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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2021

 

OR

 

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

 

For the transition period from ______ to ______.

 

Commission File Number: 001-38552

 

PROVENTION BIO, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   81-5245912
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

55 Broad Street, 2nd Floor

Red Bank, New Jersey

  07701
(Address of registrant’s principal executive offices)   (Zip code)

 

(908) 336-0360

(Registrant’s telephone number, including area code)

 

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

 

Title of Each Class   Trading Symbol(s)   Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value per share   PRVB   The Nasdaq Global Select Market

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

 

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

 

  Large accelerated filer Accelerated filer ☐
  Non-accelerated filer ☐ Smaller reporting company
    Emerging growth company

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

As of the close of business on August 2, 2021, 63,374,738 common shares, $0.0001 par value per share, of the registrant were issued and outstanding.

 

 

 

 
 

 

Provention Bio, Inc.

Form 10-Q

For the Quarter Ended June 30, 2021

 

Table of Contents

 

Item   Page
       
PART I. Financial information    
       
1. Condensed Financial Statements   5
  Condensed Balance Sheets at June 30, 2021 (unaudited) and December 31, 2020   5
  Condensed Statements of Comprehensive Loss (unaudited) for the three and six months ended June 30, 2021 and 2020   6
  Condensed Statements of Changes in Stockholders’ Equity (unaudited) for the three and six months ended June 30, 2021 and 2020   7
  Condensed Statements of Cash Flows (unaudited) for the six months ended June 30, 2021 and 2020   9
  Notes to Condensed Financial Statements (unaudited)   10
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   26
3. Quantitative and Qualitative Disclosures About Market Risk   40
4. Controls and Procedures   40
       
       
PART II. Other Information    
1. Legal Proceedings   41
1A. Risk Factors   41
2. Unregistered Sales of Equity Securities and Use of Proceeds   77
3. Defaults Upon Senior Securities   77
4. Mine Safety Disclosures   77
5. Other Information   77
6. Exhibits   77
  Signatures   78

 

2
 

 

FORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY

 

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including, among others, statements regarding the impact of the ongoing COVID-19 pandemic on our business; the timing progress and success of our ongoing and planned clinical trials; our planned engagements with regulatory agencies relating to, and the expected timing of regulatory review of, or decisions relating to, our product candidates; execution of our business plans; and our current expectations regarding the ability of our cash, cash equivalents and marketable securities to fund our projected operating requirements for at least the next 12 months, are forward-looking statements. The words “believe,” “may,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

 

These forward-looking statements are subject to a number of risks, uncertainties and assumptions. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed herein may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

 

Some of the key factors that could cause actual results to differ from our expectations include the following risks related to our business:

 

  The Company may not be successful in its goal to continue to work with the U.S. Food and Drug Administration (“FDA”) to secure approval of teplizumab and bring the first disease-modifying therapy for type 1 diabetes (“T1D”) to at-risk patients as soon as possible. On July 6, 2021, the Company announced that the FDA issued a Complete Response Letter (“CRL”) for the Company’s Biologics License Application (“BLA”) for teplizumab for the delay of clinical T1D in at-risk individuals. In the CRL, received late evening on July 2, 2021, the FDA stated that a single, low-dose pharmacokinetic/pharmacodynamic (“PK/PD”) bridging study in healthy volunteers to compare planned commercial product with drug product originating from drug substance manufactured for historic clinical trials had failed to show PK comparability.
  The results from relevant additional PK/PD data expected to be collected from a PK/PD substudy in patients receiving 12-days of therapy in the ongoing Phase 3 PROTECT trial in newly diagnosed T1D patients in the third quarter of 2021 may not support PK comparability or otherwise may be insufficient to address the FDA’s concerns on comparability. The PK/PD substudy data will be analyzed by independent, unblinded third-parties to maintain the integrity of this placebo-controlled trial. Upon review of the results from this substudy, the Company will determine whether to submit these data to the FDA for its review, along with any other relevant data and analyses based on our ongoing discussions with the FDA, to support PK comparability or otherwise justify why PK comparability is not necessary.
  The Company may not be able to address, to the FDA’s satisfaction, all other considerations cited in the CRL relating to product quality in the short-term as planned by the Company.
  As noted in the CRL, the deficiencies conveyed during a recent general inspection, not specific to teplizumab, at a fill/finish manufacturing facility used by the Company will need to be resolved before approval and the Company may not be in a position to ensure that this manufacturing facility successfully does so in a timely manner, or at all.
  The outbreak of COVID-19 has caused delays to our clinical trials and could impact the quality or quantity of data we are able to collect in our clinical trials or otherwise potentially negatively impact the execution of our clinical trials. Moreover, the longer the pandemic persists, the more impact it may have on our clinical trials and other business plans and timelines, including any product launch plans if teplizumab were to be approved by the FDA or by other competent authorities, including the European Commission in the European Union. In addition, this pandemic has caused substantial disruption in the financial markets and may adversely impact economies worldwide, both of which could result in adverse effects on our business, operations and ability to raise capital.
  Clinical drug development involves a risky, lengthy and expensive process with an uncertain outcome. We may encounter substantial delays in completing our clinical trials which in turn would require additional costs, or we may fail to demonstrate adequate safety and efficacy to the satisfaction of applicable regulatory authorities.

 

3
 

 

  We are a small company that relies on third parties for execution of our business operations and plans, including Contract research organizations (“CROs”) and contract manufacturing organization (“CMOs”) for conducting our clinical trials and manufacturing our investigational drug products. If these parties fail to perform their contractual obligations or otherwise comply with our requirements or that of regulatory authorities, our business plans and operations may be negatively, including materially, impacted.
  We are a clinical stage biopharmaceutical company with a limited operating history.
  We have incurred substantial operating losses in each year since our inception and expect to continue to incur substantial losses for the foreseeable future and we may never become profitable or, if achieved, be able to sustain profitability.
  We need to raise additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate certain, or all of our product development programs or commercialization efforts.
  We have a limited number of product candidates and may not be able to acquire additional product candidates in the future.
  Although we have received breakthrough therapy designation and priority review from the FDA, a PRIME designation from the European Medicines Agency (“EMA”), and the UK’s Innovation Passport from the Medicines and Healthcare Products Regulatory Agency (“MHRA”) for teplizumab and we may pursue such expedited pathways for other product candidates, expedited development may not actually lead to a faster development or regulatory review or approval process.
  Even though we may obtain or apply for orphan drug designation for a product candidate, we may not be able to obtain orphan drug marketing exclusivity.
  We may be unable to obtain or maintain governmental approvals to market our product candidates in the United States, European Union, United Kingdom or in other jurisdictions.
  The FDA, EMA or comparable foreign regulatory authorities could require the clearance, CE marking or approval of a companion diagnostic device for teplizumab for use in at-risk individuals, as a post-marketing commitment (FDA) or otherwise (ex-US), which may require substantial financial resources and could delay regulatory approval of teplizumab.
  Even if we receive regulatory approval for teplizumab or any of our product candidates, we may not be able to successfully commercialize any approved products, and the revenue that we generate from sales, if any, may be limited.
  We have never commercialized a product and are in the process of building and scaling the Company for potential commercialization of a first product candidate, including building our compliance, medical affairs and commercial organization, which, if we are not able to do successfully could negatively impact our business, including the successful commercialization of our product candidates.
  We currently have a limited commercial organization. If we are unable to establish satisfactory sales and commercial support and marketing capabilities, we may not successfully commercialize any of our product candidates.
  We are completely dependent on third parties to manufacture our product candidates, and our commercialization of our product candidates could be halted, delayed or made less profitable if those third parties fail to comply with regulatory requirements, obtain manufacturing approval from the FDA or comparable foreign regulatory authorities if applicable, fail to provide us with sufficient quantities of our product candidates or fail to do so at acceptable quality levels or prices.
  We depend on rights to certain pharmaceutical compounds that are licensed to us and any loss of our rights to them could prevent us from developing, commercializing or selling our products.
  We are generally a virtual company and may be unable to adequately protect our information technology systems from cyber-attacks, which could result in the disclosure of confidential information, damage our reputation, and subject us to significant financial and legal exposure.
  We may be unable to protect our intellectual property rights or may infringe on the intellectual property rights of others.
  If product liability or other lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.

 

The forward-looking statements included herein are made only as of the date hereof. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligations to update publicly any forward-looking statements for any reason after the date of this Form 10-Q to conform these statements to actual results or to changes in our expectations.

 

We may from time to time provide estimates, projections and other information concerning our industry, the general business environment, and the markets for certain diseases, including estimates regarding the potential size of those markets and the estimated incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events, circumstances or numbers, including actual disease prevalence rates and market size, may differ materially from the information reflected in this Quarterly Report. Unless otherwise expressly stated, we obtain industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources, in some cases applying our own assumptions and analysis that may, in the future, prove not to have been accurate.

 

4
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONDENSED FINANCIAL STATEMENTS

 

PROVENTION BIO, INC.

CONDENSED BALANCE SHEETS (unaudited)

(in thousands, except share and per share data)

 

   June 30, 2021   December 31, 2020 
         
ASSETS          
Current assets:          
Cash and cash equivalents  $151,781   $102,294 
Marketable securities   24,597    19,530 
Prepaid expenses and other current assets   4,209    4,730 
Total current assets   180,587    126,554 
           
Fixed assets, net   2,208    1,437 
Operating lease right-of-use assets   393    408 
Other assets   120    120 
Total assets  $183,308   $128,519 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $3,866   $7,568 
Accrued expenses and other current liabilities   13,767    9,162 
Deferred revenue   7,000     
Total current liabilities   24,633    16,730 
           
Operating lease liabilities, long-term   655    715 
Total liabilities   25,288    17,445 
           
Commitments and Contingencies (Note 6)          
           
Stockholders’ equity:          
Preferred stock, $0.0001 par value; 25,000,000 shares authorized; no shares issued or outstanding at June 30, 2021 and December 31, 2020        
Common stock, $0.0001 par value; 150,000,000 shares authorized; 63,374,738 shares issued and outstanding at June 30, 2021; 100,000,000 shares authorized; 56,517,891 shares issued and outstanding at December 31, 2020   6    6 
Additional paid-in capital   397,226    288,725 
Accumulated other comprehensive gain (loss)   12    (15)
Accumulated deficit   (239,224)   (177,642)
Total stockholders’ equity   158,020    111,074 
Total liabilities and stockholders’ equity  $183,308   $128,519 

 

The accompanying unaudited notes are an integral part of the condensed financial statements.

 

5
 

 

PROVENTION BIO, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)

(in thousands, except per share data)

 

   2021   2020   2021   2020 
   Three Months Ended June 30,   Six Months Ended June 30, 
   2021   2020   2021   2020 
Operating expenses:                    
Research and development   16,968    15,032    36,655    24,122 
General and administrative   13,205    7,764    25,986    11,539 
Total operating expenses   30,173    22,796    62,641    35,661 
                     
Loss from operations   (30,173)   (22,796)   (62,641)   (35,661)
Interest income, net   31    151    59    434 
Loss before income tax benefit   (30,142)   (22,645)   (62,582)   (35,227)
Income tax benefit   1,000    523    1,000    523 
Net loss  $(29,142)  $(22,122)  $(61,582)  $(34,704)
                     
Net loss per common share, basic and diluted  $(0.46)  $(0.45)  $(0.98)  $(0.72)
Weighted average common shares outstanding, basic and diluted   63,375    49,199    62,822    48,449 
                     
Net loss  $(29,142)  $(22,122)  $(61,582)  $(34,704)
Other comprehensive income (loss):                    
Unrealized gain (loss) on marketable securities   28    (112)   27    98 
Total comprehensive loss  $(29,114)  $(22,234)  $(61,555)  $(34,606)

 

The accompanying unaudited notes are an integral part of the condensed financial statements.

 

6
 

 

PROVENTION BIO, INC.

CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (unaudited)

(in thousands, except per share data)

 

   Shares   Amount   Capital   Income (Loss)   Deficit   Equity 
   Common Stock   Additional
Paid-In
  

Accumulated Other

Comprehensive

   Accumulated  

Total

Stockholders

 
   Shares   Amount   Capital   Income (Loss)   Deficit   Equity 
                         
Balance at March 31, 2021   63,375   $6   $393,959   $(16)  $(210,082)  $183,867 
Unrealized gain (loss) on marketable securities, net of tax               28        28 
Stock-based compensation           3,267            3,267 
Net loss                   (29,142)   (29,142)
Balance at June 30, 2021   63,375   $6   $397,226   $12   $(239,224)  $158,020 

 

   Common Stock   Additional
Paid-In
  

Accumulated Other

Comprehensive

   Accumulated  

Total

Stockholders’

 
   Shares   Amount   Capital   Income (Loss)   Deficit   Equity 
                         
Balance at March 31, 2020   47,713   $5   $162,642   $210   $(91,643)  $71,214 
Issuance of common stock in connection with underwritten public offering,
net of issuance costs
   7,590    1    103,269            103,270 
Issuance of common stock in connection with at-the-market stock sales,
net of issuance costs
   725        9,869            9,869 
Issuance of common stock in connection with warrant exercises   130                     
Issuance of common stock in connection with stock option exercises   58        380            380 
Unrealized gain (loss) on marketable securities, net of tax               (112)       (112)
Stock-based compensation           1,277            1,277 
Net loss                   (22,122)   (22,122)
Balance at June 30, 2020   56,216   $6   $277,437   $98   $(113,765)  $163,776 

 

The accompanying unaudited notes are an integral part of the condensed financial statements.

 

7
 

 

PROVENTION BIO, INC.

CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (unaudited)

(in thousands, except per share data)

 

   Common Stock   Additional
Paid-In
  

Accumulated Other

Comprehensive

   Accumulated  

Total

Stockholders’

 
   Shares   Amount   Capital   Income (Loss)   Deficit   Equity 
                         
Balance at December 31, 2020   56,518   $6   $288,725   $(15)  $(177,642)  $111,074 
Issuance of common stock in connection with underwritten public offering,
net of issuance costs
   6,838        102,329            102,329 
Issuance of common stock in connection with stock option exercises   19        48            48 
Unrealized gain (loss) on marketable securities, net of tax               27        27 
Stock-based compensation           6,124            6,124 
Net loss                   (61,582)   (61,582)
Balance at June 30, 2021   63,375   $6   $397,226   $12   $(239,224)  $158,020 

 

   Common Stock   Additional
Paid-In
  

Accumulated Other

Comprehensive

   Accumulated  

Total

Stockholders’

 
   Shares   Amount   Capital   Income (Loss)   Deficit   Equity 
                         
Balance at December 31, 2019   47,658   $5   $161,212   $   $(79,061)  $82,156 
Issuance of common stock in connection with underwritten public offering,
net of issuance costs
   7,590    1    103,269            103,270 
Issuance of common stock in connection with at-the-market stock sales,
net of issuance costs
   725        9,869            9,869 
Issuance of common stock in connection with warrant exercises   130                     
Issuance of common stock in connection with stock option exercises   113        574            574 
Unrealized gain (loss) on marketable securities, net of tax               98        98 
Stock-based compensation           2,513            2,513 
Net loss                   (34,704)   (34,704)
Balance at June 30, 2020   56,216   $6   $277,437   $98   $(113,765)  $163,776 

 

The accompanying unaudited notes are an integral part of the condensed financial statements.

 

8
 

 

PROVENTION BIO, INC.

CONDENSED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

 

   2021   2020 
   Six Months Ended June 30, 
   2021   2020 
Operating activities          
Net loss  $(61,582)  $(34,704)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock-based compensation expense   6,124    2,513 
Amortization of premium and discounts on marketable securities   327    44 
Non-cash operating lease expense   (4)    
Depreciation   154     
Changes in operating assets and liabilities:          
Prepaid expenses and other current assets   521    (2,977)
Accounts payable   (3,702)   6,053 
Accrued interest receivable   17    43 
Accrued expenses   4,564    2,086 
Deferred revenue   7,000     
Net cash used in operating activities   (46,581)   (26,942)
           
Investing activities          
Purchase of marketable securities   (16,324)   (9,049)
Maturities of marketable securities   10,940    29,000 
Purchase of fixed assets   (925)    
Net cash (used in) provided by investing activities   (6,309)   19,951 
           
Financing activities          
Proceeds from underwritten public offering, net   102,329    103,270 
Proceeds from at-the-market stock sales, net       9,869 
Proceeds from stock option exercises   48    574 
Net cash provided by financing activities   102,377    113,713 
           
Net increase in cash and cash equivalents   49,487    106,722 
Cash and cash equivalents at beginning of period   102,294    39,165 
Cash and cash equivalents at end of period  $151,781   $145,887 
           
Supplemental disclosure of cash flow information:          
Operating cash flows used for operating leases  $77   $ 

 

The accompanying unaudited notes are an integral part of the condensed financial statements.

 

9
 

 

PROVENTION BIO, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)

(tabular dollars and shares in thousands, except per share data)

 

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Business

 

Provention Bio, Inc. (the “Company”) was incorporated on October 4, 2016 under the laws of the State of Delaware. The Company is a biopharmaceutical company dedicated to intercepting and preventing immune-mediated diseases. Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets and raising capital. The Company’s business is subject to significant risks and uncertainties and will be dependent on raising substantial additional capital before it becomes profitable, and it may never achieve profitability.

 

Basis of presentation

 

The accompanying unaudited financial information as of June 30, 2021 and for the three and six months ended June 30, 2021 and 2020 has been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The December 31, 2020 Condensed Balance Sheet was derived from the Company’s audited financial statements. These interim financial statements should be read in conjunction with the notes to the financial statements contained in the Company’s Annual Report on Form 10-K (“Annual Report”) for 2020, as filed with the SEC on February 25, 2021.

 

In the opinion of management, the unaudited financial information as of June 30, 2021 and for the three and six months ended June 30, 2021 and 2020, reflects all adjustments, which are normal recurring adjustments, necessary to present a fair statement of the financial position, results of operations and cash flows of the Company. The results of operations for the three and six months ended June 30, 2021 and 2020 are not necessarily indicative of the operating results for the full fiscal year or any future period.

 

2. LIQUIDITY

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred recurring losses since inception and as of June 30, 2021, the Company had an accumulated deficit of $239.2 million. To date, the Company has not generated any revenues and has financed its operations primarily through equity offerings.

 

In January 2021, the Company completed an underwritten public offering in which it sold 6,250,000 shares of common stock at a public offering price of $16.00 per share. In February 2021, the underwriters partially exercised their option to purchase an additional 587,500 shares at a price of $16.00 per share. In the aggregate, total net proceeds from the underwritten public offering was $102.3 million, after deducting underwriting discounts and commissions of $6.6 million and other offering expenses of $0.5 million.

 

In February 2021, the Company established a new at-the-market program (the “2021 ATM Program”) through which the Company may sell, from time to time at its sole discretion, up to $150.0 million of shares of its common stock. As of June 30, 2021, no sales have been made under this program. In connection with the establishment of the 2021 ATM Program, the Company terminated its existing at-the-market program established in August 2019 (the “2019 ATM Program”) and no additional stock may be issued thereunder. Prior to its termination, the Company sold 725,495 shares of its common stock for aggregate net proceeds of approximately $9.9 million, net of $0.3 million in sales commissions, under the 2019 ATM Program, all of which occurred during the quarter ended June 30, 2020.

 

10
 

 

The Company has devoted substantially all of its financial resources and efforts to research and development and expects to continue to incur significant expenses and increasing operating losses over the next several years due to, among other things, costs related to research funding, development of its product candidates, strategic alliances, the development of its administrative and commercial organization and pre-commercial activities for teplizumab. The Company’s net losses may fluctuate significantly from quarter to quarter and year to year.

 

The Company will require substantial additional financing to fund its operations and to continue to execute its strategy. The Company may raise capital through public or private equity or debt financings. The sale of equity or other securities may result in dilution to the Company’s stockholders and certain of those securities may have rights senior to those of the Company’s existing shares. If the Company raises additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict the Company’s operations. Any other third-party funding arrangement could require the Company to relinquish valuable rights. The source, timing and availability of any future financing will depend principally upon market conditions, and, more specifically, on the progress of the Company’s clinical development programs. Funding may not be available when needed, at all, or on terms acceptable to the Company. Lack of necessary funds may require the Company, among other things, to delay, scale back or eliminate some or all of the Company’s planned operations.

 

The Company’s cash requirements for the rest of 2021 and into 2022 will be impacted by a number of factors, the most significant of which are expenses related to teplizumab, including costs and timing of the Company’s regulatory activities, costs to build out the Company’s commercial infrastructure and pre-commercial activities for teplizumab, the PROTECT clinical trial, manufacturing activities for teplizumab and any potential milestone payments that may become due upon a potential regulatory approval of teplizumab by the FDA. Other factors include costs related to the Company’s other ongoing or planned clinical trials, such as the Phase 2b PROACTIVE clinical study of PRV-015 in celiac disease, the first-in-human PROVENT study of its PRV-101 polyvalent inactivated coxsackievirus B vaccine candidate, and the planned Phase 2a PREVAIL clinical study of PRV-3279 in lupus.

 

Depending on the timing and outcome of the Company’s regulatory activities and the status of its plans to prepare for a potential regulatory approval of teplizumab by the FDA, the Company may encounter near-term liquidity needs that could impact its cash runway over the next 12 months. If the Company does not obtain additional financing, or prudently manage its expenses, the Company’s financial condition, cash flows and results of operations could be materially and adversely affected.

 

Based on the Company’s current business plans, management believes that its cash, cash equivalents and marketable securities on hand at June 30, 2021, are sufficient to meet the Company’s obligations for at least the next 12 months from the issuance of these financial statements.

 

3. SIGNIFICANT ACCOUNTING POLICIES

 

A summary of the significant accounting policies followed by the Company in the preparation of the financial statements is as follows:

 

Use of estimates

 

The process of preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates and changes in estimates may occur.

