least 20 hours per week. Participation in the ESPP is voluntary. Eligible employees will be able to contribute up to 15% of their gross base earnings for purchases under the ESPP through regular payroll deductions. The maximum number of common shares issued to insiders within any six-month period, or issuable to insiders at any time, under the ESPP and all private placements must not exceed 10% of the number of common shares issued and outstanding at that time. No employee will be eligible for the grant of any purchase rights under the ESPP if immediately after such rights are granted, such employee has voting power over 5% or more of our outstanding common shares measured by vote or value under Section 424(d) of the Code. In addition, no employee may purchase shares under the ESPP at a rate in excess of $25,000 worth of our common shares (determined on the grant date of the purchase right) for each year such purchase right is outstanding.

 

The ESPP will be implemented through a series of offerings under which eligible employees are granted rights to purchase our common shares at the end of specified purchase periods. We currently expect to hold offerings consisting of a single six-month purchase period commencing on January 1 and July 1 of each calendar year, with a single purchase date at the end of the purchase period on June 30 and December 31 of each calendar year. However, our compensation committee may establish different offerings and purchase periods from time to time, which may have a duration of between three months to twenty-four months. No offering has commenced as of the date of this Annual Report. Common shares purchased under the ESPP will be issued from treasury at a purchase price equal to 85% of the average market price of the common shares on such date, all in accordance with applicable laws and the terms and conditions of the ESPP. For the purposes of the ESPP, the average market price of the common shares as at a given date shall be the weighted average trading price on the trading day immediately preceding such date.

 

The number of common shares reserved for issuance under the ESPP will not exceed 290,000 common shares, plus the number of common shares that are automatically added on January 1st of each year, commencing on (and including) January 1, 2018 and ending on (and including) January 1, 2027, in an amount equal to the lesser of (i) 1% of the total number of common shares issued and outstanding on December 31st of the preceding calendar year, and (ii) 290,000 common shares. No rights to purchase common shares may be issued under the plan from and after the tenth anniversary of the date the plan becomes effective, unless otherwise approved by our shareholders. In accordance with the terms of the ESPP, the board of directors chose not to increase the number of common shares reserved for issuance under the plan on January 1, 2019.

 

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The ESPP is administered by the compensation committee of our board of directors. The compensation committee has the authority, in the event the common shares are subdivided or consolidated, or in the event the common shares will be exchanged for shares of another issuer in the context of a reorganization, split-up, liquidation, recapitalization or similar transaction, to determine appropriate equitable adjustments, if any, to be made under the ESPP, including adjustments to the number of common shares which have been authorized for issuance under the ESPP.

 

In the event of certain significant corporate transactions such as an acquisition, merger or sale of all or substantially all of our assets, then either (i) a participant’s then-outstanding purchase right shall be continued or substituted for by the surviving or acquiring entity, or (ii) such purchase right shall be terminated in exchange for a cash payment equal to the fair market value of a number of our common shares on the date of such transaction that the participant’s accumulated payroll deductions as of the date of the transaction could purchase, determined with reference only to the first business day of the applicable purchase period, less the result of multiplying such number of shares by such purchase price.

 

Our board of directors has the right to amend or terminate the ESPP, in whole or in part, at any time, subject to applicable laws and requirements of any stock exchange or governmental or regulatory body (including any requirement for shareholder approval). Subject to certain exceptions, our board of directors is entitled to make amendments to the ESPP without shareholder approval.

 

Rule 10b5-1 Sales Plans

 

Subject to compliance with Canadian securities laws, rules and regulations, our directors and executive officers may adopt written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or sell shares of our common shares on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or officer when entering into the plan, without further direction from the director or officer. The director or officer may amend or terminate the plan in some circumstances. Our directors and executive officers may buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material, non-public information.

  

C.Board Practices

 

Board of Directors

 

Our board of directors currently consists of 7 members. The articles provide that the number of directors shall be a minimum of one and a maximum of 10 members and will be fixed from time to time by resolution of the board of directors. Our board of directors is elected at each annual meeting of our shareholders. Our directors serve until their successors are elected or appointed, unless their office is vacated earlier. The term of office for each of the directors will expire at the time of our next annual shareholders meeting. Under the CBCA, one quarter of our directors must be resident Canadians, as defined in the CBCA.

 

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Family Relationships and Other Arrangements

 

There are no family relationships among our directors and senior management.

 

Dr. Bonita was designated as a director by OrbiMed in connection with a shareholders’ agreement, which terminated upon the closing of our IPO.