 

Segment and geographic information

 

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating and reporting segment.

 

Cash, cash equivalents and concentration of credit risk

 

The Company considers only those investments which are highly liquid, readily convertible to cash, or that mature within 90 days from the date of purchase to be cash equivalents. Marketable securities are those investments with original maturities in excess of 90 days. The carrying amounts reported in the balance sheets for cash and cash equivalents are valued at cost, which approximates their fair value.

 

11
 

 

The Company has no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other hedging arrangements. The Company holds cash and cash equivalents in banks in excess of FDIC insurance limits. However, the Company believes risk of loss is minimal as the cash and cash equivalents are held by large, highly-rated financial institutions.

 

Marketable securities

 

The Company considers securities with original maturities of greater than 90 days to be available for sale securities. Available for sale securities are classified as either current or non-current assets based on the nature of the securities and their availability for use in current operations. Available for sale securities are recorded at fair value and unrealized gains and losses are recorded within accumulated other comprehensive income. The estimated fair value of the available for sale securities is determined based on quoted market prices or rates for similar instruments. In addition, the cost of debt securities in this category is adjusted for amortization of premium and accretion of discount to maturity.

 

On a quarterly basis, the Company reviews the status of each security in an unrealized loss position, to evaluate the existence of potential credit losses. The Company first considers whether it intends to sell, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company considers a number of factors to determine if the decline in fair value has resulted from credit losses or other factors, including but not limited to: (1) the extent of the decline; (2) changes to the rating of the security by a rating agency; (3) any adverse conditions specific to the security; and (4) other market conditions that may affect the fair value of the security. If this assessment indicates that a credit loss exists and the present value of cash flows expected to be collected is less than the amortized cost basis, an allowance for credit losses is required for the credit loss. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. As of June 30, 2021, the Company has not recognized any impairment or credit losses on its available for sale securities.

 

Financial instruments

 

Cash, cash equivalents and marketable securities are reflected in the accompanying financial statements at fair value. The carrying amount of accounts payable and accrued expenses, including accrued research and development expenses, approximates fair value due to the short-term nature of those instruments.

 

Fixed assets, net

 

Fixed assets, which consists primarily of leasehold improvements, furniture and fixtures, software, office equipment and certain clinical equipment, are carried at cost less accumulated depreciation. Depreciation is computed over the estimated useful lives of the respective assets, generally three to seven years, using the straight-line method. Amortization of leasehold improvements is recorded over the shorter of the lease term or estimated useful life of the related asset.

 

Leases

 

The Company determines if an arrangement is a lease at contract inception. A lease is a contract, or part of a contract, that conveys the right to control the use of explicitly or implicitly identified property, plant or equipment in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. The Company classifies its leases as operating or financing by considering factors such as the length of the lease term, the present value of the lease payments, the specialized nature of the asset being leased and the potential for ownership of the asset to transfer during the lease term.

 

Leases with terms greater than one-year are recognized on the Company’s balance sheets as right-of-use (“ROU”) assets and lease liabilities and are measured at the present value of the fixed payments due over the lease term minus the present value of any incentives, rebates or abatements expected to be received from the lessor. Options to extend a lease are typically excluded from the expected lease term as the exercise of the option is typically not reasonably certain. Leases are measured at present value using the rate implicit in the lease or, if the implicit rate is not determinable, the lessee’s incremental borrowing rate. As the implicit rate is not typically readily determinable, the Company uses an incremental borrowing rate, which is established based upon the information available at the lease commencement date, to determine the present value of lease payments due under an arrangement. The incremental borrowing rate approximates the rate the Company would pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments.

 

12
 

 

ROU assets are amortized on a straight-line basis over the term of the lease. Lease liabilities accrete to yield and are reduced at the time when the lease payment is payable to the vendor. Costs determined to be variable and not based on an index or rate are not included in the measurement of the lease liability and are recognized in the statements of comprehensive loss in the same line item as expenses arising from fixed lease payments at the time when the event giving rise to the payment occurs.

 

Foreign currency translation

 

The Company considers the U.S. dollar to be its functional currency. Expenses denominated in foreign currencies are translated at the exchange rate on the date the expense is incurred. The effect of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars is included in the Statements of Comprehensive Loss. Foreign exchange transaction gains and losses are included in the results of operations and are not material in the Company’s financial statements.

 

Research and development expenses

 

Research and development expenses primarily consist of costs associated with the preclinical and clinical development of the Company’s product candidate portfolio, including the following:

 

  external research and development expenses incurred under arrangements with third parties, such as contract research organizations (“CROs”) and other vendors and contract manufacturing organizations (“CMOs”) for the production of drug substance and drug product; and
     
  employee-related expenses, including salaries, benefits and share-based compensation expense.

 

Research and development expenses also include costs of acquired product licenses and related technology rights where there is no alternative future use, costs of prototypes used in research and development, consultant fees and amounts paid to certain of our collaborative partners.

 

All research and development expenses are charged to operations as incurred in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic (“ASC”) 730, Research and Development. The Company accounts for non-refundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received, rather than when the payment is made.

 

Accrued research and development expenses

 

As part of the process of preparing our financial statements, the Company is required to estimate its accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on the Company’s behalf and estimating the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced or otherwise notified of the actual cost. The majority of the Company’s service providers invoice the Company monthly in arrears for services performed or when contractual milestones are met. The Company makes estimates of its accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to the Company at that time. The Company periodically confirms the accuracy of its estimates with the service providers and makes adjustments if necessary. The significant estimates in the Company’s accrued research and development expenses are related to expenses incurred with respect to CROs, CMOs and other vendors in connection with research and development and manufacturing activities.

 

The Company bases its expense related to CROs and CMOs on its estimates of the services received and efforts expended pursuant to quotations and contracts with such vendors that conduct research and development and manufacturing activities on the Company’s behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to the Company’s vendors will exceed the level of services provided and result in a prepayment of the applicable research and development or manufacturing expense. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from its estimate, the Company adjusts the accrual or prepaid expense accordingly. Although the Company does not expect its estimates to be materially different from amounts actually incurred, the Company’s understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any particular period. There have been no material changes in estimates for the periods presented.

 

13
 

 

Stock-based compensation expense

 

The Company follows the provisions of ASC 718, Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employees, including stock options. Stock-based compensation expense is based on the grant date fair value estimated in accordance with the provisions of ASC 718 and is generally recognized as an expense over the requisite service period. For grants containing performance-based vesting provisions, the grant-date fair value of the performance-based stock options is recognized as compensation expense once it is probable that the performance condition will be achieved. The Company accounts for actual forfeitures in the period the forfeiture occurs.

 

Stock Options

 

The Company estimates the fair value of stock options on the date of grant using the Black-Scholes option-pricing model. Due to the lack of trading history, the Company’s computation of stock-price volatility is based on the volatility rates of comparable publicly held companies over a period equal to the expected term of the options granted by the Company. The Company’s computation of expected term is determined using the “simplified” method, which is the midpoint between the vesting date and the end of the contractual term. The Company believes that it does not have sufficient reliable exercise data in order to justify the use of a method other than the “simplified” method of estimating the expected exercise term of employee stock option grants. The Company utilizes a dividend yield of zero based on the fact that the Company has never paid cash dividends to stockholders and has no current intentions to pay cash dividends. The risk-free interest rate is based on the zero-coupon United States Treasury yield at the date of grant for a term equivalent to the expected term of the option.

 

Stock-based compensation expense is included in both research and development expenses and general and administrative expenses in the Statements of Comprehensive Loss.

 

Collaboration revenue

 

At the inception of a collaboration agreement, the Company first assesses whether the contractual agreement is within the scope of ASC 808, Collaborative Arrangements by evaluating whether the agreement involves a joint operating activity and involves two (or more) parties that are both active participants in the activity and exposed to significant risks and rewards dependent on the commercial success of such activity. Then the Company determines whether the collaboration agreement in its entirety represents a contract with a customer as defined by ASC 606, Revenue from Contracts with Customers (“ASC 606”). If only a portion of the collaboration agreement is potentially with a customer, the Company applies the distinct good or service unit-of-account guidance in ASC 606 to determine whether there is a unit of account that should be accounted for under ASC 606.

 

In accordance with ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.

 

From time to time, the Company enters into licensing agreements that are within the scope of ASC 606, under which it may license rights to research, develop and commercialize its product candidates to third parties. The terms of these collaborative research and development agreements typically include non-refundable, upfront license fees; reimbursement for research and development activities; development, regulatory and commercial milestone payments; and royalties on net sales of commercialized products. The Company may also enter into development and manufacturing service agreements with its collaborators. For each arrangement, at contract inception, the Company identifies all performance obligations, which may include a license to intellectual property and know-how, research and development activities, transition activities and/or manufacturing services and determines if each performance obligation is distinct. In order to determine the transaction price, in addition to any upfront payment, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract. The Company constrains the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur. When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. These estimates are re-assessed each reporting period as required.

 

14
 

 

Once the estimated transaction price is established, amounts are allocated to the performance obligations that have been identified. The transaction price is generally allocated to each separate performance obligation on a relative standalone selling price basis, which requires the use of assumptions and judgement. Standalone selling prices used to perform the initial allocation are not updated after contract inception. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when or as the performance obligation is satisfied.

 

Amounts received prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue in the accompanying balance sheets. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion. Refer to Note 6 – Commitments and Contingencies, for specific details regarding the Company’s collaboration agreements.

 

Since the Company’s inception and through June 30, 2021, no revenue has been recognized by the Company.

 

Income taxes

 

The Company utilizes the liability method of accounting for deferred income taxes, as set forth in ASC 740, Income Taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance is established against deferred tax assets when, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense.

 

Recent accounting pronouncements

 

The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). ASUs not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Effective January 1, 2020, the Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost. The adoption of this ASU had no impact on the Company’s financial statements and related disclosures.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including, among other changes, the consideration of costs and benefits when evaluating disclosure requirements. Effective January 1, 2020, the Company adopted ASU 2018-13. The adoption had no impact on the Company’s financial statements and related disclosures.

 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Effective January 1, 2020, the Company adopted ASU 2018-15. The adoption had no impact on the Company’s financial statements and related disclosures.

 

15
 

 

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808), which clarifies the interaction between the guidance for collaborative arrangements (Topic 808) and the new revenue recognition standard (Topic 606). Effective January 1, 2020, the Company adopted ASU 2018-18. The adoption had no impact on the Company’s financial statements and related disclosures.

 

In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (ASU 2021-04). This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. ASU 2021-04 is effective for fiscal years beginning after December 15, 2021 on a prospective basis, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period and should be applied as of the beginning of the fiscal year that includes the interim period. The Company is currently evaluating this new standard, but does not expect it to have a material impact on the Company’s financial statements and related disclosures.

 

4. CAPITALIZATION

 

On May 12, 2021, the Company held its Annual Meeting of Stockholders, at which the Company’s stockholders approved an amendment to the Company’s Second Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 100,000,000 shares to 150,000,000 shares.

 

As of June 30, 2021, the Company had authorized 150,000,000 shares of common stock, $0.0001 par value per share, of which 63,374,738 were issued and outstanding. As of December 31, 2020, the Company had authorized 100,000,000 shares of common stock, $0.0001 par value per share, of which 56,517,891 were issued and outstanding.

 

In addition, as of June 30, 2021 and December 31, 2020, the Company had authorized 25,000,000 shares of preferred stock, $0.0001 par value per share, of which none were issued and outstanding.

 

5. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES

 

The Company considers all highly liquid investments purchased with original maturities of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents as of June 30, 2021 and December 31, 2020 were $151.8 million and $102.3 million, respectively, and included cash and investments in money market funds.

 

The Company considers securities with original maturities of greater than 90 days at the date of purchase to be available for sale securities. The Company held available for sale securities with a fair value totaling $24.6 million and $19.5 million at June 30, 2021 and December 31, 2020, respectively. These available for sale securities consisted solely of investment-grade corporate debt securities and had expected maturities of less than one year. The Company may sell certain of its marketable securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation.

 

The Company evaluates securities with unrealized losses, if any, to determine whether the decline in fair value has resulted from credit loss or other factors. As of June 30, 2021, the Company has not recognized any impairment or credit losses on the Company’s available for sale securities. While the Company classifies these securities as available for sale, the Company does not currently intend to sell its investments and the Company currently believes it has the ability to hold these investments until maturity.

 

The following table summarizes the amortized cost, fair value and allowance for credit losses of the Company’s available for sale securities:

 

   June 30, 2021 
   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Fair Value 
                 
Corporate debt securities  $24,585   $    12   $   $24,597 
Total  $24,585   $12   $   $24,597 

 

   December 31, 2020 
   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Fair Value 
                 
Corporate debt securities  $19,545   $   $(15)  $19,530 
Total  $19,545   $   $(15)  $19,530 

 

16
 

 

The Company’s available for sale securities are reported at fair value on the Company’s balance sheets. Unrealized gains (losses) are reported within accumulated other comprehensive income (loss) in the Statements of Comprehensive Loss. The cost of securities sold and any realized gains/losses from the sale of available for sale securities are based on the specific identification method. The changes in accumulated other comprehensive income (loss) associated with the unrealized gain (loss) on available for sale securities during the three and six months ended June 30, 2021 and 2020, respectively, were as follows:

 

   2021   2020   2021   2020 
   Three Months Ended June 30,   Six Months Ended June 30, 
   2021   2020   2021   2020 
                 
Beginning balance  $(16)  $210   $(15)  $ 
Current period changes in fair value before reclassifications, net of tax   28    (112)   27    98 
Amounts reclassified from accumulated other comprehensive income (loss), net of tax                
Other comprehensive income (loss)   28    (112)   27    98 
Ending balance  $12   $98   $12   $98 

 

6. COMMITMENTS AND CONTINGENCIES

 

License and Other Agreements

 

In May 2018, the Company entered into an Asset Purchase Agreement (the “MacroGenics Asset Purchase Agreement”) with MacroGenics, Inc. (“MacroGenics”) pursuant to which the Company acquired MacroGenics’ interest in teplizumab (renamed PRV-031), a humanized mAb for the treatment of Type 1 Diabetes (“T1D”). As partial consideration for the MacroGenics Asset Purchase Agreement, the Company granted MacroGenics a warrant to purchase 2,162,389 shares of the Company’s common stock at an exercise price of $2.50 per share. The Company is obligated to pay MacroGenics contingent milestone payments totaling $170.0 million upon the achievement of certain regulatory approval milestones, including $60.0 million payable within 90 days of an approval of a BLA for a first indication in the United States. In addition, the Company is obligated to make contingent milestone payments to MacroGenics totaling $225.0 million upon the achievement of certain sales milestones. The Company has also agreed to pay MacroGenics a single-digit royalty on net sales of the product. The Company has also agreed to pay third-party obligations, including low single-digit royalties, a portion of which is creditable against royalties payable to MacroGenics, aggregate milestone payments of up to approximately $0.7 million and other consideration, for certain third-party intellectual property under agreements the Company assumed pursuant to the MacroGenics Asset Purchase Agreement. Further, the Company is required to pay MacroGenics a low double-digit percentage of certain consideration to the extent it is received in connection with a future grant of rights to teplizumab by the Company to a third party. The Company is obligated to use reasonable commercial efforts to develop and seek regulatory approval for teplizumab.

 

In May 2018, the Company entered into a License Agreement with MacroGenics (the “MacroGenics License Agreement”), pursuant to which MacroGenics granted the Company exclusive global rights for the purpose of developing and commercializing MGD010 (renamed PRV-3279), a humanized protein and a potential treatment for systemic lupus erythematosus (“SLE”) and other similar diseases. As partial consideration for the MacroGenics License Agreement, the Company granted MacroGenics a warrant to purchase 270,299 shares of the Company’s common stock at an exercise price of $2.50 per share. The Company is obligated to make contingent milestone payments to MacroGenics totaling $42.5 million upon the achievement of certain developmental and approval milestones for the first indication, and an additional $22.5 million upon the achievement of certain regulatory approvals for a second indication. In addition, the Company is obligated to make contingent milestone payments to MacroGenics totaling $225.0 million upon the achievement of certain sales milestones. The Company has also agreed to pay MacroGenics a single-digit royalty on net sales of the product. Further, the Company is required to pay MacroGenics a low double-digit percentage of certain consideration to the extent received in connection with a future grant of rights to PRV-3279 by the Company to a third party. In connection with the Company’s grant of certain rights for PRV-3279 to Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd. (“Huadong”) under the Huadong License Agreement, in May 2021, the Company paid $1.1 million to MacroGenics related to “qualified” consideration, as defined in the MacroGenics License Agreement, that the Company received from Huadong. See below for further description of the Huadong License Agreement.

 

The Company is obligated to use commercially reasonable efforts to develop and seek regulatory approval for PRV-3279. The license agreement may be terminated by either party upon a material breach or bankruptcy of the other party, by the Company without cause upon prior notice to MacroGenics, and by MacroGenics in the event that the Company challenges the validity of any licensed patent under the agreement.

 

17
 

 

As of June 30, 2021, the Company has not achieved any milestones that would trigger payments to MacroGenics.

 

In July 2019, MacroGenics elected to exercise its warrants for an aggregate of 2,432,688 shares on a cashless basis, resulting in the Company’s net issuance of 1,948,474 shares. Following the MacroGenics’ July 2019 warrant exercises, there are no additional warrants outstanding in connection with the MacroGenics License Agreement and the MacroGenics Asset Purchase Agreement.

 

In February 2021, the Company entered into a License Agreement with Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd., a wholly-owned subsidiary of Huadong Medicine Co., Ltd. (the “Huadong License Agreement”), pursuant to which the Company granted Huadong exclusive rights for the purpose of developing and commercializing PRV-3279, a DART® (bispecific antibody-based molecule) targeting the B cell surface proteins CD32B and CD79B, in Greater China (mainland China, Hong Kong, Macau and Taiwan). Provention Bio will retain exclusive worldwide rights to develop PRV-3279 for combination uses to reduce the immunogenicity of biotherapeutics, but Huadong will have the exclusive right to distribute PRV-3279 in that field in Greater China. In consideration of the license and other rights granted as part of the Huadong License Agreement, the Company received an upfront payment of $6.0 million and will receive up to $11.5 million in research, development and manufacturing funding over the next three years, of which $1.0 million was received as of June 30, 2021. If Huadong successfully develops, obtains regulatory approval for, and commercializes PRV-3279 in Greater China, the Company is eligible to receive up to $37.0 million in regulatory milestones and up to $135.0 million in commercial milestones based on aggregate net sales in a calendar year in Greater China. If commercialized, the Company would also be eligible to receive low double-digit royalties on net sales of PRV-3279 by Huadong in Greater China. The License Agreement may be terminated by either party upon a material breach or bankruptcy of the other party, by Huadong without cause upon at least 12 months prior notice to the Company and by the Company in the event Huadong challenges a licensed patent or in the event that the Company’s upstream license terminates. The Company may also terminate the License Agreement if Huadong ceases commercialization of PRV-3279 for a consecutive period of six months after first commercial sale. The Company is generally responsible for the manufacturing of PRV-3279 at least through regulatory approval in Greater China and Huadong will exclusively purchase all clinical and commercial supply requirements of PRV-3279 from the Company until Huadong exercises its option to assume manufacturing responsibilities, which may be triggered after regulatory approval in China. The Company will retain all rights to PRV-3279 in the rest of the world. The Company plans to begin a Phase 2a trial of PRV-3279 in systemic lupus erythematosus in the fourth quarter of 2021 and expects a portion of such trial to be conducted in Hong Kong.

 

The Company evaluated the Huadong License Agreement under the provisions of ASC 606 and identified the following three material promises: (1) the license of rights to PRV-3279 in Greater China, (2) the performance of clinical research activities and (3) manufacturing process improvements. The Company concluded that the performance obligations were not distinct and consequently do not have value on a standalone basis. Accordingly, they were determined to represent one performance obligation. The Company determined that the transaction price of the Huadong License Agreement was $15.5 million, consisting of the $6.0 million up-front payment and $9.5 million of the research, development and manufacturing funding expected to be received. which would not result in a significant reversal of revenue in a future period. The total transaction price was allocated to the single identified performance obligation. The regulatory and sales event-based milestone payments represent variable consideration, and the Company used the most likely amount method to estimate this variable consideration because the potential milestone payment is a binary event, as the Company will either receive the milestone payment or it will not. Given the high degree of uncertainty around achievement of these milestones, the Company determined the milestone amounts to be fully constrained and will not recognize revenue until the uncertainty associated with these payments is resolved. Any consideration related to royalties will be recognized if and when the related sales occur. The Company re-assesses the transaction price in each reporting period and when events whose outcomes are resolved or other changes in circumstances occur.

 

The Company determined to recognize revenue using a cost-based input method according to costs incurred to date compared to estimated total costs of the clinical research activities over the period which the activities are performed under the agreement, which is currently expected to occur from mid-2021 through mid-2024. The Company recognized no collaboration revenue during the three and six month periods ending June 30, 2021, and total deferred revenue as of June 30, 2021 was $7.0 million.

 

18
 

 

In November 2018, the Company entered into a License and Collaboration Agreement (the “Amgen Agreement”) with Amgen, Inc. (“Amgen”) for PRV-015 (formerly AMG 714), a novel anti-IL-15 monoclonal antibody being developed for the treatment of gluten-free diet non-responsive celiac disease (“NRCD”). Under the terms of the agreement, the Company will conduct and fund a Phase 2b trial in NRCD and lead the development and regulatory activities for the program. Amgen agreed to make an equity investment of up to $20.0 million in the Company, subject to certain terms and conditions set forth in the agreement. Amgen is also responsible for the manufacturing of PRV-015. Upon completion of the Phase 2b trial, a $150.0 million milestone payment is due from Amgen to the Company, plus an additional regulatory milestone payment, and single digit royalties on future sales; provided, however, that Amgen has the right to elect not to pay the $150.0 million milestone, in which case we will have an option to negotiate for the transfer to the Company of rights to AMG 714 pursuant to a termination license agreement between Amgen and the Company. The material terms of the termination license agreement have been negotiated and agreed and form part of the Amgen Agreement. Under the terms of the termination license agreement, the Company would be obligated to make certain contingent milestone payments to Amgen and other third parties totaling up to $70.0 million upon the achievement of certain clinical and regulatory milestones and a low double-digit royalty on net sales of any approved product based on the IL-15 technology. The agreement may be terminated by either party upon a material breach or upon an insolvency event and by Amgen if we are not able to fund our clinical development obligations (among other termination triggers). The agreement expires upon the expiration of Amgen’s last obligation to make royalty payments to Provention. In September 2019, in a private placement completed concurrently with the Company’s underwritten public offering, Amgen purchased 2,500,000 shares of the Company’s common stock at the underwritten public offering price of $8.00 per share, for a total investment of $20.0 million.

 

In April 2017, the Company entered into a License Agreement with Vactech Ltd. (the “Vactech License Agreement”), pursuant to which Vactech Ltd. (“Vactech”) granted the Company exclusive global rights for the purpose of developing and commercializing the group B coxsackievirus vaccine (“CVB”) platform technology. In consideration of the licenses and other rights granted by Vactech, the Company issued two million shares of its common stock to Vactech. The Company recorded the issuance of the shares at their estimated fair value of approximately $1.70 per share for a total of $3.4 million as a license fee expense included as part of research & development expense for the year ended December 31, 2017. Provention paid Vactech a total of approximately $0.5 million for transition and advisory services during the first 18 months of the term of the agreement. In addition, Provention may be obligated to make a series of contingent milestone payments to Vactech totaling up to an additional $24.5 million upon the achievement of certain clinical development and regulatory filing milestones, of which the Company paid $0.5 million to Vactech in April 2021. This payment was triggered upon the dosing of the first patient in the Phase 1 PROVENT study, which occurred in January 2021. In addition, the Company has agreed to pay Vactech tiered single-digit royalties on net sales of any approved product based on the CVB platform technology and three additional payments totaling $19.0 million upon the achievement of certain annual net sales levels. The Vactech License Agreement may be terminated by the Company on a country-by-country basis without cause (in which case the exclusive global rights to the technology will transfer back to Vactech) and by either party upon a material breach or insolvency of the other party. If the Company terminates the agreement with respect to two or more specified European countries, the agreement will be deemed terminated with respect to all of the European Union, and if the Company terminates the agreement with respect to the United States, the agreement will be deemed terminated with respect to all of North America. The agreement expires upon the expiration of the Company’s last obligation to make royalty payments to Vactech.

 

Legal Proceedings

 

On May 21, 2021, a putative class action complaint was filed in the U.S. District Court for the District of New Jersey (the “Court”), naming the Company, Chief Executive Officer Ashleigh Palmer, and Chief Financial Officer Andrew Drechsler as defendants. The complaint alleges violations of the Securities Exchange Act of 1934 and Rule 10b-5 in connection with disclosures made regarding the teplizumab BLA and teplizumab’s commercialization timeline. The plaintiff seeks to represent a class of shareholders who purchased or otherwise acquired the Company’s securities between November 2, 2020 and April 8, 2021. The complaint seeks unspecified damages. Per the procedures set forth by federal securities laws, applications for appointment of lead plaintiff(s) and lead counsel were due to the Court on July 20, 2021. Two applications for lead plaintiff and lead counsel were submitted to the Court on that date; one of the two movants subsequently withdrew its application.

 

The Company is unable at this time to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows. The Company does not have contingency reserves established for any litigation liabilities.

 

7. NET LOSS PER SHARE OF COMMON STOCK

 

Basic and diluted net loss per common share is determined by dividing net loss by the weighted average common shares outstanding during the period. For the periods where there is a net loss, stock options and warrants have been excluded from the calculation of diluted net loss per common share because their effect would be anti-dilutive. Therefore, the weighted average common shares used to calculate both basic and diluted net loss per common share would be the same.

 

19
 

 

The following table sets forth the computation of basic and diluted net loss per share of common stock for the periods indicated: 

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2021   2020   2021   2020 
     
Net loss  $(29,142)  $(22,122)  $(61,582)  $(34,704)
                     
Weighted average shares of common stock outstanding - basic and diluted   63,375    49,199    62,822    48,449 
Net loss per share of common stock, basic and diluted  $(0.46)  $(0.45)  $(0.98)  $(0.72)

 

The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding as they would be antidilutive:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2021   2020   2021   2020 
                 
Stock options    12,103    6,846    12,103    6,846 
Warrants   1,705    1,972    1,705    1,972 

 

8. ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

   June 30, 2021   December 31, 2020 
     
Accrued research and development costs  $8,620   $5,165 
Accrued compensation   2,364    1,443 
Accrued pre-commercial costs   1,336    1,191 
Accrued professional fees   1,160    1,197 
Other accrued liabilities   287    166 
Total accrued expenses  $13,767   $9,162 

 

9. FAIR VALUE OF ASSETS AND LIABILITIES

 

The carrying amounts reported in the balance sheet for cash and cash equivalents, accounts payable and accrued expenses approximate fair value based on the short-term nature of these items.

 

In accordance with accounting principles generally accepted in the United States, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy prioritizes the inputs used to measure fair value as follows:

 

Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

 

Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

20
 

 

The following is a summary of assets and their related classifications under the fair value hierarchy:

 

    June 30, 2021  
    Financial Instruments Carried at Fair Value  
   

Quoted prices in

active markets for identical items

(Level 1)

   

Significant other

observable inputs

(Level 2)

   

Significant

unobservable inputs

(Level 3)

    Total  
Assets:                                
Cash and cash equivalents1     $ 151,781     $     $     $ 151,781  
Investments in Corporate debt securities2             24,597             24,597  

 

   December 31, 2020 
   Financial Instruments Carried at Fair Value 
   Quoted prices in             
   active markets for   Significant other   Significant     
   identical items   observable inputs   unobservable inputs     
   (Level 1)   (Level 2)   (Level 3)   Total 
Assets:                    
Cash and cash equivalents 1    $102,294   $   $   $102,294 
Investments in Corporate debt securities2         19,530        19,530 

 
 

1 Cash and cash equivalents primarily include investments in money market funds
2 Investments in investment-grade corporate debt securities are classified as available for sale securities

 

10. STOCK OPTIONS

 

In 2017, the Company adopted the Provention Bio, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). Pursuant to the 2017 Plan, the Company’s Board of Directors may grant incentive stock options, nonqualified stock options, and restricted stock to employees, officers, directors, consultants and advisors. As of June 30, 2021, there were options to purchase an aggregate of 11,665,932 shares of common stock outstanding under the 2017 Plan. Options issued under the 2017 Plan are exercisable for up to 10 years from the date of issuance.

 

In 2018, the Company amended and restated its 2017 Plan to, among other things, include an evergreen provision, which would automatically increase the number of shares available for issuance under the 2017 Plan in an amount equal to (1) the difference between (x) 18% of the total shares of the Company’s common stock outstanding, on a fully diluted basis, on December 31st of the preceding calendar year, and (y) the total number of shares of the Company’s common stock reserved under the 2017 Plan on December 31st of such preceding calendar year or (2) an amount less than this calculated increase as determined by the board of directors.

 

In connection with the evergreen provisions of the 2017 Plan, the number of shares available for issuance under the 2017 Plan was increased by 2,270,353 shares, as determined by the board of directors under the provisions described above, effective as of January 1, 2021. As of June 30, 2021, there were 197,801 shares available for future grants.

 

In October 2020, the Company adopted the Provention Bio, Inc. 2020 Inducement Plan (the “2020 Inducement Plan”). Pursuant to the terms of the 2020 Inducement Plan, the Company may grant non-statutory stock options, stock appreciation rights, restricted stock unit awards and restricted stock for up to a total of 2,000,000 shares of common stock to individuals that were not previously an employee or director of the Company or individuals returning to employment after a bona fide period of non-employment with the Company. As of June 30, 2021, there were options to purchase 436,800 shares of common stock outstanding under the 2020 Inducement Plan and 1,563,200 shares available for future grants. Options issued under the 2020 Inducement Plan are exercisable for up to 10 years from the date of issuance.

 

21
 

 

Stock-based compensation

 

Total stock-based compensation expense recognized for both employees and non-employees was as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2021   2020   2021   2020 
     
General and administrative  $2,069   $848   $3,875   $1,561 
Research and development   1,198    429    2,249    952 
Total stock-based compensation expense  $3,267   $1,277   $6,124   $2,513 

 

Option activity

 

The Company grants options with service-based vesting requirements as well as options with performance-based vesting requirements. Generally, the service-based requirements vest over a four-year period in multiple tranches. Each tranche of the performance-based component vests upon the achievement of a specific milestone. These milestones are related to the Company’s clinical trials, manufacturing activities, regulatory activities, commercial activities and certain other performance metrics.

 

A summary of option activity for the six months ended June 30, 2021 are presented below:

 

           Weighted-    
       Weighted-   Average    
       Average   Remaining    
   Underlying   Exercise   Contractual  Intrinsic 
Stock Option Awards  Shares   Price   Term  Value 
                
Outstanding at December 31, 2020   9,503   $9.10   8.3 years  $ 
Granted   2,922   $7.70         
Exercised   (19)  $2.50         
Forfeited or expired   (303)  $5.26         
Outstanding at June 30, 2021   12,103   $8.87   8.3 years  $22,258 
Exercisable at June 30, 2021   4,367   $6.26   7.0 years  $15,851 

 

The weighted average grant-date fair value of options granted during the six months ended June 30, 2021, was $5.34 per share. As of June 30, 2021, there were approximately 2,240,000 unvested options subject to performance-based vesting criteria with approximately $14.7 million of unrecognized compensation expense. This expense will be recognized when each milestone becomes probable of occurring. In addition, as of June 30, 2021, there were approximately 5,496,000 unvested options outstanding subject to time-based vesting with approximately $32.4 million of unrecognized compensation expense which will be recognized over a period of 3.1 years.

 

Cash proceeds from, and the aggregate intrinsic value of, stock options exercised during the periods presented below were as follows:

 

   2021   2020   2021   2020 
   Three Months Ended June 30,   Six Months Ended June 30, 
   2021   2020   2021   2020 
     
Cash proceeds from options exercised  $   $380   $48   $574 
Aggregate intrinsic value of options exercised       323    239    953 

 

22
 

 

The Company uses the Black-Scholes option-pricing model to estimate the fair value of option awards with the following weighted-average assumptions for the period indicated:

  

   Six Months Ended June 30, 
   2021   2020 
         
Exercise price  $7.70   $13.09 
Expected volatility    81%   73%
Expected dividends        
Expected term (in years)    6.1    6.2 
Risk-free interest rate   1.07%   1.05%

 

The weighted-average valuation assumptions were determined as follows:

 

  Risk-free interest rate: The Company bases the risk-free interest rate on the interest rate payable on United States Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected option term.
     
  Expected annual dividends: The estimate for annual dividends is 0%, because the Company has not historically paid, and does not expect for the foreseeable future to pay, a dividend.
     
  Expected stock price volatility: The expected volatility used is based on historical volatilities of similar entities within the Company’s industry which were commensurate with the Company’s expected term assumption.
     
  Expected term of options: The expected term of options represents the period of time options are expected to be outstanding. The expected term of the options granted to employees is derived from the “simplified” method as described in Staff Accounting Bulletin 107 relating to stock-based compensation, whereby the expected term is an average between the vesting period and contractual period due to the limited operating history.

 

11. WARRANTS

 

In connection with the April 2017 sale of Series A Convertible Redeemable Preferred Stock, the Company issued warrants to MDB, the placement agent, and its designees to purchase 558,740 shares of Series A Convertible Redeemable Preferred Stock with an exercise price of $2.50 per share with a seven-year term. Upon completion of the IPO in July 2018, the warrants automatically became warrants for the purchase of 558,740 shares of the Company’s common stock. In June 2020, certain warrant holders from the Series A offering elected to exercise warrants for an aggregate of 153,000 shares on a cashless basis, resulting in the Company’s net issuance of 129,719 shares. As of June 30, 2021, a total of 316,754 warrants have been exercised on a cashless basis and there were 241,986 warrants outstanding related to the Series A Offering.

 

In connection with the Company’s completion of its IPO, in July 2018, the Company issued to MDB, the underwriter in the IPO, and its designees warrants to purchase 1,596,956 shares of the Company’s common stock at an exercise price of $5.00 per share. These warrants have a five-year term. As of June 30, 2021, a total of 134,114 warrants have been exercised on a cashless basis and there were 1,462,842 warrants outstanding related to the IPO.

 

23
 

 

12. FIXED ASSETS

 

Fixed assets consisted of the following:

   June 30, 2021   December 31, 2020 
         
Leasehold improvements  $838   $828 
Software   287     
Furniture and fixtures   149    149 
Office equipment   35    35 
Clinical equipment   60    27 
Construction in progress   1,026    431 
    2,395    1,470 
Less accumulated depreciation   (187)   (33)
Fixed assets, net  $2,208   $1,437 

 

Depreciation expense was $0.1 million for the three months ended June 30, 2021, and $0.2 million for the six months ended June 30, 2021. The Company had no depreciation expense for the three and six months ended June 30, 2020.

 

13. LEASES

 

The Company’s lease portfolio consists of one office lease located in Red Bank, NJ. This lease is classified as an operating lease and has an initial term of 64 months from the lease commencement date, which began in October 2020. The Company has the option to renew or terminate the current term of a lease agreement at the end of the lease term. In its initial assessment of the lease term of the Red Bank, NJ office lease, the Company concluded that it is not reasonably certain to exercise the option to renew or terminate and therefore, this option was not considered in its lease assessment. The Company does not separate lease and non-lease components for all classes of underlying assets. The Company does not have any leases that contain residual value guarantees and the Company does not sublease any of its leased assets. The Company does not record leases with an initial lease term of one-year or less on its balance sheet. As of June 30, 2021, the Company has not entered into any short-term leases.

 

The components of lease costs from continuing operations were as follows:

 

             
   Three Months Ended June 30,   Six Months Ended June 30, 
   2021   2020   2021   2020 
                 
Operating lease costs  $37   $   $74   $ 
Variable lease costs   6        12     
Total lease costs  $43   $   $86   $ 

 

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Supplemental balance sheet information related to leases are as follows:

 

   Classification 

As of June 30,

2021

   As of December 31, 2020 
            
Operating leases              
Lease right-of-use assets             
Non-current   Operating lease right-of-use assets  $393   $408 
Lease liabilities             
Current   Accrued expenses  $114   $72 
Non-current  Operating lease liabilities, long-term  $655   $715 
              
Weighted average remaining lease term             
Operating leases       4.7 years    5.2 years 
              
Weighted average discount rate              
Operating leases      15.0%   15.0%

 

As of June 30, 2021, maturities of lease liabilities on an annual basis for the remaining years of the Company’s non-cancelable lease agreements were as follows:

   Operating Leases 
     
Year ending December 31,     
2021 (remaining)  $108 
2022   221 
2023   227 
2024   232 
2025   238 
Thereafter   41 
Total lease payments   1,067 
Less: present value discount   298 
Present value of lease liabilities  $769 

  

14. INCOME TAXES

 

The Company recorded a benefit from state income taxes of approximately $1.0 million and $0.5 million for the three and six months ended June 30, 2021 and 2020, respectively. The benefit from state income taxes solely reflects the reversal of valuation allowances previously recorded against the Company’s New Jersey State net operating losses (“NOLs”) that resulted from the Company’s sale of approximately $11.9 million and $6.8 million, respectively in each period, of its New Jersey state NOLs under the State of New Jersey’s Technology Business Tax Certificate Transfer Program (the “Program”) for cash proceeds of $1.0 million and $0.5 million. The Program allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of NOLs and defined research and development tax credits.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2020 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2021. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties and should be read together with the “Risk Factors” section of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Overview

 

We are a biopharmaceutical company dedicated to intercepting and preventing immune-mediated diseases. Since our inception, we have devoted substantially all of our efforts to business planning, research and development, pre-commercial activities, recruiting management and technical staff, acquiring operating assets, partnering and raising capital. We have not yet commenced any commercial revenue-generating operations, do not have any positive cash flows from operations and we will need to raise additional capital to finance our operations.

 

We have not generated any revenue to date and, through June 30, 2021, we had an accumulated deficit of $239.2 million. We have financed our operations primarily through equity offerings.

 

In January 2021, we completed an underwritten public offering in which we sold 6,250,000 shares of common stock at a public offering price of $16.00 per share. In February 2021, the underwriters partially exercised their option to purchase an additional 587,500 shares at a price of $16.00 per share. In the aggregate, total net proceeds from this underwritten public offering was $102.3 million, after deducting underwriting discounts and commissions of $6.6 million and other offering expenses of $0.5 million.

 

In February 2021, we established the 2021 ATM Program through which we may sell, from time to time at our sole discretion, up to $150.0 million of shares of our common stock. As of June 30, 2021, no sales have been made under this program. In connection with the establishment of the 2021 ATM Program, we terminated our 2019 ATM Program and no additional stock may be issued thereunder. Prior to its termination, we sold 725,495 shares of our common stock for aggregate net proceeds of approximately $9.9 million, net of $0.3 million in sales commissions, under the 2019 ATM Program, all of which occurred during the quarter ended June 30, 2020.

 

We expect that over the next several years we will continue to incur losses from operations as we increase our expenditures in research and development in connection with our regulatory submissions, clinical trials and other development activities, as well as costs to support our commercialization efforts to launch teplizumab, if we receive regulatory approval in the United States. If adequate funds are not available to us on a timely basis, or at all, we may be required to terminate or delay certain development activities.

 

Our Focus and Pipeline

 

Inflammation is a natural consequence of most infections, as it is the immune system’s first response to invading pathogens in the event of injury or acute illness. Most of the time, this response is beneficial and well-controlled; helping to repair tissue damage and clear pathogens from the body. In addition to directly damaging tissues and organs, an infection can sometimes result in the excessive release of toxic immune mediators leading to a potentially life-threatening acute pathological immune response. When patients have the requisite genetic predisposition, infections can also trigger chronic autoimmune responses that persist and progress long after the original insult has subsided. These sustained pathological responses have been linked to an increased susceptibility to chronic debilitating and potentially life-threatening diseases like inflammatory bowel disease, diabetes, celiac, SLE, cancer, and certain neurological disorders.

 

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Our “predict” and “preempt” therapeutic development focus is on product candidates that intercept the underlying pathological immune and inflammatory responses in susceptible individuals. Our pipeline of product candidates in development includes:

 

  PRV-031: a humanized, anti-CD3 monoclonal antibody (“mAb”) for the delay of progression to Stage 3 clinical T1D in at-risk individuals and for patients with newly-diagnosed T1D. Teplizumab has been designated by the FDA as an orphan drug for the treatment of newly-diagnosed T1D. Teplizumab was also granted breakthrough therapy designation from the FDA in August 2019, PRIME eligibility from the EMA in October 2019 and awarded an Innovation Passport in the United Kingdom in July 2021. In July 2021, the Company received a CRL to the BLA for teplizumab for the delay of clinical T1D in at-risk individuals, and we plan to continue to work collaboratively with the FDA to potentially secure approval of teplizumab. We currently estimate that the prevalence of individuals in the United States that have two or more auto-antibodies and dysglycemia and are at risk of developing clinical stage T1D to be approximately 200,000 people at any time. We currently estimate that there are approximately 64,000 new cases of T1D in the United States each year, approximately 26% of which are in patients aged eight through 17 years;
     
  PRV-101: a CVB vaccine to prevent acute CVB infections and, in those patients at risk, to prevent the CVB-triggered autoimmune damage to pancreatic beta cells that may progress to T1D and damage to intestinal cells that may lead to celiac disease;
     
  PRV-3279: a humanized bispecific scaffold molecule targeting the B-cell surface proteins, CD32B and CD79B, for the treatment of SLE and for the prevention of immunogenicity of biotherapeutics such as those used in gene therapy; and
     
  PRV-015: a human anti-interleukin 15 (“IL-15”) mAb for the treatment of gluten-free diet NRCD, intercepting the effects of contaminating gluten in the most common autoimmune disorder without any approved medication.

 

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The table below summarizes the current status and anticipated milestones for our principal product candidates:

 

Product Candidate / Indication   Status   Next Expected Milestone
PRV-031 (teplizumab, anti-CD3 mAb) for the interception of T1D        
         

At-Risk Indication – for the delay of progression to Stage 3 clinical T1D in at-risk individuals

 

United States: In July 2021, we received a CRL to the BLA for teplizumab for the delay of clinical T1D in at-risk individuals, and we plan to continue to work collaboratively with the FDA to potentially secure approval of teplizumab. See “Recent Company Developments” below for more information.

 

On May 27, 2021, an FDA advisory committee meeting was held where the Endocrinologic and Metabolic Drugs Advisory Committee (“EMDAC”) of the FDA voted ten yes and seven no on the question, “Does the information provided in the background documents and presentations by the Applicant and FDA show that the benefits of teplizumab outweigh the risks in support of approval to delay clinical type 1 diabetes mellitus?”.