 

Mr. Pariseau was designated as a director by BDC Venture Capital in connection with a shareholders’ agreement, which terminated upon the closing of our IPO. Mr. Pariseau resigned as a director on July 5, 2018.

 

Mr. Mott was designated as a director by New Enterprise Associates in connection with a shareholders’ agreement, which terminated upon the closing of our IPO. Mr. Mott resigned as a director on February 27, 2018.

 

Director Independence

 

As a foreign private issuer, under the listing requirements and rules of The Nasdaq Global Select Market, we are not required to have independent directors on our board of directors, except to the extent that our audit committee is required to consist of independent directors, subject to certain phase-in schedules. Nevertheless, our board of directors has undertaken a review of the independence of the directors and considered whether any director has a material relationship with us that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. Our board of directors determined that 7 of our 8 directors are “independent directors” as defined under current rules and regulations of the SEC and the listing standards of The Nasdaq Global Select Market. In making these determinations, our board of directors considered the current and prior relationships that each non-employee director has with our Company and all other facts and circumstances that our board of directors deemed relevant in determining their independence.

 

Board Committees

 

The standing committees of our board of directors consist of an audit committee, compensation committee and a nominating and corporate governance committee.

 

Audit Committee

 

Our audit committee is currently comprised of Pierre Legault (Chair), Dr. David Bonita and Dr. Allan Mandelzys.

 

Our board of directors has determined that each of the members of our audit committee is financially literate and has sufficient financial expertise, and is independent within the meaning of such term in the rules of The Nasdaq Global Select Market and the SEC. Our board of directors has determined that Pierre Legault is a financial expert in accordance with the applicable rules and regulations of the SEC.

 

The purpose of our audit committee is to assist our board of directors in overseeing:

 

the integrity of our financial statements and our accounting and financial reporting processes and financial statement audits;
our compliance with legal and regulatory requirements;
the performance, qualifications and independence of our registered public accounting firm (independent auditor);
the results of our audits; and
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the design, implementation and ongoing effectiveness of our systems of disclosure controls and procedures, risk management systems,
internal control over financial reporting and compliance with ethical standards adopted by us.

 

In June 2017, our Board of Directors adopted a new written charter for the Audit Committee. A copy of the Audit Committee charter is available on our website at www.clementiapharma.com or, without charge, upon written request to Clementia Pharmaceuticals Inc., 1000 de la Gauchetière Street West, Suite 1200, Montreal, Quebec, Canada H3B 4W5, Attention: Investor Relations, telephone 1-514-940-1080 or via email at info@clementiapharma.com.

 

Compensation Committee

 

Our compensation committee is comprised of Dr. Allan Mandelzys (Chair), Shawn Tomasello and Dr. Robert Heft, all of whom are “independent” in accordance with the provisions of Rule 10C-1(b)(1) under the Exchange Act and Nasdaq Rule 5605(a)(2).

 

Our board of directors has determined that each member of our compensation committee is independent within the meaning of such term in the rules and regulations of the SEC and The Nasdaq Global Select Market. In affirmatively determining the independence of any member of our compensation committee, our board of directors must consider all factors specifically relevant to determining whether a director has a relationship to the Company that is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including, but not limited to: (i) the source of compensation of such director, including any consulting, advisory or other compensatory fee paid by the Company to such director; and (ii) whether such director is affiliated with the Company, a subsidiary of the Company or an affiliate of a subsidiary of the Company.

 

The purpose of our compensation committee is to ensure that the compensation programs and values transferred to management through cash pay, share and share-based awards, whether immediate, deferred, or contingent are fair and appropriate to attract, retain and motivate management and are reasonable in view of company economics and of the relevant practices of other similar companies. Our compensation committee also recommends to our board of directors’ compensation arrangements for board members.

 

In June 2017, our Board of Directors adopted a new written charter for the Compensation Committee. A copy of the Compensation Committee charter is available on our website at www.clementiapharma.com or, without charge, upon written request to Clementia Pharmaceuticals Inc., 1000 de la Gauchetière Street West, Suite 1200, Montreal, Quebec, Canada H3B 4W5, Attention: Investor Relations, telephone 1-514-940-1080 or via email at info@clementiapharma.com.