 

 

In April 2021, we received a deficiencies letter and feedback from the FDA that it did not find that the AGC Biologics and Eli Lilly drug products used in the PK/PD bridging study are comparable with respect to PK area under the curve (“AUC”) and that the Agency will need additional data to address their concerns. The FDA has also informed us that it concluded the PK profiles are not comparable since the intended commercial product did not meet the pre-specified 80-125% PK AUC comparability target range, and that it cannot be certain if this observation is not clinically relevant. Additionally, the FDA has raised questions regarding the reliability of one of the analytical methods used to release teplizumab drug product; as well as the Form 483 observations issued to AGC Biologics which have since been resolved by AGC.

 

The FDA also recommended that we remove the term “prevention” from the previously proposed indication. See “Recent Company Developments” below for more information regarding FDA feedback. 

 

PK/PD data from the substudy in the ongoing Phase 3 PROTECT trial expected to be available in the third quarter of 2021 which we will evaluate to determine whether these data will be submitted to the FDA to address its PK comparability concerns.

 

United Kingdom: Continue pursuing regulatory path forward with Innovation Passport in the United Kingdom, with a potential filing of a Marketing Authorization Application (“MAA”) in the second half of 2022. We plan to continue to evaluate the regulatory path forward in the United Kingdom and in the European Union based on our further engagement with the MHRA, EMA and other European stakeholders in 2021.

 

 

 

 

 

 

 

 

 

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    United Kingdom: In July 2021, teplizumab was awarded an Innovation Passport in the United Kingdom. In April 2021, we received initial non-binding scientific advice in a letter from the Medicines and Healthcare Products Regulatory Agency (“MHRA”) on a potential regulatory path forward for teplizumab in the United Kingdom. The MHRA indicated its view that (i) there is an unmet medical need for a treatment that delays or prevents progression to T1D in at-risk patients, (ii) an MAA may benefit from additional supplementary information on patient preference, and (iii) reliance on one pivotal study to obtain a marketing authorization ought to meet the criteria described in the EMA/CPMP points to consider on application with (a) meta-analyses and (b) one pivotal study (CPMP/EWP/2330/99).    
         
Newly Diagnosed Indication – for the treatment to preserve beta cell function in individuals with newly diagnosed T1D  

We commenced a Phase 3 clinical trial (the PROTECT study) in approximately 300 pediatric and adolescent patients with newly diagnosed T1D. The first patient was dosed in the second quarter of 2019.

 

In March 2020, in connection with the COVID-19 pandemic, we announced a temporary pause in the randomization of patients with newly diagnosed T1D into the PROTECT study. In June 2020, we resumed enrollment of the PROTECT study on a country by country, site by site basis.

 

  We expect to complete enrollment in the PROTECT study in the third quarter of 2021 and report top-line results from the PROTECT study in mid-2023 , subject to change for any potential COVID-19 related or other interruptions.
PRV-101 (polyvalent CVB vaccine) for the prevention of acute CVB and the prevention of CVB triggered T1D and celiac disease.  

We have completed manufacturing of a polyvalent vaccine at Intravacc, our strategic partner in vaccine manufacturing process development.

 

We commenced a first-in-human Phase 1 study in December 2020 and completed enrollment in April 2021.

 

  We expect to report top-line first-in-human data in the fourth quarter of 2021.
PRV-3279 (humanized anti-CD32B and CD79B bispecific) for the treatment of SLE and for the prevention of immunogenicity of biotherapeutics such as gene therapy.  

In March 2020, we announced positive top-line results from our Phase 1b clinical trial (the PREVAIL study), which evaluated PRV-3279 in 16 healthy volunteers.

 

In January 2021, we announced positive results of pre-clinical experiments in support of the prevention of immunogenicity indication.

 

In February 2021, we entered into a License Agreement with Zhongmei Huadong Pharmaceutical Co., Ltd. (“Huadong”), pursuant to which we granted Huadong certain exclusive rights to develop and commercialize PRV-3279 in greater China excluding the immunogenicity field (combination with gene therapies) to which we retained global rights.

 

  We expect to commence a Phase 2a study in lupus in the fourth quarter of 2021.
PRV-015 (anti-IL-15 mAb) for the treatment of gluten-free diet NRCD.   In August 2020, we initiated a Phase 2b clinical trial (the PROACTIVE trial) in approximately 220 adult celiac patients with gluten-free diet NRCD.   We expect to report top-line results from the Phase 2b PROACTIVE study in 2022.

 

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Recent Company Developments

 

PRV-031 (teplizumab, anti-CD3 mAb)

 

2021 Feedback from FDA

 

On April 2, 2021, the Company received a letter from the FDA stating that as part of its ongoing review of the Company’s BLA for teplizumab, the FDA identified deficiencies that preclude discussion of labeling and post-marketing requirements/commitments at this time. Also on April 2, 2021, at an informal meeting with the Company to discuss the upcoming Advisory Committee, the FDA indicated that, based on the data it had reviewed to date, it was taking the position that the pharmacokinetic profiles of the planned commercial product and the drug product originating from drug substance manufactured for historic clinical trials evaluated in a PK/PD bridging study submitted by the Company for review by the FDA are not comparable, and additional data would be required before the FDA’s concerns could be satisfied. As a follow up, on April 8, 2021, the FDA stated to the Company that it was willing to discuss these issues concurrently with its ongoing review.

 

At an informal meeting on April 23, 2021, held to discuss the FDA’s considerations regarding the comparability of the two drug products, the FDA reported that it concluded that the PK profiles of the two drug products evaluated in the PK/PD bridging study are not comparable since the intended commercial product did not meet the pre-specified 80-125% PK AUC comparability target range. The FDA stated that it cannot be certain if this observation is not clinically relevant, given that the relationship between transient lymphocyte reduction, a PD marker, which was comparable in the PK/PD bridging study, and clinical efficacy, has yet to be fully validated. While the FDA emphasized its understanding of the high unmet need associated with delaying the onset of clinical-stage T1D and reiterated their willingness to work with the Company to find a solution and path forward for the comparability issue, the Company reported its belief that the FDA’s PK comparability considerations were likely to result in a delay in potential BLA approval timelines and the specifics of such delay would depend upon the outcome of ongoing discussions with the FDA to find a solution. The FDA further informed the Company at the April 23, 2021 informal meeting that it planned to mention its PK comparability review in the clinical pharmacology summary of its briefing materials for the May 27, 2021 Advisory Committee Meeting, in addition to including a statement that the FDA is actively working with the Company to resolve the issue and that the focus of the Advisory Committee meeting is the efficacy and safety of teplizumab. The FDA also recommended that both the FDA and the Company update their Advisory Committee briefing materials to reflect the removal of the term “prevention” from the previously proposed “At-Risk” indication, as the remaining term “delay” more accurately reflects the results of the TN-10 trial.

 

Advisory Committee Meeting Held

 

On May 27, 2021, an FDA advisory committee meeting was held where the EMDAC of the FDA voted ten yes and seven no on the question, “Does the information provided in the background documents and presentations by the Applicant and FDA show that the benefits of teplizumab outweigh the risks in support of approval to delay clinical type 1 diabetes mellitus?”.

 

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CRL to BLA Received

 

On July 6, 2021, the Company announced that the FDA issued a CRL for the Company’s BLA for teplizumab for the delay of clinical T1D in at-risk individuals. In the CRL, the FDA stated that a single, low-dose pharmacokinetic/pharmacodynamic (PK/PD) bridging study in healthy volunteers to compare planned commercial product with drug product originating from drug substance manufactured for historic clinical trials had failed to show PK comparability. The FDA further noted that PK remains the primary endpoint for demonstration of comparability between the two products and that the Company will need to establish PK comparability appropriately between the intended commercial product and the clinical trial product or provide other data that adequately justify why PK comparability is not necessary.

 

The Company expects relevant additional PK/PD data being, or to be, collected from a PK/PD substudy in patients receiving 12-days of therapy in the ongoing Phase 3 PROTECT trial in newly diagnosed T1D patients in the third quarter of 2021. These data will be analyzed by independent, unblinded third-parties to maintain the integrity of this placebo-controlled trial. Upon review of the results from this substudy, the Company will determine whether to submit these data to the FDA for its review, along with any other relevant data and analyses based on our ongoing discussions with the FDA, to support PK comparability or otherwise justify why PK comparability is not necessary.

 

In the CRL, the FDA cited several additional considerations related to product quality, which the Company believes have either been addressed in amendments already submitted to the BLA or can be addressed in the short-term. The CRL acknowledged that the FDA had not reviewed several amendments already submitted by the Company in response to certain Chemistry, Manufacturing and Controls (“CMC”) information requests.

 

The FDA also stated that certain deficiencies conveyed during a recent general inspection, not specific to teplizumab, at a fill/finish manufacturing facility used by the Company will need to be resolved before approval. The FDA’s Form 483 observations recently issued to AGC Biologics have since been resolved by AGC and were not included in the CRL.

 

The CRL did not cite any clinical deficiencies related to the efficacy and safety data packages submitted to the BLA and confirmed the acceptability of the proposed proprietary name for teplizumab. The FDA requested that the Company provide a safety update as part of its BLA resubmission. The CRL contained other comments and recommendations that do not impact approvability, as well as general guidance regarding the resubmission process. The Company plans continue to work collaboratively with the FDA to potentially secure approval of teplizumab and bring the first disease-modifying therapy for T1D to at-risk patients as soon as possible.

 

At-Risk Study Data

 

On June 15, 2020, we announced that new data from the “At-Risk” TN-10 study, presented by TrialNet at the 2020 American Diabetes Association Scientific Sessions on June 15, 2020, which demonstrated that a single 14-day course of our lead drug candidate, teplizumab, delayed the median onset of clinical T1D, as compared to placebo, by approximately three years in at-risk individuals. These new data from the “At-Risk” TN-10 study added approximately one year to the two-year median delay that was previously observed.

 

On March 3, 2021, we announced the peer reviewed publication of the extended follow-up results from the “At-Risk” TN-10 study showing that a single teplizumab 14-day course delayed the onset of insulin dependence in type 1 diabetes (T1D) patients by approximately 32.5 months, compared to placebo.

 

PRV-101 (CVB Vaccine)

 

PROVENT Study Initiated

 

In December 2020, we initiated the PROVENT (PROtocol for coxsackievirus VaccinE in healthy voluNTeers) study, a first-in-human study of our polyvalent inactivated CVB vaccine candidate, PRV-101. We are developing PRV-101 for the prevention of acute CVB infection and the potential delay or prevention of T1D and celiac disease. PROVENT is a placebo-controlled, double-blind, randomized first-in-human study. The study’s primary endpoint is the safety of two dose levels of PRV-101 in healthy adult volunteers provided three administrations with 4-week intervals. Tolerability and immunogenicity will also be evaluated. We completed enrollment in April 2021 and results of PROVENT are expected in the fourth quarter of 2021.

 

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PRV-3279 (humanized anti-CD32B and CD79B bispecific)

 

Huadong License Agreement

 

On February 17, 2021, we entered into a License Agreement with Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd. (“Huadong”), a wholly-owned subsidiary of Huadong Medicine Co., Ltd. (the “Huadong License Agreement”), pursuant to which we granted Huadong exclusive rights for the purpose of developing and commercializing PRV-3279, a DART® (bispecific antibody-based molecule) targeting the B cell surface proteins CD32B and CD79B, in Greater China (mainland China, Hong Kong, Macau and Taiwan). We will retain exclusive worldwide rights to develop PRV-3279 for combination uses to reduce the immunogenicity of biotherapeutics, but Huadong will have the exclusive right to distribute PRV-3279 in that field in Greater China. In consideration of the license and other rights granted as part of the Huadong License Agreement, we received an upfront payment of $6.0 million and will receive up to $11.5 million in research, development and manufacturing funding over the next three years, of which $1.0 million was received as of June 30, 2021. If Huadong successfully develops, obtains regulatory approval for, and commercializes PRV-3279 in Greater China, we are eligible to receive up to $37.0 million in regulatory milestones and up to $135.0 million in commercial milestones based on aggregate net sales in a calendar year in Greater China. If commercialized, we would also be eligible to receive low double-digit royalties on net sales of PRV-3279 by Huadong in Greater China. The License Agreement may be terminated by either party upon a material breach or bankruptcy of the other party, by Huadong without cause upon at least 12 months prior notice to us and by us in the event Huadong challenges a licensed patent or in the event that our upstream license terminates. We may also terminate the License Agreement if Huadong ceases commercialization of PRV-3279 for a consecutive period of six months after first commercial sale. We are generally responsible for the manufacturing of PRV-3279 at least through regulatory approval in Greater China and Huadong will exclusively purchase all clinical and commercial supply requirements of PRV-3279 from us until Huadong exercises its option to assume manufacturing responsibilities, which may be triggered after regulatory approval in China. We will retain all rights to PRV-3279 in the rest of the world. We plan to begin a Phase 2a trial of PRV-3279 in systemic lupus erythematosus in the fourth quarter of 2021 and expect a portion of such trial to be conducted in Hong Kong.

 

Preclinical Data Announced

 

In January 2021, we announced positive results of pre-clinical proof-of-concept experiments in support of the prevention of immunogenicity indication. A PRV-3279 mouse surrogate was tested in mice transgenic for human CD32B, which received gene therapy with an adeno-associated virus (“AAV”) vector AAV9 encoding for the enzyme acid-alpha-glucosidase (“GAA”) gene. Errors in the GAA gene cause the serious human glycogen storage disease type II known as Pompe disease. In the study, the PRV-3279 surrogate reduced anti-AAV9 vector antibody levels in a dose-dependent fashion. Anti-AAV9 antibodies have been linked to reduced efficacy, safety concerns and the inability to re-dose patients, and thus, based on these and other study data, we believe PRV-3279 co-administration with gene therapy products has the potential to improve the safety and efficacy of this therapeutic modality. The PRV-3279 surrogate in combination with sirolimus increased skeletal muscle levels of GAA enzyme expression. Consistent with prior results from clinical trials in healthy human subjects, the PRV-3279 surrogate decreased Immunoglobulin M (“IgM”) production and was well tolerated. These results have been presented at the 2021 American Society for Gene and Cell Therapy conference.

 

Based on these data, we plan to look for opportunities to work with academic and industry experts to combine PRV-3279 with gene therapy and other biotherapeutic products to further our mission of preventing and intercepting devastating immune-mediated conditions.

 

Impact of COVID-19 on our Business

 

We are closely monitoring the continued developments related to the COVID-19 pandemic and are making every effort to ensure we remain focused on the health and well-being of our patients and our employees while maintaining business continuity. At this time, we are unable to predict what the long-term impact of this pandemic, and the associated economic downturn, will have on our business, including on our potential United States launch of teplizumab if approved by the FDA. We have experienced some level of disruption to three of our current or planned clinical trials. In March 2020, we announced a temporary pause in the randomization of patients with newly diagnosed T1D into our global Phase 3 PROTECT study of teplizumab. During the second quarter of 2020, we resumed enrolling patients in the PROTECT study on a country by country and site by site basis and by the end of the third quarter of 2020, all sites were activated, with a majority of the sites actively enrolling patients. As a result of the delay, we now expect to complete enrollment in the PROTECT study in the third quarter of 2021 and report top-line results from the PROTECT study in mid-2023, subject to change for any potential COVID-19 related or other interruptions. In addition, we, with our development partner Amgen, collectively decided that, to protect the integrity and quality of the PRV-015 Phase 2b trial in gluten free diet NRCD, we would stagger study startup throughout the third quarter of 2020 rather than initiating screening in the second quarter of 2020, as had originally been scheduled. We initiated the Phase 2b trial in August 2020 and the pandemic has caused difficulties and delays in recruitment. Additionally, our plans to initiate the Phase 2a portion of the PREVAIL study in lupus patients has been delayed from the first half of 2021 to the fourth quarter of 2021, predominantly due to COVID-19 related impacts on our plans.

 

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Financial operations overview

 

Research and Development Expenses

 

Research and development expenses consist primarily of clinical studies, the cost of manufacturing our drug candidates for clinical study, regulatory costs, other internal operating expenses, and the cost of conducting preclinical activities. Expenses also include the cost of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our research and development functions. In addition, our research and development expenses include payments to third parties, as well as the fair value of equity issuances to third parties for the license rights to products in development (prior to marketing approval). Our expenses related to clinical trials are primarily related to activities at CROs and other consultants that design, obtain regulatory approval, and conduct clinical trials on our behalf. Our expenses related to the production of drug substance or drug product for our clinical trials and development programs are primarily related to activities performed by licensors, strategic partners or CMOs and other consultants on our behalf. Our development efforts from inception through June 30, 2021 were principally related to the acquisition and development of our clinical programs.

 

All research and development expenses are charged to operations as incurred in accordance with ASC 730, Research and Development. We account for non-refundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received, rather than when the payment is made.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for our personnel serving in our executive, business development, pre-commercial, legal and finance and accounting functions. General and administrative expenses also include professional fees for marketing and other pre-commercial activities, legal, including patent-related expenses, consulting, insurance, board of director fees, tax and accounting services. We expect that our general and administrative expenses will increase significantly in the future as a result of the build out of our commercial organization and pre-commercial activities for teplizumab.

 

Interest Income, Net

 

Interest income, net, consists of interest income earned on our cash, cash equivalents and marketable securities offset by amortization of premiums and accretion of discounts to maturity on our marketable securities.

 

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RESULTS OF OPERATIONS

 

Comparison of the three months ended June 30, 2021 and 2020

 

   Three Months Ended June 30,     
   2021   2020   Increase (Decrease) 
   (in thousands, except per share data)     
Statement of Comprehensive Loss Data:               
Operating expenses:               
Research and development   16,968    15,032    1,936 
General and administrative   13,205    7,764    5,441 
Total operating expenses   30,173    22,796    7,377 
Loss from operations   (30,173)   (22,796)   7,377 
Interest income, net   31    151    (120)
Loss before income tax benefit   (30,142)   (22,645)   7,497 
Income tax benefit   1,000    523    477 
Net loss  $(29,142)  $(22,122)  $7,020 
                
Net loss per common share, basic and diluted  $(0.46)  $(0.45)     
Weighted average common shares outstanding, basic and diluted   63,375    49,199      

 

Research and Development Expenses

 

Research and development expenses were $17.0 million for the three months ended June 30, 2021, an increase of $2.0 million, compared to $15.0 million for the three months ended June 30, 2020. The increase related primarily to increased costs for our teplizumab program, including the PROTECT study and our regulatory activities, as well as the build out of our medical affairs infrastructure, medical education programs and grants to support screening of potential T1D patients. Also contributing to the increase were costs for the PROACTIVE study (PRV-015), which was initiated in August 2020, and the PROVENT study (PRV-101), which was initiated in December 2020. These increases were offset by a decrease in teplizumab manufacturing costs, including costs for good manufacturing practice (“GMP”) and process performance qualification (“PPQ”) batches of drug supply and drug product, which were produced in 2020. Research and development expenses for the three months ended June 30, 2021 and 2020 also included personnel costs of $4.2 million and $1.7 million, respectively, including stock-based compensation of $1.2 million and $0.4 million in each respective year. The increase in personnel costs, including stock-based compensation, relates to an increase in headcount.

 

General and Administrative Expenses

 

General and administrative expenses were $13.2 million for the three months ended June 30, 2021, an increase of $5.4 million, compared to $7.8 million for the three months ended June 30, 2020. General and administrative expenses for the three months ended June 30, 2021 and 2020 were comprised of the following:

 

   Three Months Ended June 30,     
   2021   2020   Increase (Decrease) 
   (in thousands)     
Pre-commercial expenses  $7,056   $4,939   $2,117 
Other general and administrative expenses   6,149    2,825    3,324 
Total general and administrative expenses  $13,205   $7,764   $5,441 

 

Pre-commercial expenses were $7.1 million for the three months ended June 30, 2021, and primarily consisted of $3.7 million in external costs for our pre-commercial activities, such as marketing and market access costs, and $3.4 million in personnel costs, including stock-based compensation of $0.7 million. Pre-commercial expenses were $4.9 million for the three months ended June 30, 2020, and primarily consisted of $4.3 million in costs of pre-commercial activities for PRV-031 and $0.6 million in personnel costs, including stock-based compensation of $0.1 million. The increase in pre-commercial expenses related primarily to an increase in expenses to build-out our commercial infrastructure, including our headcount, as we prepare for the potential commercial launch of teplizumab.

 

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Other general and administrative expenses were $6.1 million for the three months ended June 30, 2021 and primarily consisted of $2.8 million in personnel costs, including stock-based compensation of $1.4 million, $2.0 million in professional fees and legal expenses and approximately $0.6 million in insurance and other public company costs. Other general and administrative expenses were $2.8 million for the three months ended June 30, 2020 and primarily consisted of $1.4 million in personnel costs, including stock-based compensation of $0.7 million, $1.0 million in professional fees and legal expenses and approximately $0.4 million in insurance and other costs associated with being a public company.

 

Interest Income, Net

 

Interest income, net, was $31 thousand during the three months ended June 30, 2021, compared to $0.2 million during the three months ended June 30, 2020. The decrease in interest income, net during the three months ended June 30, 2021 primarily related to a reduction in interest rates.

 

Income Tax Benefit

 

We recorded an income tax benefit of $1.0 million during the three months ended June 30, 2021, compared to $0.5 million during the three months ended June 30, 2020. Both benefits recognized related to proceeds from the sale of certain of our prior years New Jersey net operating losses. The increase in income tax benefit related to an overall increase in the amount of NOLs sold year over year.

 

Comparison of the six months ended June 30, 2021 and 2020

 

   Six Months Ended June 30,     
   2021   2020   Increase (Decrease) 
   (in thousands, except per share data)     
Statement of Comprehensive Loss Data:               
Operating expenses:               
Research and development   36,655    24,122    12,533 
General and administrative   25,986    11,539    14,447 
Total operating expenses   62,641    35,661    26,980 
Loss from operations   (62,641)   (35,661)   26,980 
Interest income, net   59    434    (375)
Loss before income tax benefit   (62,582)   (35,227)   27,355 
Income tax benefit   1,000    523    477 
Net loss  $(61,582)  $(34,704)  $26,878 
                
Net loss per common share, basic and diluted  $(0.98)  $(0.72)     
Weighted average common shares outstanding, basic and diluted   62,822    48,449      

 

Research and Development Expenses

 

Research and development expenses were $36.7 million for the six months ended June 30, 2021, an increase of $12.6 million, compared to $24.1 million for the six months ended June 30, 2020. The increase related primarily to increased costs for our teplizumab program, including the PROTECT study and regulatory activities, as well as the build out of our medical affairs infrastructure, medical education programs and grants to support the screening of potential T1D patients. Also contributing to the increase were costs for the PROACTIVE study (PRV-015), which was initiated in August 2020, and the PROVENT study (PRV-101), which was initiated in December 2020. We also incurred $1.1 million in expense, which was paid to MacroGenics in May 2021, in connection with the Company’s grant of certain rights of PRV-3279 to Huadong under the Huadong License Agreement and $0.5 million in expense related to a milestone payment to Vactech for the first subject dosed in the PROVENT study during the first quarter of 2021. These increases were offset by a decrease in teplizumab manufacturing costs, including costs for GMP and PPQ batches of drug supply and drug product, which were produced in 2020. Research and development expenses for the six months ended June 30, 2021 and 2020 also included personnel costs of $8.0 million and $3.3 million, respectively, including stock-based compensation of $2.2 million and $1.0 million in each respective year. The increase in personnel costs, including stock-based compensation, relates to an increase in headcount.

 

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General and Administrative Expenses

 

General and administrative expenses were $26.0 million for the six months ended June 30, 2021, an increase of $14.5 million, compared to $11.5 million for the six months ended June 30, 2020. General and administrative expenses for the six months ended June 30, 2021 and 2020 were comprised of the following:

 

   Six Months Ended June 30,     
   2021   2020   Increase (Decrease) 
   (in thousands)     
Pre-commercial expenses  $13,310   $6,005   $7,305 
Other general and administrative expenses   12,676    5,534    7,142 
Total general and administrative expenses  $25,986   $11,539   $14,447 

 

Pre-commercial expenses were $13.3 million for the six months ended June 30, 2021 and primarily consisted of $7.9 million in external costs for our pre-commercial activities, such as marketing and market access costs, and $5.4 million in personnel costs, including stock-based compensation of $1.1 million. Pre-commercial expenses were $6.0 million for the six months ended June 30, 2020 and primarily consisted of $4.9 million in costs of pre-commercial activities for PRV-031 and $1.1 million in personnel costs, including stock-based compensation of $0.3 million. The increase in pre-commercial expenses related primarily to an increase in expenses to build-out our commercial infrastructure, including our headcount, as we prepare for the potential commercial launch of teplizumab.

 

Other general and administrative expenses were $12.7 million for the six months ended June 30, 2021, and primarily consisted of $5.7 million in personnel costs, including stock-based compensation of $2.7 million, $4.4 million in professional fees and legal expenses and approximately $1.3 million in insurance and other public company costs. Other general and administrative expenses were $5.5 million for the six months ended June 30, 2020, and primarily consisted of $2.7 million in personnel costs, including stock-based compensation of $1.3 million, $1.7 million in professional fees and legal expenses and approximately $0.9 million in insurance and other costs associated with being a public company.

 

Interest Income, Net

 

Interest income, net, was $0.1 million during the six months ended June 30, 2021, compared to $0.4 million during the six months ended June 30, 2020. The decrease in interest income, net during the six months ended June 30, 2021 primarily related to a reduction in interest rates.

 

Income Tax Benefit

 

We recorded an income tax benefit of $1.0 million during the six months ended June 30, 2021, compared to $0.5 million during the six months ended June 30, 2020. Both benefits recognized related to proceeds from the sale of certain of our prior years New Jersey net operating losses. The increase in income tax benefit related to an overall increase in the amount of NOLs sold year over year.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Overview

 

There is considerable time and cost associated with developing a potential drug or pharmaceutical product to the point of regulatory approval and commercialization. We have funded our operations to date through offerings of equity securities. We expect to continue to incur losses, as we plan to continue to fund development activities.

 

As of June 30, 2021, we had cash, cash equivalents and marketable securities of $176.4 million. We currently have invested our cash, cash equivalents and marketable securities primarily in money market funds and certain short-term investment-grade corporate debt securities.

 

In January 2021, we completed an underwritten public offering in which we sold 6,250,000 shares of common stock at a public offering price of $16.00 per share. In February 2021, the underwriters partially exercised their option to purchase an additional 587,500 shares at a price of $16.00 per share. In the aggregate, total net proceeds from this underwritten public offering was $102.3 million, after deducting underwriting discounts and commissions of $6.6 million and other offering expenses of $0.5 million.

 

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In February 2021, we established the 2021 ATM Program through which we may sell, from time to time at our sole discretion, up to $150.0 million of shares of our common stock. As of June 30, 2021, no sales have been made under this program. In connection with the establishment of the 2021 ATM Program, we terminated our 2019 ATM Program, and no additional stock may be issued thereunder. Prior to its termination, we sold 725,495 shares of our common stock for aggregate net proceeds of approximately $9.9 million, net of $0.3 million in sales commissions, under the 2019 ATM Program, all of which occurred during the quarter ended June 30, 2020.

 

We will need to raise additional capital to fund our operations, to develop and commercialize teplizumab, PRV-015, PRV-3279 and PRV-101 and to develop, acquire, or in-license other products. We currently plan to raise additional capital through equity offerings, debt, or potential out-licensing transactions. Such additional funding will be necessary to continue to develop our product candidates, to pursue the license or purchase of other technologies, to commercialize our product candidates or to purchase other products. We may seek to sell common or preferred equity or convertible debt securities, enter into a credit facility or another form of third-party funding, or seek other debt financing. In addition, we may consider raising additional capital to fund operating activities, to expand our business, to pursue strategic investments, to take advantage of financing opportunities, or for other reasons. The sale of equity and convertible debt securities may result in dilution to our stockholders and those securities may have rights senior to those of our common stock. If we raise additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict our operations. Any other third-party funding arrangement could require us to relinquish valuable rights. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, or at all. If we are unable to obtain sufficient additional funds when required, we may be forced to delay, restrict or eliminate all or a portion of our development programs, dispose of assets or technology or cease operations.

 

Our cash requirements for the rest of 2021 and into 2022 will be impacted by a number of factors, the most significant of which are expenses related to teplizumab, including costs and timing of our regulatory activities, costs to build out our commercial infrastructure and pre-commercial activities for teplizumab, the PROTECT clinical trial, manufacturing activities for teplizumab and any potential milestone payments that may become due upon a potential regulatory approval of teplizumab by the FDA. Other factors include costs related to our other ongoing or planned clinical trials, such as the Phase 2b PROACTIVE clinical study of PRV-015 in celiac disease, the first-in-human PROVENT study of our PRV-101 polyvalent inactivated CVB vaccine candidate, and the planned Phase 2a PREVAIL clinical study of PRV-3279 in lupus.

 

Depending on the timing and outcome of our regulatory activities and the status of our plans to prepare for a potential regulatory approval of teplizumab by the FDA, we may encounter near-term liquidity needs that could impact our cash runway over the next 12 months. If we do not obtain additional financing, or prudently manage our expenses, our financial condition, cash flows and results of operations could be materially and adversely affected.

 

Based on our current business plans, management believes that our cash, cash equivalents and marketable securities on hand at June 30, 2021 are sufficient to meet our obligations for at least the next 12 months from the issuance of the financial statements included in this report.

 

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Cash Flows

 

The following table shows a summary of our cash flows for the six months ended June 30, 2021 and 2020:

 

   Six Months Ended June 30, 
   2021   2020 
   (in thousands) 
Net cash (used in) provided by:          
Operating activities  $(46,581)  $(26,942)
Investing activities   (6,309)   19,951 
Financing activities   102,377    113,713 
Net change in cash and cash equivalents  $49,487   $106,722 

 

Cash Flows from Operating Activities

 

Net cash used in operating activities was $46.6 million for the six months ended June 30, 2021, and primarily related to cash used to fund clinical development, manufacturing, regulatory activities and pre-commercial activities for teplizumab, clinical development activities for PRV-015 and PRV-101, and increased personnel costs to support our clinical programs and the build out of our corporate and commercial infrastructure. Cash expenses were offset by $7.0 million received from Huadong in connection with the Huadong License Agreement, of which $7.0 million is currently recorded as deferred revenue as of June 30, 2021. Our working capital was $156.0 million as of June 30, 2021.

 

Net cash used in operating activities was $26.9 million for the six months ended June 30, 2020 and primarily related to cash used to fund clinical development, manufacturing, and pre-commercial activities for PRV-031, clinical development activities for PRV-015, development activities for PRV-101, and increased personnel costs to support our clinical programs and the build out of our corporate and commercial infrastructure.

 

Cash Flows from Investing Activities

 

Net cash used in investing activities was $6.3 million for the six months ended June 30, 2021, and primarily related to the purchases of marketable securities totaling $16.3 million and capital expenditures associated with data information systems of $0.9 million offset by proceeds received from the maturity of marketable securities totaling $10.9 million.

 

Net cash provided by investing activities was $20.0 million for the six months ended June 30, 2020 and primarily related to the proceeds received from the maturity of marketable securities totaling $29.0 million offset by purchases of marketable securities totaling $9.0 million.

 

Cash Flows from Financing Activities

 

Net cash provided by financing activities was $102.4 million for the six months ended June 30, 2021, and primarily related to aggregate net proceeds of $102.3 million received from our underwritten public offering which closed in January 2021, including the subsequent partial exercise of the underwriters’ option to purchase additional shares in February 2021, as well as approximately $0.1 million in proceeds from stock option exercises during the period.

 

Net cash provided by financing activities was $113.7 million for the six months ended June 30, 2020, and primarily related to net proceeds received from our underwritten public offering which closed in June 2020 of $103.3 million, net proceeds received from the sale of our common stock under the 2019 ATM program of $9.9 million, as well as cash received from stock option exercises during the period.

 

Commitments and Contractual Obligations

 

We have entered into a number of license, collaboration, acquisition and other agreements with third parties. For further details regarding our significant contracts, and the commitments and contractual obligations contained within each contract, please refer to Note 6 – Commitments and Contingencies to our condensed financial statements included in this report, which is incorporated herein by reference. There have been no material changes to commitments and obligations during the six months ended June 30, 2021 compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

 

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The table below presents a summary of our contractual obligations as of June 30, 2021:

 

   Payments Due By Period 
       Within           More than 
   Total   1 year   1-3 Years   3-5 Years   5 years 
   (In thousands) 
Purchase obligations (1)  $1,697   $1,697   $   $   $ 
Operating lease obligations (2)   1,067    218    453    396     
Total (3)  $2,764   $1,915   $453   $396   $ 

 

(1) Purchase obligations represent our commitments under binding forecasts, and purchase orders (inclusive of cancellation fees), including those provided under our agreement(s) with AGC Biologics and our other CMOs. The actual amounts incurred will be determined based on the amount of goods purchased and the pricing then in effect under the applicable arrangement.
   
(2) Operating lease obligations represent the gross minimum cash rent payments under our lease in Red Bank, NJ.
   
(3) This table does not include (a) any milestone payments which may become payable to third parties under license and collaboration agreements as the timing and likelihood of such payments are not known with certainty, (b) any royalty payments to third parties as the amounts, timing and likelihood of such payments are not known, and (c) contracts that are entered into in the ordinary course of business that are not material in the aggregate in any period presented above.

 

In July 2020, we entered into an agreement to lease approximately 7,000 square feet of office space in Red Bank, NJ, for which the initial lease term expires approximately 64 months from the lease commencement date, which occurred in October 2020, with base annual lease payments of approximately $0.2 million.

 

In addition, in the course of normal business operations, we have agreements with contract service providers to assist in the performance of our research and development and manufacturing activities. Expenditures to CROs, CMOs and other clinical development related vendors represent significant costs in clinical development. Subject to required notice periods and our obligations under binding purchase orders, we can elect to discontinue the work under these agreements at any time. We could also enter into additional collaborative research, contract research, manufacturing, and supplier agreements in the future, which may require upfront payments and even long-term commitments of cash.

 

We also have employment agreements with certain employees which require the funding of a specific level of payments, if certain events, such as a change in control or termination without cause, occur.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We do not have any interest in special purpose entities, structured finance entities or other variable interest entities.

 

Critical Accounting Policies and Estimates

 

There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, with the exception of accounting for collaboration revenue and revenue from contracts with customers, which are detailed further within this Quarterly Report on Form 10-Q. See Note 3 – Significant Accounting Policies, to our condensed financial statements included in this report, which is incorporated herein by reference.

 

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Recent Accounting Pronouncements

 

See Note 3 – Significant Accounting Policies, to our condensed financial statements included in this report, which is incorporated herein by reference.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risk related to changes in interest rates. We had cash, cash equivalents and marketable securities of $176.4 million as of June 30, 2021, consisting of cash and investments in money market funds and certain short-term investment-grade corporate debt securities. Our investments in money market funds and investment-grade corporate debt securities are not insured by the federal government. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of United States interest rates, particularly because a significant portion of our investments are in short-term securities. Due to the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.

 

The majority of our business is conducted in U.S. dollars. However, we do contract with certain CROs to perform clinical trial activities abroad which are denominated in other currencies, including Euros. Historically, fluctuations in foreign currency exchange rates have not materially affected our results of operations. During the six months ended June 30, 2021 and 2020, our results of operations were not materially affected by fluctuations in foreign currency exchange rates. As of June 30, 2021, substantially all of our total liabilities were denominated in the U.S. dollar.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Based on the evaluation of our disclosure controls and procedures as of June 30, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

In the first quarter of 2021, we completed the implementation of a new enterprise resource planning (“ERP”) system to improve certain operational and financial processes. Accordingly, we modified the design and operation of certain internal control processes and procedures relating to the new ERP system. Other than the ERP system implementation described above, there were no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three or six month periods ended June 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. Other Information

 

ITEM 1. LEGAL PROCEEDINGS

 

On May 21, 2021, a putative class action complaint was filed in the U.S. District Court for the District of New Jersey (the “Court”), naming the Company, Chief Executive Officer Ashleigh Palmer, and Chief Financial Officer Andrew Drechsler as defendants. The complaint alleges violations of the Securities Exchange Act of 1934 and Rule 10b-5 in connection with disclosures made regarding the teplizumab BLA and teplizumab’s commercialization timeline. The plaintiff seeks to represent a class of shareholders who purchased or otherwise acquired the Company’s securities between November 2, 2020 and April 8, 2021. The complaint seeks unspecified damages. Per the procedures set forth by federal securities laws, applications for appointment of lead plaintiff(s) and lead counsel were due to the Court on July 20, 2021. Two applications for lead plaintiff and lead counsel were submitted to the Court on that date; one of the two movants subsequently withdrew its application.

 

The Company is unable at this time to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows. The Company does not have contingency reserves established for any litigation liabilities.

 

ITEM 1A. RISK FACTORS

 

Certain factors may have a material adverse effect on our business, financial condition and results of operations, and you should carefully consider them. Accordingly, in evaluating our business, we encourage you to consider the following discussion of risk factors in its entirety, in addition to other information contained in this Quarterly Report on Form 10-Q as well as our other public filings with the SEC. The risks and uncertainties described below are those we currently believe to be material, but they are not the only ones we face. If any of the following risks, or any other risks and uncertainties that we have not yet identified or that we currently consider not to be material, actually occur or become material risks, our business and financial condition could be materially and adversely affected.

 

Risks Related to Our Business

 

We are a clinical stage biopharmaceutical company with a limited operating history.

 

We are a clinical-stage biopharmaceutical company formed in October 2016 and have a limited operating history. We do not lease or own any laboratory space and we have historically had a remote work environment for our employees. We outsource our manufacturing and clinical trial operations as well as certain other functions.

 

We have acquired or in-licensed four clinical stage assets and a late stage preclinical enteroviral vaccine platform. Marketing approval of our product candidates will require extensive clinical testing data to support safety and efficacy requirements, as well as pharmaceutical development, manufacturing and preclinical data, all of which are needed for regulatory approval, and the requirements may be different in different jurisdictions in which we intend to launch our products. The likelihood of success of our business plan must be considered in light of the challenges, substantial expenses, difficulties, complications and delays frequently encountered in connection with developing and expanding early-stage businesses and the regulatory and competitive environment in which we operate. Biopharmaceutical product development is a highly speculative undertaking, involves a substantial degree of risk, and is a capital-intensive business.

 

Accordingly, you should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development, especially clinical-stage biopharmaceutical companies such as ours. Potential investors should carefully consider the risks and uncertainties that a company with a limited operating history will face. In particular, we may not be able to:

 

  successfully implement or execute our current business plan;
  successfully start and complete clinical trials and obtain regulatory approval for the marketing of our product candidates;
  successfully contract for the manufacture of our clinical drug products and establish a commercial drug supply;
  secure market exclusivity and/or adequate intellectual property protection for our product candidates;
  attract and retain an experienced management and advisory team;
  raise sufficient funds in the capital markets to effectuate our business plan, including clinical development, regulatory approval and commercialization for our product candidates;
  successfully recruit and retain a fully functional launch ready commercial organization;
  successfully launch teplizumab in the United States;
  successfully execute our teplizumab launch plan for the At-Risk indication, including raising awareness and expanding screening to identify patients At-Risk of developing clinical T1D; and
  successfully establish strategic partnerships to launch teplizumab outside the United States

 

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If we cannot successfully execute any one of the foregoing, our business may not succeed, and your investment will be adversely affected.

 

We expect to incur substantial expenses and may never become profitable or be able to sustain profitability.

 

We expect to incur substantial expenses without corresponding revenues unless and until we are able to obtain regulatory approval and successfully commercialize our product candidates. We expect to incur significant expense to complete our clinical programs for our product candidates in the United States and elsewhere. We may never be able to obtain regulatory approval for the marketing of our product candidates in any indication in the United States or internationally. Even if we are able to commercialize our product candidates, we may not be able to generate significant revenues or ever achieve profitability.

 

We expect to incur significant research and development expenses as we advance clinical trials for our product candidates as well as significant costs to build out our commercial infrastructure and conduct pre-commercial activities for teplizumab as we prepare for potential commercialization. As a result, we expect to incur substantial losses for the foreseeable future, and these losses will be increasing. We are uncertain when or if we will be able to achieve or sustain profitability. If we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Failure to become and remain profitable may impair our ability to sustain operations and adversely affect our business and our ability to raise capital.

 

We need to raise additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate certain, or all of our product development programs or commercialization efforts.

 

We expect our operating costs to be substantial as we incur costs to support our commercialization efforts for teplizumab, including costs related to the buildout of an internal commercial infrastructure, and our ongoing and planned clinical trials for teplizumab and our other product candidates. We will operate at a loss for the foreseeable future or until such time as we obtain regulatory approval for and execute a successful commercial launch of teplizumab, if ever. For the six months ended June 30, 2021 and 2020, we had a net loss of $61.6 million and $34.7 million, respectively, and as of June 30, 2021, we had an accumulated deficit of $239.2 million and $176.4 million in cash, cash equivalents and marketable securities. We believe our current cash, cash equivalents and marketable securities, will be sufficient to fund projected operating requirements for at least the next 12 months from the issuance of the financial statements included in this report. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. If we obtain regulatory approval for teplizumab, we have substantial milestone payments that will become payable to our partners. We will need substantial additional capital to fund these milestone payments, as well as to fund the clinical development programs for all of our product candidates.

 

We do not have any prospective financing arrangements or credit facilities as a source of future funds apart from the available capacity under our 2021 ATM Program, and there can be no assurance that we will be able to raise sufficient additional capital on acceptable terms or at all. We may seek additional capital through a combination of private equity offerings, public equity offerings, debt financings and strategic collaborations. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. Debt financing, if obtained, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, could increase our expenses and could require that our assets secure such debt. Moreover, any debt we incur must be repaid regardless of our operating results. If we choose to pursue additional indications and/or geographies for our product candidates, in-license or acquire additional development assets, or otherwise expand more rapidly than we presently anticipate, we may also need to raise additional capital sooner than expected.

 

If we are unable to raise additional capital when required or on acceptable terms, we may need to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates or cease operations altogether, or relinquish or license on unfavorable terms, our rights to technologies or any future product candidates that we otherwise would seek to develop or commercialize.

 

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Our forecast of the period of time through which our financial resources will adequately support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this Risk Factors section. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

 

We may not be able to correctly estimate or control our future operating expenses, which could lead to cash shortfalls.

 

Our operating expenses may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. These factors include:

 

  the success of our development strategy;
  the time, resources, and expense required to develop and conduct clinical trials and seek regulatory approvals for our product candidates;
  the cost of preparing, filing, prosecuting, defending, and enforcing patent claims and other patent related costs, including litigation costs and the results of such litigation;
  the cost of manufacturing and maintaining sufficient inventories of our products to meet anticipated demand;
  any product liability or other lawsuits related to our product candidates and the costs associated with defending them or the results of such lawsuits;
  the cost of growing our ongoing development operations and establishing commercialization operations;
  the cost to attract and retain personnel with the skills required for effective operations;
  the costs associated with being a public company; and
  the costs associated with commercialization.

 

Any material increases in our operating expenses will have a material impact on our financial condition and business operations. In addition, if we are unable to correctly estimate or control our future operating expenses, we may need to raise additional capital, delay or cease development of one or more of our product candidates, which could have a material adverse effect on our business, operating results and prospects.