 

Nominating and Corporate Governance Committee

 

Our nominating and corporate governance committee is comprised of Dr. Francois Nader (Chair), Dr. David Bonita and Pierre Legault, all of whom are “independent directors” within the meaning of Nasdaq Rule 5605(a)(2). In affirmatively determining the independence of any member of our corporate governance and nominating committee, our board must consider all factors specifically relevant to determining whether a director has a relationship to us that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

 

The purpose of our corporate governance and nominating committee is to:

 

assist our board of directors in identifying prospective director nominees and recommend to our board of directors the director nominees for each annual meeting of shareholders;
recommend members for each board committee;
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ensure that our board of directors is properly constituted to meet its fiduciary obligations to the Company and its shareholders and that the Company follows appropriate governance standards;
develop and recommend to our board of directors governance principles applicable to the Company;
review and recommend to the board of directors the functions, duties and compositions of the committees of the board of directors;
oversee the succession planning for senior management; and
oversee the evaluation of our board of directors and management.

 

In June 2017, our Board of Directors adopted a new written charter for the Nominating and Corporate Governance Committee. A copy of the Nominating and Corporate Governance Committee charter is available on our website at www.clementiapharma.com or, without charge, upon written request to Clementia Pharmaceuticals Inc., 1000 de la Gauchetière Street West, Suite 1200, Montreal, Quebec, Canada H3B 4W5, Attention: Investor Relations, telephone 1-514-940-1080 or via email at info@clementiapharma.com.

 

Code of Business Conduct and Ethics

 

Our board of directors has adopted a Code of Business Conduct and Ethics applicable to all of our employees, executive officers and directors. A copy of this Code of Business Conduct and Ethics is available on our website at www.clementiapharma.com or, without charge, upon written request to Clementia Pharmaceuticals Inc., 1000 de la Gauchetière Street West, Suite 1200, Montreal, Quebec, Canada H3B 4W5, Attention: Investor Relations, telephone 1-514-940-1080 or via email at info@clementiapharma.com.

 

The Corporate Governance and Nominating Committee of our board of directors is responsible for overseeing the Code of Business Conduct and Ethics and must approve any waivers from the Code of Business Conduct and Ethics for employees, executive officers and directors. There were no amendments to our Code of Business Conduct and Ethics since its adoption. We did not grant any waivers to the provisions of our Code of Business Conduct and Ethics during the fiscal years ended December 31, 2018 and 2017.

 

D.Employees

 

As at December 31, 2018, we employed 45 full-time employees, including 28 in research and development functions and 17 in general and administrative and commercial functions. 12 of our employees hold M.D., Sc.D., or Ph.D. degrees and an additional 15 hold M.Sc. degrees. As at December 31, 2018, 32 of our employees were located in Montreal, Quebec, Canada and 15 were located in Newton, Massachusetts, USA. We have never had a work stoppage, and none of our employees is represented by a labor organization or under any collective-bargaining arrangements. We consider our employee relations to be good.

 

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E.Share Ownership

 

The following table sets out the share ownership and options held by our directors and NEOs as of December 31, 2018.

 

Name and office held  Number of common shares owned   Number of stock options held   Exercise price   Option expiry date  Number of exercisable options 
David P. Bonita, Chairman of the Board, Director 
    -    23,980   $10.04   04/20/2027   10,658 
         11,990   $10.04   04/20/2027   11,990 
         11,990   $13.40   11/06/2025   999 
Jean-François Pariseau(1)                       
David Mott, Director(1)                       
Robert Heft, Director(2)                       
    63,895    39,999   $0.29   06/17/2023   39,999 
         14,724   $0.29   08/27/2024   14,724 
         23,980   $10.04   04/20/2027   10,658 
         11,990   $10.04   04/20/2027   11,990 
         11,990   $13.40   11/06/2025   999 
Allan Mandelzys, Chairman of the Audit Committee, Director 
    58,751    79,997   $0.29   06/17/2023   79,997 
         14,724   $0.29   08/27/2024   14,724 
         23,980   $10.04   04/20/2027   10,658 
         11,990   $10.04   04/20/2027   11,990 
         11,990   $13.40   11/06/2025   999 
François Nader, Chairman of the Nominating and Corporate Governance Committee, Director 
    103,329    39,999   $0.29   02/20/2024   39,999 
         14,724   $0.29   08/27/2024   14,724 
         23,980   $10.04   04/20/2027   10,658 
         11,990   $10.04   04/20/2027   11,990 
         11,990   $13.40   11/06/2025   999 
Clarissa Desjardins, President, Chief Executive Officer, Director 
    814,054    400,034   $0.29   06/17/2023   400,034 
         329,473   $0.29   08/27/2024   252,532 
         59,950   $10.04   04/20/2027