 

Risks Related to Product Development, Regulatory Approval, Manufacturing and Commercialization

 

The potential approval of teplizumab in the United States is subject to satisfactorily addressing issues raised by the FDA in its CRL to the teplizumab BLA, including the FDA’s conclusion that the drug pharmacokinetic profiles of the two drug products evaluated in our PK/PD bridging study for teplizumab are not comparable, product quality issues, and the requirement that a fill/finish manufacturing facility used by the Company for teplizumab resolve deficiencies identified by the FDA during a general inspection not specific to teplizumab. This may require further development activities, additional data, analyses and modeling and will likely affect the potential for and timing of any re-submission by the Company for an approval of teplizumab for the delay of clinical T1D in at-risk patients.

 

As required by the FDA, Provention has provided in the BLA analytical data for teplizumab supporting the comparability between the study drug previously manufactured by MacroGenics and Eli Lilly and Provention Bio’s to-be-commercialized drug product. In addition to conducting analytical tests to evaluate comparability we have also conducted a double-blind, single low-dose, PK/ PD bridging study in healthy subjects to support the CMC comparability assessment between the teplizumab study drug derived from drug substance manufactured by Eli Lilly and the to-be-commercialized teplizumab drug product derived from the drug substance manufactured by our contract manufacturing partner, AGC Biologics. This single low-dose study was the first time the teplizumab drug product derived from the drug substance manufactured by AGC Biologics has been used in humans. We believe, based on the data and our analysis, that the results of the PK/PD study suggest that the drug substances manufactured by AGC Biologics and Eli Lilly are comparable. Comparison of drug plasma concentration versus time after dosing shows a lower AUC for the teplizumab drug product derived from the drug substance manufactured by AGC Biologics. Based on our PK/PD modeling, we do not believe this lower AUC is significant enough to impact the efficacy or safety of the to-be-commercialized teplizumab drug product when used as proposed in our BLA filing. We submitted our finalized Clinical Study Report and discussion document to the FDA in January 2021.

 

As previously announced, the Company received a letter from the FDA on April 2, 2021, indicating that, as part of its then ongoing review of the Company’s BLA for teplizumab, the FDA has identified deficiencies that preclude discussion of labeling and post-marketing requirements/commitments at such time. Separately, at an April 2, 2021 informal meeting with the Company to discuss the May 27, 2021 Advisory Committee meeting, the FDA indicated that, based on the data it has reviewed to date, it was taking the position that the drug pharmacokinetic profiles of the two drug products evaluated in a PK/PD bridging study submitted by the Company for review by the FDA are not comparable, and additional data would be required before the FDA’s concerns could be satisfied. At a second informal meeting on April 23, 2021, held to discuss the FDA’s considerations regarding the comparability of the two drug products, the FDA reported that it concluded that the PK profiles of the two drug products evaluated in the PK/PD bridging study are not comparable since the intended commercial product did not meet the pre-specified 80-125% PK AUC comparability target range. The FDA stated that it cannot be certain if this observation is not clinically relevant, given that the relationship between transient lymphocyte reduction, a PD marker, which was comparable in the PK/PD bridging study, and clinical efficacy, has yet to be fully validated.

 

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The FDA further informed the Company at the April 23, 2021 informal meeting that it planned to mention its PK comparability review in the clinical pharmacology summary of its briefing materials for the May 27, 2021 Advisory Committee Meeting, which occurred as planned, in addition to including a statement that the FDA is actively working with the Company to resolve the issue and that the focus of the Advisory Committee meeting is the efficacy and safety of teplizumab. The FDA also recommended that both the FDA and the Company update their Advisory Committee briefing materials to reflect the removal of the term “prevention” from the previously proposed indication, as the remaining term “delay” more accurately reflects the results of the TN-10 trial. The FDA emphasized its understanding of the high unmet need associated with delaying the onset of clinical-stage T1D and expressed its willingness to work with the Company to find a solution and path forward for the comparability issue.

 

The Company may not be successful in its goal to continue to work with the FDA to secure approval of teplizumab and bring the first disease-modifying therapy for T1D to at-risk patients as soon as possible. On July 6, 2021, the Company announced that the FDA issued a CRL for the Company’s BLA for teplizumab for the delay of clinical T1D in at-risk individuals. In the CRL, received late evening on July 2, 2021, the FDA stated that a single, low-dose PK/PD bridging study in healthy volunteers to compare planned commercial product with drug product originating from drug substance manufactured for historic clinical trials had failed to show PK comparability. The FDA further noted that PK remains the primary endpoint for demonstration of comparability between the two products and that the Company will need to establish PK comparability appropriately between the intended commercial product and the clinical trial product or provide other data that adequately justify why PK comparability is not necessary.

 

The results from relevant additional PK/PD data being, or to be, collected from a PK/PD substudy in patients receiving 12-days of therapy in the ongoing Phase 3 PROTECT trial in newly diagnosed T1D patients in the third quarter of 2021 may not support PK comparability or otherwise may be insufficient to address the FDA’s concerns on comparability. The PK/PD substudy data will be analyzed by independent, unblinded third-parties to maintain the integrity of this placebo-controlled trial. Upon review of the results from this substudy, the Company will determine whether to submit these data to the FDA for its review, along with any other relevant data and analyses based on our ongoing discussions with the FDA, to support PK comparability or otherwise justify why PK comparability is not necessary.

 

The Company may not be able to address to the FDA’s satisfaction all other considerations cited in the CRL relating to product quality in the short-term as planned by the Company or at all. The CRL acknowledged that the FDA had not reviewed several amendments already submitted by the Company in response to certain CMC information requests.

 

As noted in the CRL, the deficiencies conveyed during a recent general inspection, not specific to teplizumab, at a fill/finish manufacturing facility used by the Company will need to be resolved before approval and the Company may not be in a position to ensure that this manufacturing facility successfully does so in a timely manner or at all.

 

Addressing all of the FDA’s concerns in the CRL may not be possible. Even if the Company provides the FDA, as planned, with additional data, analyses, modeling, and additional information from ongoing or new studies to support an approval of teplizumab for at-risk patients, the results from these efforts may not clearly or fully address the FDA’s concerns raised in the CRL or be sufficient to support a resubmission or an approval. If the Company fails to address the FDA’s concerns, despite its efforts, including additional time and investments, our business and operations may be materially and adversely impacted.

 

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We may not be successful in our efforts to develop and obtain regulatory approval for our product candidates. If we are unable to obtain approval for or generate revenues from our product candidates, our ability to create stockholder value will be limited.

 

Our product candidates are in various stages of clinical development. Our ability to generate product revenue, which we do not expect will occur for many years, if ever, will depend heavily on the successful development and eventual commercialization of our product candidates, which may never occur. For example, our potential product candidates may be shown to have harmful side effects or may have other characteristics that may make the products impractical to manufacture, unmarketable, or unlikely to receive marketing approval. We currently generate no revenue from sales of any product, and we may never be able to develop or commercialize a marketable product.

 

We will be required to submit our clinical trial protocols and receive approvals from the regulatory authorities before we can commence additional studies with our product candidates, including PRV-3279. Nonclinical study results for our product candidates, including toxicology studies, may not support the filing of an IND or foreign equivalent for the product candidate.

 

Moreover, we may not be successful in obtaining acceptance from the regulatory authorities to start our clinical trials. Prior to commencing any clinical trials, we will also have to obtain approval from the Institutional Review Board (“IRB”), or Ethics Committee (“EC”) for each of the institutions at which we plan to conduct our clinical trials. If we do not obtain such acceptance, the time in which we expect to commence clinical programs for any product candidate will be extended and such extension will increase our expenses and increase our need for additional capital.

 

Further, there is no guarantee that our clinical trials will be successful or that we will continue clinical development in support of an approval from the regulatory authorities for any indication. Our clinical trial results may show our product candidates to be less effective than expected or have unacceptable side effects or toxicities. For example, our Phase 2a PRINCE trial did not achieve its primary endpoint of a change in Crohn’s Disease Activity Index Score at week 12 as compared to placebo. We note that most drug candidates never reach the clinical development stage and even those that do commence clinical development have only a small chance of successfully completing clinical development and gaining regulatory approval.

 

Our business currently depends entirely on the successful development, regulatory approval and commercialization of our product candidates. Our product candidates will require additional preclinical and clinical development, regulatory and marketing approval in multiple jurisdictions, obtaining sufficient manufacturing capacity and expertise for both clinical development and commercial production and substantial investment and significant commercialization efforts before we generate any revenue from product sales.

 

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

 

  successful completion of preclinical and clinical studies with positive results;
  sufficiency of our financial and other resources to complete the necessary preclinical studies and clinical trials;
  entry into collaborations to further the development of our product candidates;
  Investigational new drug or clinical trial authorization applications, being cleared such that our product candidates can commence clinical trials;
  successful initiation of enrollment in and completion of clinical trials;
  successful data from our clinical programs that support a finding of safety and effectiveness and an acceptable risk-benefit profile of our product candidates in the intended populations;
  receipt of regulatory and marketing approvals from applicable regulatory authorities;
  establishment of arrangements with third-party manufacturers for clinical supply and commercial manufacturing and, where applicable, commercial manufacturing capabilities;
  successful development of our internal manufacturing processes and transfer, where applicable, from our reliance on CMOs, to our own manufacturing facility, or from our own manufacturing facility to CMOs or the facilities of collaboration partners;
  establishment and maintenance of patent and trade secret protection or regulatory exclusivity for our product candidates;
  commercial launch of our product candidates, if and when approved, whether alone or in collaboration with others, including our ability to recruit and retain commercial talent;
  acceptance of our product candidates and their therapeutic uses, if and when approved, by patients, the medical community and third-party payors;
  effective competition with other therapies and treatment options;

 

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  establishment and maintenance of healthcare coverage and adequate reimbursement from third-party payors and national healthcare systems for any approved products;
  enforcement and defense of intellectual property rights and claims;
  maintenance of a continued acceptable safety profile of the product candidates following approval; and
  achieving desirable medicinal properties for the intended indications.

 

If we do not succeed in one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize our product candidates. We cannot assure you that our product candidates will be successfully developed or commercialized. If we are unable to develop, or obtain regulatory approval for, or, if approved, to successfully commercialize our product candidates, it could have a material adverse effect on our business, operating results and prospects.

 

The outbreak of the novel coronavirus 2019 (COVID-19) has caused delays to our clinical trials. Moreover, the longer the pandemic persists, the more impact it will have on our clinical trial and other business plans and timelines. In addition, this pandemic has caused substantial disruption in the financial markets and may adversely impact economies worldwide, both of which could result in adverse effects on our business, operations and ability to raise capital.

 

The COVID-19 pandemic continues to drive global uncertainty and has caused, and may continue to cause, delays to the development of certain of our product candidates. Delays in completing our clinical trials are expected to increase our costs, slow our development and approval process and could negatively impact our ability to commence product sales and generate revenues. Out of an abundance of caution to protect patients, caregivers, clinical site staff, company employees as well as due to facility closures, quarantine, travel restrictions and other governmental restrictions in March 2020 we temporarily paused the enrollment and randomization of new patients with newly diagnosed T1D into our global Phase 3 PROTECT study of teplizumab. During the second quarter of 2020, we resumed enrolling patients in the PROTECT study on a country by country and site by site basis and as of the end of the third quarter of 2020, all sites were activated, with a majority of the sites actively enrolling patients. As a result of the delay, we now expect to complete enrollment in the PROTECT study in the third quarter of 2021 and report top-line results from the PROTECT study in mid-2023 , subject to change for any potential COVID-19 related or other interruptions. In addition, we, with our development partner Amgen, collectively decided that, to protect the integrity and quality of the PRV-015 Phase 2b trial in gluten free diet non-responsive celiac disease, we would stagger study startup throughout the third quarter of 2020 rather than initiating screening in the second quarter of 2020, as had originally been scheduled. We initiated the Phase 2b trial in August 2020 and the pandemic has caused difficulties and delays in recruitment. Additionally, our plans to initiate the Phase 2a portion of the PREVAIL study in lupus patients has been delayed from the first half to the fourth quarter of 2021 predominantly due to COVID-19 related impacts on our plans.

 

Timely enrollment in our clinical trials is dependent upon global clinical trial sites which may be adversely affected by global health matters, such as pandemics. We are currently conducting clinical trials for our product candidates in many countries, including the United States, European Union, the UK and Canada and may expand to other geographies. Many of these regions in which we operate are currently being or may in the future be affected by COVID-19. Some factors from the COVID-19 outbreak that may delay or otherwise adversely affect enrollment in the clinical trials of our product candidates, as well as adversely impact our business generally, include:

 

  delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff, and delays enrolling patients in our clinical trials or increased rates of patients withdrawing from our clinical trials following enrollment as a result of contracting COVID-19, being forced to quarantine, or not accepting home health visits, particularly for older patients with a higher risk of contracting COVID-19;
  limitations on travel that could interrupt key trial activities, such as clinical trial site initiations and monitoring, domestic and international travel by employees, contractors or patients to clinical trial sites, including any government-imposed travel restrictions or quarantines that may impact the ability or willingness of patients, employees or contractors to travel to our clinical trial sites or secure visas or entry permissions, any of which could delay or adversely impact the conduct or progress of our clinical trials;
  interruption or delays in the operations of the United States Food and Drug Administration and foreign regulatory authorities, which may impact review and approval timelines;

 

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  interruption of, or delays in receiving, supplies of raw materials for or our product candidates from our contract manufacturing organizations due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems; and
  business disruptions caused by potential workplace, laboratory and office closures and an increased reliance on employees working from home, disruptions to or delays in ongoing laboratory experiments and operations or travel, and staffing shortages.

 

Additionally, in response to the COVID-19 pandemic, on March 10, 2020, the FDA announced its intention to postpone most inspections of foreign manufacturing facilities and products; and, on March 18, 2020, the FDA temporarily postponed routine surveillance inspections of domestic manufacturing facilities. Subsequently, on July 10, 2020, the FDA announced its intention to resume certain on-site inspections of domestic manufacturing facilities subject to a risk-based prioritization system. The FDA intends to use this risk-based assessment system to identify the categories of regulatory activity that can occur within a given geographic area, ranging from mission critical inspections to resumption of all regulatory activities. More recently, in April 2021 the FDA issued guidance describing how it will request and conduct voluntary remote interactive evaluations of manufacturing and outsourcing facilities as well as facilities involved in non-clinical and clinical research. Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

 

The pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could adversely impact our ability to raise additional funds through public offerings or private placements and may also impact the volatility of our stock price and trading in our stock. Moreover, it is possible the pandemic will continue to significantly impact economies worldwide, which could result in adverse effects on our business and operations. The rapid development and fluidity of the pandemic precludes any prediction as to the ultimate impact of COVID-19. Additionally, the pandemic could negatively impact our ability to execute a successful launch of teplizumab if we receive marketing approval, which could impact our revenue making potential and have other negative material adverse impacts on our business. The full extent of the impact and effects of COVID-19 on our business, operations, liquidity, financial condition and results of operations remain uncertain at this time.

 

Clinical drug development involves a risky, lengthy and expensive process, with an uncertain outcome. We may encounter substantial delays in completing our clinical trials which in turn will require additional costs, or we may fail to demonstrate adequate safety and efficacy to the satisfaction of applicable regulatory authorities.

 

It is impossible to predict if or when any of our product candidates will prove safe or effective in humans or will receive regulatory approval, and the risk of failure through the development process is high. Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of the product candidates in humans. Clinical testing is expensive, time-consuming and uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical trials can occur at any stage of testing. Events that may prevent successful or timely completion of clinical development include:

 

  delays in reaching, or failing to reach, a consensus with regulatory agencies on study design;
  delays in reaching, or failing to reach, agreement on acceptable terms with a sufficient number of 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;
  delays in obtaining required IRB, or EC, approval at each clinical trial site;
  delays in recruiting a sufficient number of suitable patients to participate in our clinical trials;
  delays as a result of the impact of the COVID-19 pandemic on clinical trial recruitment or other clinical trial activities;
  imposition of a clinical hold by regulatory agencies, IRBs, or ECs;
  failure by our CROs, other third parties or us to adhere to contractual, clinical trial, regulatory or legal requirements;
  failure to perform in accordance with the FDA’s GCP or applicable regulatory guidelines in other countries;

 

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  delays in the testing, validation, manufacturing and delivery of sufficient quantities of our product candidates to the clinical sites;
  delays in having patients’ complete participation in a study or return for post-treatment follow-up;
  subjects choosing an alternative treatment for the indications for which we are developing our product candidates, or participating in competing clinical trials;
  clinical study sites or patients dropping out of a study;
  delay or failure to address any patient safety concerns that arise during the course of a trial;
  unanticipated costs or increases in costs of clinical trials of our product candidates;
  occurrence of serious adverse events associated with the product candidate that are viewed to outweigh its potential benefits; or
  changes in regulatory requirements and guidance that require amending or submitting new clinical protocols.

 

We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs or ECs of the institutions in which such trials are being conducted, by an independent Safety Review Board for such trial or by the FDA, MHRA, the competent authorities of the European Union Member States, or other regulatory authorities. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA, MHRA, the competent authorities of the European Union Member States, or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.

 

Product development costs for any of our product candidates will increase if we have delays in testing or approval or if we need to perform more or larger clinical trials than planned. Additionally, changes in regulatory requirements and policies may occur and we may need to amend study protocols to reflect these changes. Amendments may require us to resubmit our study protocols to the FDA, comparable foreign regulatory authorities, and IRBs/ECs for reexamination, which may impact the costs, timing or successful completion of that study. If we experience delays in completion of, or if we, the FDA or other regulatory authorities, the IRB, the ECs or other reviewing entities, or any of our clinical trial sites suspend or terminate any of our clinical trials of any of our product candidates, its commercial prospects may be materially harmed and our ability to generate product revenues will be delayed. 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 of regulatory approval of our product candidates. 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 any of our product candidates could be significantly reduced. Clinical trial delays could also shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do, which could impair our ability to successfully commercialize our product candidates. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business, financial condition and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

 

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The outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Further, product candidates in later stages of clinical trials may fail to show the desired safety and efficacy profile despite having progressed through pre-clinical studies and initial clinical trials. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier studies, and we cannot be certain that we will not face similar setbacks. Additionally, data submitted to regulators are subject to varying interpretations that could delay, limit or prevent agency approval. We cannot assure you that the FDA, EMA, MHRA or comparable foreign regulatory authorities will view the results as we do, that the views of different regulatory authorities on our study results and data will be consistent with each other or that any future trials of any of our product candidates will achieve positive results. For example, in the European Union, we have initiated the process of seeking scientific advice from the EMA’s Committee for Medicinal Products for Human Use (“CHMP”), with respect to the regulatory pathway for teplizumab. While the guidance provided in scientific advice procedures do not seek to pre-evaluate the results of studies, the initial scientific advice letter that we received from CHMP in December 2020 suggested that an additional confirmatory study would be necessary to support a marketing authorization application (“MAA”), for the use of PRV-031 in at-risk individuals. We plan to engage with CHMP to further elucidate the disease-modifying effect of PRV-031 supported by study data in the context of clinical management of T1D, specifically in at-risk individuals. If, however, the EMA determines that our current PRV-031 data package is insufficient to support an MAA for at-risk individuals and requires additional studies or data, such determination would delay or prevent approval of PRV-031 in the European Union and European Economic Area (“EEA”) for this indication, and may impact similar discussions in the United Kingdom. We have engaged with the MHRA to discuss a potential regulatory path for PRV-031 in the United Kingdom. We have filed for and received in July 2021 an Innovation Passport for teplizumab in the UK. The Innovation Passport is the mandated entry point to the Innovative Licensing and Access Pathway (“ILAP”) in the United Kingdom to facilitate approval of and market access to an innovative medicine. Additionally, we have engaged the MHRA in a scientific advice procedure to discuss, among other topics, ILAP. The discussions with and feedback from the MHRA in the United Kingdom, ILAP partner agencies such as the National Institute for Health and Care Excellence and the Scottish Medicines Consortium, and the EMA/CHMP in the European Union will help us evaluate the possible regulatory and market access paths forward in the UK and the European Union for teplizumab. On April 20, 2021 we received a scientific advice letter from the MHRA on matters relating to the therapeutic position, non-clinical and clinical characterization of PRV-031. There is also no guarantee that a similar position would be taken by the EMA in the European Union. The advice given by the MHRA makes clear that it is not legally binding with regard to any future MAA for PRV-031, nor can it be taken as indicative of any future agreed position. The MHRA indicated in its letter that it is of the view that there is an unmet medical need for a treatment that delays or prevents progression to T1D in at-risk patients. The MHRA did not request another confirmatory study to be carried out, acknowledging that the indication being sought is rare and that we may have difficulties recruiting sufficient numbers of subjects for such a study. However, the MHRA has considered that an MAA may benefit from additional supplementary information on patient preference. Such additional information would seek to strengthen the argument that PRV-031 would benefit the at-risk patients according to the proposed label claim. The MHRA also considered that reliance on one pivotal study to obtain a marketing authorization ought to meet the criteria described in the EMA/CPMP guidance entitled “Points to consider on application with (i) meta-analyses and (ii) one pivotal study” (CPMP/EWP/2330/99) , which for the time being, is still relevant to applications made in the United Kingdom. We also plan additional engagements with EMA and other European stakeholders in 2021; however, these stakeholders may not agree with our views on our teplizumab data package or our view of the relevant medical need in at-risk populations and our efforts may not lead to favorable positions or decisions relating to or an approval of teplizumab by the MHRA or a positive opinion by the EMA and a subsequent marketing authorization by the European Commission. Even if PRV-031 is approved in United Kingdom and/or in the European Union, the MHRA or EMA/European Commission, may limit the indication for which the product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming additional clinical trials or reporting as conditions of an approval, amongst other requirements which the Company may or may not be able to comply with.

 

We have conducted and are conducting clinical trials outside the United States and anticipate conducting additional clinical trials outside the United States, and the FDA may not accept data from such trials.

 

We are currently conducting clinical trials for our product candidates in countries outside of the United States and we anticipate that we will conduct additional clinical trials in countries outside the United States. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of such study data by the FDA is subject to certain conditions. For example, the clinical trial must be conducted in accordance with GCP requirements and the FDA must be able to validate the data from the clinical trial through an onsite inspection if it deems such inspection necessary. Where data from foreign clinical trials are intended to serve as the sole basis for marketing approval in the United States, the FDA will not approve the application on the basis of foreign data alone unless those data are considered applicable to the United States patient population and United States medical practice, the clinical trials were performed by clinical investigators of recognized competence, and the data is considered valid without the need for an on-site inspection by the FDA or, if the FDA considers such an inspection to be necessary, the FDA is able to validate the data through an on-site inspection or other appropriate means. In addition, such clinical trials would be subject to the applicable local laws of the foreign jurisdictions where the clinical trials are conducted. A description of any studies related to overdosage is also required, including information on dialysis, antidotes, or other treatments, if known. There can be no assurance the FDA will accept data from clinical trials conducted outside of the United States. If the FDA does not accept any such data, it would likely result in the need for additional clinical trials, which would be costly and time-consuming and delay aspects of our development plan.

 

Risks inherent in conducting international clinical trials include, but are not limited to:

 

  foreign regulatory requirements that could burden or limit our ability to conduct our clinical trials;
  administrative burdens of conducting clinical trials under multiple foreign regulatory schema;

 

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  foreign currency fluctuations which could negatively impact our financial condition since certain payments are paid in local currencies;
  manufacturing, customs, shipment and storage requirements;
  cultural differences in medical practice and clinical research; and
  diminished protection of intellectual property in some countries.

 

Biologics carry unique risks and uncertainties, which could have a negative impact on future results of operations.

 

The successful discovery, development, manufacturing and sale of biologics is a long, expensive and uncertain process. There are unique risks and uncertainties with biologics. For example, access to and supply of necessary biological materials, such as cell lines, may be limited and governmental regulations restrict access to and regulate the transport and use of such materials. In addition, the development, manufacturing and sale of biologics is subject to regulations that are often more complex and extensive than the regulations applicable to other pharmaceutical products. Manufacturing biologics, especially in large quantities, is often complex and may require the use of innovative technologies. Such manufacturing also requires facilities specifically designed and validated for this purpose and sophisticated quality assurance and quality control procedures. Biologics are also frequently costly to manufacture because production inputs are derived from living animal or plant material, and some biologics cannot be made synthetically. In addition, after receiving product approval, the FDA and other regulatory authorities may require us to submit samples of any lot of any approved product together with the protocols showing the results of applicable tests at any time. Under some circumstances, the FDA and other regulatory authorities may require that we not distribute a lot until the agency authorizes its release. Failure to successfully discover, develop, manufacture and sell biologics could adversely impact our business and results of operations.

 

If we are not able to obtain any required regulatory approvals for our product candidates, we will not be able to commercialize our product candidates and our ability to generate revenue will be limited.

 

The research, testing, manufacturing, labeling, packaging, storage, approval, sale, marketing, advertising and promotion, pricing, export, import and distribution of drug products are subject to extensive regulation by the FDA, EMA, MHRA and other regulatory authorities in the United States, European Union, United Kingdom and other countries, where regulations differ from country to country. We are not permitted to market our product candidates as prescription pharmaceutical products in the United States until we receive approval of a New Drug Application (“NDA”), or BLA from the FDA, or in any foreign countries until we receive the requisite approval from such countries. In the United States, the FDA generally requires the completion of clinical trials of each drug to establish its safety and efficacy and extensive pharmaceutical development to ensure its quality before an NDA or a BLA is approved. Regulatory authorities in other jurisdictions impose similar requirements. Of the large number of drugs in development, only a small percentage result in the submission of an NDA or a BLA to the FDA or other regulatory authorities and even fewer are eventually approved for commercialization. Changes in regulatory approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for a submitted product application may cause delays in the approval or rejection of an application. We have only limited experience in filing the applications necessary to gain regulatory approvals and expect to rely on consultants and third party CROs with expertise in this area to assist us in this process. Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing marketing approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities and grant of manufacturing authorizations and Good Manufacturing Practices (“GMP”) certificates by, the regulatory authorities. Our product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining marketing approval or prevent or limit commercial use. If our development efforts for our product candidates, including regulatory approval, are not successful for their planned indications, our business will be materially adversely affected. Our success depends on the receipt of regulatory approval and the issuance of such regulatory approvals is uncertain and subject to a number of risks, including the following:

 

  the results of our clinical trials may not be satisfactory or may not meet the level of statistical or clinical significance required by the FDA, EMA/European Commission, MHRA or other regulatory agencies for marketing approval;
  the dosing of our product candidates in a particular clinical trial may not be at an optimal level;
  we may be required to provide additional analysis or data for already completed clinical studies, or conduct additional studies;

 

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  the FDA, EMA, MHRA or comparable foreign regulatory authorities may require us to obtain clearance, CE marking or approval of companion diagnostic tests;
  the FDA, EMA, MHRA or comparable foreign regulatory authorities may disagree on the design or implementation of our clinical trials, including the methodology used in our studies, our chosen endpoints, our statistical analysis, or our proposed product indication;
  our failure to demonstrate to the satisfaction of the FDA, EMA, MHRA or comparable regulatory authorities that a product candidate is safe and effective for its proposed indication;
  we may fail to demonstrate that a product candidate’s clinical benefits outweigh its safety risks;
  immunogenicity might affect a product candidate efficacy and/or safety;
  the FDA, MHRA, the competent authorities of the European Union Member States or comparable foreign regulatory authorities may disagree with our interpretation of data from nonclinical studies or clinical trials;
  the FDA, MHRA, the competent authorities of the European Union Member States or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with whom we contract for clinical and commercial supplies; or
  there may be changes in the approval policies or regulations that render our nonclinical and clinical data insufficient for approval.

 

Additionally, even if we obtain regulatory approval for one indication, there is no guarantee we will be able to gain regulatory approval for additional indications. For example, we intend to initially seek regulatory approval for our CVB vaccine product candidate for the prevention of acute CVB infection. The results of longitudinal studies demonstrating the connection between CVB and T1D or celiac disease will be necessary to expand the indicated use of this vaccine to T1D. These studies must be completed and submitted to the FDA, MHRA or EMA prior to receiving approval in the United States, United Kingdom or European Union to market the CVB vaccine for additional indications such as prevention of T1D. Such studies will be costly and time consuming and may not demonstrate to the FDA’s, MHRA’s or EMA’s satisfaction the connection between the CVB virus and the onset of T1D or celiac disease. Failure or delay in obtaining regulatory approval for our product candidates for the foregoing, or any other reasons, will prevent or delay us from commercializing our product candidates, and our ability to generate revenue will be materially impaired. We cannot guarantee that regulators will agree with our assessment of the results of the clinical trials we have conducted or intend to conduct in the future or that such future trials will be successful. The FDA, EMA, MHRA and other regulators have substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional clinical trials, or pre-clinical or other studies. In addition, varying interpretations of the data obtained from pre-clinical and clinical testing could delay, limit or prevent regulatory approval of our product candidates.

 

The FDA, EMA, MHRA or comparable foreign regulatory authorities could require the clearance, CE marking or approval of a companion diagnostic device for teplizumab as a post-marketing commitment or otherwise, which may require substantial financial resources and could delay or prevent regulatory approval of teplizumab.

 

The FDA has communicated to the Company that it (i) acknowledges that the diagnosis stage 2 T1D may be well understood to future prescribers of teplizumab, and therefore, specification of autoantibody testing in the labeling may not be required for the safe and effective use of teplizumab and (ii) is continuing to discuss internally the requirement for a companion diagnostic(s) for teplizumab, and given these uncertainties, the Company should consider seeking additional advice from the agency on the process of companion diagnostic development, as it remains possible it will be required as a post-marketing commitment. The Company’s position is that a companion diagnostic should not be required for the use of teplizumab in at-risk individuals based upon, among other reasons, (i) relevant FDA precedent and guidance, (ii) the fact that the presence of autoantibodies is supportive, but not sufficient, for a diagnoses of stage 2 T1D and (iii) the commercial availability of FDA-cleared tests or Clinical Laboratory Improvement Amendments, licensed laboratory-developed tests to identify T1D, which the teplizumab final label can direct physicians to use.

 

Should the FDA, EMA, MHRA or comparable foreign regulatory authorities disagree with us and require the use of a companion diagnostic, we may face delays or obstacles in obtaining approval for teplizumab, as the FDA or other regulatory authorities may take the position that a companion diagnostic device is required prior to granting approval of teplizumab. In addition, if a companion diagnostic is required, we may be dependent on the cooperation and efforts of third-party collaborators to develop one or more companion diagnostics, which generally require FDA clearance or approval, or equivalent approval in other jurisdictions. We and our potential future collaborators may encounter difficulties in developing, validating or obtaining clearance/approval/CE marking for such companion diagnostics. Any delay or failure by us or our potential future collaborators to develop or obtain regulatory clearance, CE marking or approval of such companion diagnostics, if necessary, may delay or prevent approval of teplizumab, PRV-101 or our other product candidates.

 

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Even if we obtain marketing approval for any of our product candidates, we will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense. Additionally, our product candidates could be subject to labeling and other restrictions and withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our product candidates.

 

Even if we obtain regulatory approval for any of our product candidates for an indication, the FDA, EMA/European Commission, MHRA or foreign equivalent may still impose significant restrictions on their indicated uses or marketing or the conditions of approval or impose ongoing requirements for potentially costly and time-consuming post-approval studies, including Phase 4 clinical trials, post-market surveillance to monitor safety and efficacy and a Risk Evaluation and Mitigation Strategy (“REMS”) or other risk minimization measures. If the FDA concludes a REMS is needed in the United States, the sponsor of the NDA or BLA must submit a proposed REMS; the FDA will not approve the NDA or BLA without an approved REMS, if required. A REMS could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. The FDA may also require a REMS for an approved product when new safety information emerges. Any such post-marketing requirements may negatively impact our commercialization plans or require us to raise additional capital to support the execution of such requirements. Additionally, if we face challenges or are unable to comply with post-marketing requirements, we may not be able to maintain marketing approval, or we may decide to abandon the program.

 

Our product candidates will also be subject to ongoing regulatory requirements governing the manufacturing, labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of adverse events and other post-market information. These requirements include registration with the FDA, as well as continued compliance with current GCP regulations for any clinical trials that we conduct post-approval, and any additional requirements in other jurisdictions. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current GMP requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents.

 

With respect to sales and marketing activities by us or any future licensor, advertising and promotional materials must comply with FDA rules in addition to other applicable federal, state and local laws in the United States and similar legal requirements in other countries. We may also be subject, directly or indirectly through our customers and licensors, to various fraud and abuse laws, including, without limitation, the United States Anti-Kickback Statute, United States False Claims Act, and similar state laws, which impact, among other things, our proposed sales, marketing, and scientific/educational grant programs. If we participate in the United States Medicaid Drug Rebate Program, the Federal Supply Schedule of the United States Department of Veterans Affairs, or other government drug programs, we will be subject to complex laws and regulations regarding reporting and payment obligations. All of these activities are also potentially subject to United States federal and state consumer protection and unfair competition laws. Similar requirements exist in many of these areas in other countries.

 

In addition, if any of our product candidates are approved for a particular indication, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA, MHRA, and the competent authorities of the European Union Member States strictly regulate the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA, MHRA, or the European Commission as reflected in, or in a manner that is otherwise inconsistent with, the product’s approved labeling. If we receive marketing approval for our product candidates, physicians may nevertheless legally prescribe our products to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, or otherwise inappropriately promoted our products, we may become subject to significant liability and government fines. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses and false or misleading claims, and a company that is found to have improperly promoted products, including off-label uses, may be subject to significant sanctions. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees of permanent injunctions under which specified promotional conduct is changed or curtailed.

 

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If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, problems with the facility where the product is manufactured, or we or our manufacturers fail to comply with applicable regulatory requirements, we may be subject to the following administrative or judicial sanctions:

 

  restrictions on the marketing or manufacturing of the product;
  withdrawal of the product from the market;
  voluntary or mandatory product recalls;
  restrictions of the labeling of a product;
  restrictions on product distribution or use
  requirements to conduct post-marketing studies or clinical trials;
  issuance of warning letters or untitled letters;
  injunctions or the imposition of civil or criminal penalties or monetary fines, restitution, or disgorgement of profit or revenues;
  suspension, withdrawal, variation or revocation of regulatory approval;
  suspension or termination of any ongoing clinical trials;
  refusal to approve pending applications or supplements to approved applications filed by us;
  suspension or imposition of restrictions on operations, including costly new manufacturing requirements; or
  product seizure or detention or refusal to permit the import or export of product.

 

The occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and generate revenue. Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. Adverse regulatory action, whether pre- or post-approval, can also potentially lead to product liability claims and increase our product liability exposure.

 

Even though we may obtain or apply for orphan drug designation for a product candidate, we may not be able to obtain orphan drug marketing exclusivity and even if we obtain orphan drug marketing exclusivity, it may not effectively protect the product from competition.

 

We have obtained orphan drug designation from the FDA for teplizumab for the treatment of newly diagnosed T1D. Separately, some of the subsets of lupus erythematosus, which we may target with PRV-3279, are orphan indications (e.g., lupus nephritis). However, there is no guarantee that the FDA, the European Commission or comparable foreign regulatory authorities will grant any future application for orphan drug designation for any of our other product candidates, including teplizumab for the use in at-risk individuals, which would make us ineligible for the additional exclusivity and other benefits of orphan drug designation, including the potential to receive a transferable priority review voucher for obtaining approval of a designated rare pediatric disease product. For example, we have applied for orphan drug designation of teplizumab for the use in at-risk individuals and await a final determination from the FDA’s Office of Orphan Drug Development (“OOPD”). Current data suggests that there may be an initial undiagnosed prevalence approaching 165,000-200,000 Stage 2 T1D subjects in all age groups, however, we believe the diagnosed prevalence for Stage 2 T1D subjects is less than 200,000, which, if the FDA agrees, would meet the FDA’s criteria for orphan drug designation. Additionally, we believe it would take a significant amount of resources and time to identify 200,000 treatable patients on a year-by-year basis. While we believe there is sufficient epidemiological evidence and rationale to support Stage 2 T1D being a rare disease, OOPD may disagree with us and reject our orphan designation request. Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States or for which there is no reasonable expectation that the cost of developing and making a drug available in the United States for this type of disease or condition will be recovered from sales of the product. Orphan drug designation must be requested before submitting an NDA or a BLA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan product designation does not convey any advantage in or shorten the duration of regulatory review and approval process. In addition to the potential period of exclusivity, orphan designation makes a company eligible for grant funding to defray costs of clinical trial expenses, tax credits for clinical research expenses and potential exemption from the FDA application user fee. If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other applications to market the same drug for the same indication for seven years, except in limited circumstances, such as (i) the drug’s orphan designation is revoked; (ii) its marketing approval is withdrawn; (iii) the orphan exclusivity holder consents to the approval of another applicant’s product; (iv) the orphan exclusivity holder is unable to assure the availability of a sufficient quantity of drug; or (v) a showing of clinical superiority to the product with orphan exclusivity by a competitor product. If a drug designated as an orphan product receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan drug exclusivity. There can be no assurance that we will receive orphan drug designation for any of our product candidates in the indications for which we think they might qualify, if we elect to seek such applications.

 

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Even if we obtain orphan drug exclusivity for teplizumab for the treatment of newly-diagnosed T1D in the United States, the FDA can still approve other drugs that have a different active ingredient for use in treating the same indication. Furthermore, the FDA can waive orphan drug exclusivity if we are unable to manufacture sufficient supply of teplizumab or if the FDA finds that a subsequent applicant for newly-diagnosed T1D demonstrates clinical superiority to teplizumab. Accordingly, orphan drug exclusivity for a product may not effectively protect the product from competition.

 

Although we may pursue expedited regulatory approval pathways for a product candidate, it may not qualify for expedited development or, if it does qualify for expedited development, it may not actually lead to a faster development or regulatory review or approval process.

 

Although we believe there may be an opportunity to accelerate the development of certain of our product candidates through one or more of the FDA’s or EMA’s expedited programs, such as fast track, breakthrough therapy, accelerated approval or priority review, we cannot be assured that any of our other product candidates will qualify for such programs.

 

For example, in the United States, a drug may be eligible for designation as a breakthrough therapy if the drug is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. Although breakthrough designation or access to any other expedited program may expedite the development or approval process, it does not change the standards for approval. If we apply for breakthrough therapy designation or any other expedited program for our product candidates, the FDA may determine that our proposed target indication or other aspects of our clinical development plans do not qualify for such expedited program. Even if we are successful in obtaining a breakthrough therapy designation or access to any other expedited program, we may not experience faster development timelines or achieve faster review or approval compared to conventional FDA procedures. For example, the time required to identify and resolve issues relating to chemistry, manufacturing and controls, the acquisition of a sufficient supply of our product for clinical trial purposes or the need to conduct additional preclinical or clinical studies may delay approval by the FDA, even if the product candidate qualifies for a breakthrough therapy designation or access to any other expedited program. Access to an expedited program may also be withdrawn by the FDA if it believes that the designation is no longer supported by data from our clinical development program. Additionally, qualification for any expedited review procedure does not ensure that we will ultimately obtain regulatory approval for such product candidate.

 

Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not mean that we will be successful in obtaining regulatory approval of our product candidates in other jurisdictions.

 

Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not guarantee that we will be able to obtain or maintain regulatory approval in any other jurisdiction, but a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. For example, even if the FDA grants marketing approval of a product candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from those in the United States, including additional preclinical studies or clinical trials, as clinical trials conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In many jurisdictions outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval.

 

Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. If we fail to comply with the regulatory requirements in international markets and/ or to receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed.

 

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Current and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates.

 

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval for our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell our product candidates.

 

Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We do not know whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the United States Congress (“Congress”) of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.

 

The FDA’s and other regulatory authorities’ policies may change, and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We also cannot predict the likelihood, nature, or extent of adverse government regulation that may arise from pending or future legislation or administrative action, either in the United States or abroad. For example, on March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in response to the COVID-19 pandemic. Among other provisions, the CARES Act made a number of changes to the Federal Food, Drug, and Cosmetic Act (“FDCA”) aimed at preventing drug shortages. Similarly, the FDA has issued a number of guidance documents describing the agency’s expectations for how drug manufacturers should comply with various FDA requirements during the pandemic, including with respect to conducting clinical trials, distributing drug samples, and reporting post-marketing adverse events. Moreover, as a result of the COVID-19 pandemic, there has been increasing political and regulatory scrutiny of drug supply chains, resulting in proposed and enacted legislative and executive actions, including Executive Orders, to incentivize or compel drug manufacturing operations to relocate to the United States. It is not clear how these changes and proposals could impact our business. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, and we may not achieve or sustain profitability.

 

Healthcare reform and other governmental and private payor initiatives may have an adverse effect upon, and could prevent, our product candidates’ commercial success, if approved.

 

The United States government and individual states have been aggressively pursuing healthcare reform designed to impact delivery of, and/or payment for, healthcare, which include initiatives intended to reduce the cost of healthcare. For example, in March 2010, the United States Congress enacted the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act (the “ACA”), which, among other things, expanded healthcare coverage through Medicaid expansion and the implementation of the individual health insurance mandate; included changes to the coverage and reimbursement of drug products under government healthcare programs; imposed an annual fee on manufacturers of branded drugs; and expanded government enforcement authority. We face uncertainties because there have been, and may be additional, federal legislative and administrative efforts to repeal, substantially modify or invalidate some or all of the provisions of the ACA. For example, tax reform legislation was enacted at the end of 2017 that eliminated the tax penalty for individuals who do not maintain sufficient health insurance coverage beginning in 2019. The ACA has also been subject to judicial challenge. The case Texas v. Azar, which challenges the constitutionality of the ACA, including provisions that are unrelated to healthcare reform but were enacted as part of the ACA, was argued before the Supreme Court in November 2020. The Supreme Court dismissed this challenge to the ACA on June 17, 2021 and, therefore, all of the ACA but the individual mandate to buy health insurance currently remains in effect. In addition, the expansion of the 340B Drug Discount Program through the ACA has increased the number of purchasers who are eligible for significant discounts on branded drugs. Several drug manufacturers have commenced litigation, which remains ongoing, challenging the legality of contract pharmacy arrangements under the 340B Drug Discount Program, which may affect the way in which manufacturers are required to extend the 340B Drug Discount Program prices to covered entities, including through contract pharmacies. There are also ongoing challenges regarding the implementation of the 340B Drug Discount Program Administrative Dispute Resolution Process, which is in part intended to resolve claims by covered entities that they have been overcharged for covered outpatient drugs by manufacturers. The nature of the current Administrative Dispute Resolution Process, and the outcomes of these court cases, may have a material adverse impact on our revenue should we participate in the 340B Drug Discount Program after receiving approval for our product candidates.

 

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Beyond the ACA, in 2020 and early 2021, the United States Department of Health and Human Services has issued various rules that affect pricing or payment for drug products. For example, effective January 2023, revisions to the federal anti-kickback statute would remove protection for traditional Medicare Part D discounts offered by pharmaceutical manufacturers to pharmacy benefit managers and health plans. Additional healthcare reform efforts have sought to address certain issues related to the COVID-19 pandemic, including an expansion of telehealth coverage under Medicare and accelerated or advanced Medicare payments to healthcare providers. Some of these changes have been and may continue to be subject to legal challenge. For example, courts have temporarily enjoined a new “most favored nation” payment model for select drugs covered under Medicare Part B that was to take effect on January 1, 2021 and would limit payment based on international drug price. In addition, there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several U.S. Congressional inquiries, hearings and proposed and enacted federal legislation and rules, as well as Executive Orders, designed to, among other things, reduce or limit the prices of drugs and make them more affordable for patients, such as by tying the prices that Medicare reimburses for physician-administered drugs to the prices of drugs in other countries, reform the structure and financing of Medicare Part D pharmaceutical benefits, including through increasing manufacturer contributions to offset Medicare beneficiary costs, bring more transparency to drug pricing rationale and methodologies (including, for example, by requiring drug manufacturers to disclose planned drug price increases and the rationales for such increases), implement data collection and reporting under Section 204 of Title II of Division BB of the Consolidated Appropriations Act, 2021, which requires, among other things, health plans and issuers to disclose rebates, fees, and other remuneration provided by drug manufacturers related to certain pharmaceutical products, enable the government to negotiate prices for drugs covered under Medicare, including H.R. 3 which passed the House, revise rules associated with the calculation of Medicaid Average Manufacturer Price and Best Price, including the removal of the current statutory 100% of Average Manufacturer Price per-unit cap on Medicaid rebate liability effective as of January 1, 2024 under the American Rescue Plan Act of 2021, which may significantly affect the amount of rebates paid on prescription drugs under Medicaid and the prices that are required to be charged to covered entities under the 340B Drug Discount Program, create new anti-kickback statute safe harbors applicable to certain point-of-sale discounts to patients and fixed-fee administrative fee payment arrangements with pharmacy benefit managers, each of which are currently stayed, and facilitate the importation of certain lower-cost drugs from other countries. The nature and scope of health care reform in the wake of the transition from the Trump administration to the Biden administration remains uncertain, although President Biden supported reforms to lower drug prices during his campaign for the presidency. Adoption of new healthcare reform legislation at the federal or state level could affect demand for, or pricing of, our products or product candidates if approved for sale. We cannot predict, however, the ultimate content, timing or effect of any healthcare reform legislation or action, or its impact on us, and healthcare reform could increase compliance costs and may adversely affect our future business and financial results.

 

In addition, other legislative changes have been adopted that could have an adverse effect upon, and could prevent, our products’ or product candidates’ commercial success. More broadly, the Budget Control Act of 2011, as amended, or the Budget Control Act, includes provisions intended to reduce the federal deficit, including reductions in Medicare payments to providers through 2030 (except May 1, 2020 to December 31, 2021). Any significant spending reductions affecting Medicare, Medicaid or other publicly funded or subsidized health programs, or any significant taxes or fees imposed as part of any broader deficit reduction effort or legislative replacement to the Budget Control Act, or otherwise, could have an adverse impact on our anticipated product revenues.

 

In addition to governmental efforts in the United States, foreign jurisdictions as well as private health insurers and managed care plans are likely to continue challenging manufacturers’ ability to obtain reimbursement, as well as the level of reimbursement, for pharmaceuticals and other healthcare-related products and services. These cost-control initiatives could significantly decrease the available coverage and the price we might establish for our products, which would have an adverse effect on our financial results. The pricing and reimbursement of medicinal products in the European Union and the UK is subject to strict governmental control. Pricing and reimbursement negotiations with governmental authorities are complex and may take significant amounts of time. To obtain reimbursement and/or pricing approval in the European Union Member States and/or the UK, we may be required to conduct studies or otherwise provide data demonstrating the cost effectiveness of our products compared with other available established therapies. The conduct of such studies could also result in delays in the commercialization of our products. Additionally, cost-control initiatives, increasingly based on affordability and accessibility, as well as post-marketing assessment of the product’s added value as compared to existing treatments, could decrease the price of our products or the indications for which we are able to obtain reimbursement, which would result in lower revenues to us. New legislative and policy initiatives in the European Union, aimed at increasing accessibility and affordability of medicinal products, and the increased cooperation between the European Union Member States may further impact the price and reimbursement status of our products in the future.

 

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If we fail to successfully commercialize any of our product candidates, we may need to acquire additional product candidates and our business will be adversely affected.

 

We have never developed and obtained approval for any product candidates or commercialized any product candidates. We have limited product candidates and do not have any other compounds in pre-clinical testing, lead optimization or lead identification stages beyond our product candidates. We cannot be certain that any of our product candidates will prove to be sufficiently effective and safe to meet applicable regulatory standards for any indication. If we fail to successfully obtain regulatory approval or commercialize any of our product candidates for their targeted indications, whether as stand-alone therapies or in combination with other therapeutic agents, and if we are unable to acquire additional product candidates in the future, our business will be adversely affected.

 

Even if we receive regulatory approval for any of our product candidates, we may not be able to successfully commercialize the product and the revenue that we generate from its sales, if any, may be limited.

 

If approved for marketing, the commercial success of our product candidates will depend upon each product’s acceptance by the medical community, including physicians, patients and health care payors. The degree of market acceptance for any of our product candidates will depend on a number of factors, including:

 

  demonstration of clinical safety and efficacy;
  relative convenience, dosing burden and ease of administration;
  the prevalence and severity of any adverse events and the overall safety profile;
  the clinical indications for which our products are approved;
  the acceptance of physicians to include T1D screening in routine patient medical care;
  the willingness of physicians to prescribe our product candidates, and the target patient population to try new therapies;
  the willingness of physicians and patients to accept 14 consecutive days of IV therapy
  efficacy of our product candidates compared to future competing products or therapies;
  the introduction of any new products that may in the future become available targeting indications for which our product candidates may be approved;
  new procedures or therapies that may reduce the incidences of any of the indications in which our product candidates may show utility;
  pricing and cost-effectiveness;
  the inclusion or omission of our product candidates in applicable therapeutic and vaccine guidelines;
  the effectiveness of our own or any future collaborators’ sales and marketing strategies;
  limitations or warnings contained in approved labeling from regulatory authorities, including any interactions of our products with other medicines patients are taking;
  our ability to obtain and maintain sufficient third-party coverage or reimbursement from government health care programs, including Medicare and Medicaid, private health insurers and other third-party payors or to receive the necessary pricing approvals from government bodies regulating the pricing and usage of therapeutics; and
  the willingness of patients to pay out-of-pocket in the absence of third-party coverage or reimbursement or government pricing approvals.

 

If any of our product candidates are approved, but do not achieve an adequate level of acceptance by physicians, health care payors, and patients, we may not generate sufficient revenue and we may not be able to achieve or sustain profitability. Our efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful.

 

In addition, even if we obtain regulatory approvals, the timing or scope of any approvals may prohibit or reduce our ability to commercialize our product candidates successfully. For example, if the approval process takes too long, we may miss market opportunities and give other companies the ability to develop competing products or establish market dominance. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render our product candidates not commercially viable. For example, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve any of our product candidates with a label that does not include the labeling claims necessary or desirable for the successful commercialization for that indication. Further, the FDA or comparable foreign regulatory authorities may place conditions on approvals or require risk management plans or a REMS, to assure the safe use of the drug. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of our product candidates. Moreover, product approvals may be withdrawn for non-compliance with regulatory standards or if problems occur following the initial marketing of the product. Any of the foregoing scenarios could materially harm the commercial success of our product candidates.

 

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We currently have a limited commercial organization. If we are unable to establish satisfactory sales and commercial support and marketing capabilities, we may not successfully commercialize any of our product candidates.

 

We have just recently begun to build out our commercial infrastructure and at present, we have only limited sales personnel. In order to commercialize products that are approved for commercial sales, we must develop our own sales infrastructure. If we are not successful recruiting sales personnel or in building our sales and marketing infrastructure in the United States, we will have difficulty successfully commercializing our product candidates, which would adversely affect our business, operating results and financial condition.

 

If we are unable to establish a satisfactory sales infrastructure, we may not realize a positive return on this investment. In addition, we will have to compete with established and well-funded pharmaceutical and biotechnology companies to recruit, hire, train and retain sales personnel. Factors that may inhibit our efforts to commercialize our product candidates without strategic partners or licensees include:

 

  our inability to recruit and retain adequate numbers of effective sales, market access, patient services, medical affairs and other key commercial personnel;
  the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any of our product candidates;
  the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and
  unforeseen costs and expenses associated with creating an independent commercial organization.

 

We may enter into collaborations with third parties for the research, development, and commercialization of certain of the product candidates we may develop. If any such collaborations are not successful, we may not be able to capitalize on the market potential of those product candidates.

 

We may seek additional third-party collaborators for the research, development, and commercialization of certain of the product candidates we may develop. If we enter into any such arrangements with any third parties, we will likely have limited control over the amount and timing of resources that our collaborators dedicate to the development or commercialization of any product candidates we may seek to develop with them. Our ability to generate revenues from these arrangements will depend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements. We cannot predict the success of any collaboration that we enter into.

 

Collaborations pose numerous risks to us, including the following:

 

  collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;
  collaborators may not pursue development and commercialization of any product candidates we may develop or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborator’s strategic focus or available funding or external factors such as an acquisition that diverts resources or creates competing priorities;
  collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials, or require a new formulation of a product candidate for clinical testing;
  collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our medicines or product candidates we may develop if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours;
  collaborators with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing and distribution of such product or products;

 

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  collaborators may not properly obtain, maintain, enforce, or defend our intellectual property or proprietary rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our proprietary information or expose us to potential litigation;
  disputes may arise between the collaborators and us that result in the delay or termination of the research, development, or commercialization of our products or product candidates or that result in costly litigation or arbitration that diverts management attention and resources;
  we may lose certain valuable rights under circumstances identified in our collaborations, including if we undergo a change of control;
  collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates we may develop; and
  collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. If a present or future collaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our product development or commercialization program under such collaboration could be delayed, diminished, or terminated.

 

If our collaborations do not result in the successful development and commercialization of product candidates, or if one of our collaborators terminates its agreement with us, we may not receive any future research funding or milestone or royalty payments under the collaboration. If we do not receive the funding we expect under these agreements, our development of product candidates could be delayed, and we may need additional resources to develop product candidates. In addition, if one of our collaborators terminates its agreement with us, we may find it more difficult to find a suitable replacement collaborator or attract new collaborators, and our development programs may be delayed or the perception of us in the business and financial communities could be adversely affected. All of the risks relating to product development, regulatory approval and commercialization described in this Quarterly Report on Form 10-Q apply to the activities of our collaborators.

 

These relationships, or those like them, may require us to incur non-recurring and other charges, increase our near- and long-term expenditures, issue securities that dilute our existing stockholders, or disrupt our management and business. In addition, we could face significant competition in seeking appropriate collaborators, and the negotiation process is time-consuming and complex. Our ability to reach a definitive collaboration agreement 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 several factors. If we license rights to any product candidates, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture.

 

Amgen has the right to assume control over the activities of our anti-IL-15 mAb product candidate.

 

Pursuant to the Amgen Agreement, Amgen reserves the right, at any time until 120 days after the delivery of the final data package relating to the Phase 2b PROACTIVE study which we initiated in August 2020, to assume control over all activities with respect to our anti-IL-15 monoclonal antibody (“mAb”), product candidate, including pricing and marketing decisions, after the payment of a $150.0 million milestone. There can be no assurance that Amgen’s strategic direction will be in line with ours should it assume control of activities, or that their decisions will have a positive impact on our results of operations. Moreover, we may not realize the full economic benefit of this agreement.

 

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

 

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We have existing competitors and will have potential new competitors in a number of jurisdictions, many of which have or will have substantially greater name recognition, commercial infrastructures and financial, technical and personnel resources than we have. Established competitors may invest heavily to quickly discover and develop novel compounds that could make any of our product candidates obsolete or uneconomical. Any new product that competes with an approved product may need to demonstrate compelling advantages in efficacy, cost, convenience, tolerability and safety to be commercially successful. Other competitive factors, including generic competition, could force us to lower prices or could result in reduced sales. In addition, new products developed by others could emerge as competitors to our product candidates. If we are not able to compete effectively against our current and future competitors, our business will not grow, and our financial condition and operations will suffer.

 

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Our potential competitors both in the United States and throughout the world include companies developing and/or marketing drugs and therapeutic solutions for immune-mediated diseases, including oncological, autoimmune and inflammatory diseases, as well as companies working in our specific fields, including T1D, enteroviral and emerging viral diseases, lupus, and inflammatory bowel diseases, such as CD.

 

There can be no assurance that our product candidates will be more effective or achieve greater market acceptance than competitive products, or that our competitors will not succeed in developing products and technologies that are more effective than those being developed by us or that would render our products and technologies less competitive or obsolete. Additionally, there can be no assurance that the development by others of new or improved products will not make our product candidates superfluous or obsolete.

 

Our product candidates may face competition sooner than expected.

 

We intend to seek data exclusivity or market exclusivity for our monoclonal antibodies teplizumab and PRV-015, our DART molecule PRV-3279 and our PRV-101 CVB vaccine product candidates provided under the FDCA, and similar laws in other countries. In the United States, we believe that these product candidates will qualify for 12 years of data exclusivity under the Biologics Price Competition and Innovation Act of 2009 (“BPCIA”), which was enacted as part of the ACA. Under the BPCIA, an application for a biosimilar product or BLA cannot be submitted to the FDA until four years, or if approved by the FDA, until 12 years, after the original brand product identified as the reference product is approved under a BLA. The BPCIA provides an abbreviated pathway for the approval of biosimilar and interchangeable biological products. The abbreviated regulatory pathway establishes legal authority for the FDA to review and approve biosimilar biologics, including the possible designation of a biosimilar as “interchangeable” based on its similarity to an existing brand product. The law is complex and the processes the FDA establishes to implement the law could have a material adverse effect on the future commercial prospects for our biological product candidates. There is also a risk that Congress could repeal or amend the BPCIA to shorten this exclusivity period, potentially creating the opportunity for biosimilar competition sooner than anticipated after the expiration of our patent protection. Moreover, the extent to which a biosimilar, once approved, will be substituted for any reference product in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.

 

Our product candidates that are not, or are not considered, biologics that would qualify for exclusivity under the BPCIA may be eligible for market exclusivity as drugs under the FDCA. The FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. The Ensuring Innovation Act, enacted on April 23, 2021, amended the FDA’s statutory authority for granting such exclusivity to reflect the agency’s existing regulations and longstanding interpretation that award exclusivity based on a drug’s active moiety, as opposed to its active ingredient, which is intended to limit the applicability of this exclusivity, thereby potentially facilitating generic competition. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application (“ANDA”), or a 505(b)(2) NDA, submitted by another company for another version of such drug. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, for new indications, dosages, or strengths of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving 505(b)(2) NDAs or ANDAs for drugs containing the original active agent.

 

Even if, as we expect, our product candidates are considered to be reference products eligible for 12 years of exclusivity under the BPCIA or five years of exclusivity under the FDCA, another company could market competing products if the FDA approves a full BLA or full NDA for such product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity and potency of the products. Moreover, an amendment or repeal of the BPCIA could result in a shorter exclusivity period for our product candidates, which would have a material adverse effect on our business.

 

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In addition, the Further Consolidated Appropriations Act, 2020, which incorporated the framework from the Creating and Restoring Equal Access To Equivalent Samples (“CREATES”) legislation, was signed into law as part of the 2019 year-end federal spending package. The legislation purports to promote competition in the market for drugs and biological products by facilitating the timely entry of lower-cost generic and biosimilar versions of those drugs and biological products, including by allowing ANDA, 505(b)(2) NDA or biosimilar developers to obtain access to branded drug and biological product samples. While the full impact of these provisions is unclear at this time and initial litigation brought under this law is pending, its provisions do have the potential to facilitate the development and future approval of biosimilar or generic versions of our products if approved, introducing biosimilar or generic competition that could have a material adverse impact on our business, financial condition and results of operations.

 

Our future growth depends, in part, on our ability to penetrate international markets, where we would be subject to additional regulatory burdens and other risks and uncertainties.

 

Our future profitability will depend, in part, on our ability to commercialize our product candidates in international markets for which we intend to rely on collaborations with third parties. If we commercialize any of our product candidates in international markets, we would be subject to additional risks and uncertainties, including:

 

  our customers’ ability to obtain reimbursement for our product candidates in international markets;
  our inability to directly control commercial activities because we are relying on third parties;
  the burden of complying with complex and changing international regulatory, tax, accounting and legal requirements;
  different medical practices and customs in foreign countries affecting acceptance in the marketplace;
  import or export licensing requirements;
  longer accounts receivable collection times;
  longer lead times for shipping;
  language barriers for technical training;
  reduced protection of intellectual property rights in some foreign countries;
  foreign currency exchange rate fluctuations; and
  the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.

 

International sales of our product candidates could also be adversely affected by the imposition of governmental controls, political and economic instability, trade restrictions and changes in tariffs, any of which may adversely affect our results of operations.

 

If we market any of our product candidates or, if approved, commercial products, in a manner that violates healthcare laws, or if we violate government price reporting laws, we may be subject to civil or criminal penalties.

 

The marketing and sale of pharmaceutical products are subject to comprehensive governmental regulation within the United States, with similar requirements in other jurisdictions. Numerous federal, state and local authorities have jurisdiction over, or enforce laws related to, such activities, including the FDA, United States Drug Enforcement Agency, Centers for Medicare & Medicaid Services, the United States Department of Health and Human Services Office of Inspector General, the United States Department of Justice, state Attorneys General, state departments of health and state pharmacy boards. See the section entitled “Business—Government Regulation” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2021.

 

The FDA enforces laws and regulations which require that the promotion of pharmaceutical products be consistent with the approved prescribing information. While physicians may prescribe an approved product for a so-called “off label” use, it is unlawful for a pharmaceutical company to promote its products in a manner that is inconsistent with its approved label and any company which engages in such conduct can subject that company to significant liability. The federal government has levied large civil and criminal fines and/or other penalties against companies for alleged improper promotion and has investigated and/or prosecuted several companies in relation to off-label promotion. The FDA has also requested that certain companies enter consent decrees or permanent injunctions under which specified promotional conduct is changed, curtailed or prohibited. Similarly, industry codes in the European Union and other foreign jurisdictions prohibit companies from engaging in off-label promotion and regulatory agencies in various countries enforce violations of the code with civil penalties. While we intend to ensure that our promotional materials are consistent with our label, regulatory agencies may disagree with our assessment and may issue untitled letters, warning letters or may institute other civil or criminal enforcement proceedings.

 

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We are also subject to various federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback laws and false claims laws, for activities related to sales of any of our products or product candidates that may in the future receive marketing approval. Anti-kickback laws generally prohibit persons from soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid. Although the specific provisions of these laws vary, their scope is generally broad and there may not be regulations, guidance or court decisions that apply the laws to particular industry practices. False claims laws prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, information or claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent.

 

If any of our product candidates are approved, we anticipate that we will need to participate in the Medicaid Drug Rebate Program and a number of other federal and state government pricing programs in the United States in order to obtain coverage for the product by certain government healthcare programs. These programs would generally require us to pay rebates or provide discounts to certain private purchasers or government payers in connection with our products when dispensed to beneficiaries of these programs. In some cases, such as with the Medicaid Drug Rebate Program, the rebates are based on pricing and rebate calculations that we report on a monthly and quarterly basis to the government agencies that administer the programs. We may have reimbursement obligations or be subject to penalties if we fail to provide timely and accurate information to the government, pay the correct rebates or offer the correct discounted pricing.

 

Over the past few years, numerous pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of alleged promotional and marketing activities, such as: allegedly providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in off-label promotion that caused claims to be submitted to Medicare or Medicaid for non-covered, off-label uses; and submitting inflated best price information to the Medicaid Drug Rebate Program to reduce liability for Medicaid rebates. Most 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. Efforts to ensure that our activities comply with applicable healthcare laws and regulations will involve substantial costs. Given the breadth of the laws and regulations, limited guidance for certain laws and regulations and evolving government interpretations of the laws and regulations, governmental authorities may possibly conclude that our business practices may not comply with healthcare laws and regulations. If our operations are found to be in violation of any of the laws described above or any other government regulations that apply to us, we may be subject to sanctions, including substantial civil monetary penalties, exclusion of our products from reimbursement under government programs, substantial criminal fines and imprisonment, any of which could adversely affect our business, financial condition, results of operations, prospects and reputation.

 

We are dependent on third parties to manufacture our product candidates, and our commercialization of our product candidates could be halted, delayed or made less profitable if those third parties fail to obtain manufacturing approval from the FDA or comparable foreign regulatory authorities, fail to provide us with sufficient quantities of our product candidates or fail to do so at acceptable quality levels or prices.

 

We do not currently have, nor do we plan to acquire, the capability or infrastructure to manufacture drug substance, in our product candidates for use in our clinical trials or for commercial products, if any. As a result, we are obligated to rely on contract manufacturers for clinical supplies of our product candidates and will be obligated, if and when any of our product candidates are approved for commercialization, to rely on contract manufacturers for commercial supply. We may not be able to engage a contract manufacturer for commercial supply of any of our product candidates on acceptable terms to us, or at all.

 

The facilities used by our contract manufacturers to manufacture our product candidates must be approved by the FDA, the competent authorities of the European Union Member States, MHRA or other regulatory authorities pursuant to inspections that will be conducted after we submit an NDA or BLA to the FDA or equivalent applications to other relevant regulatory authorities. We will be completely dependent on our contract manufacturers for compliance with GMPs for manufacture of both active drug substances and finished drug products. These GMP regulations cover all aspects of the manufacturing, testing, quality control and record keeping relating to our product candidates. If our contract manufacturers do not successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA, the competent authorities of the European Union Member States, MHRA or other regulatory authorities, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. If the FDA, the competent authorities of the European Union Member States, MHRA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.

 

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Our contract manufacturers are subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies for compliance with GMPs and similar regulatory requirements. Although we are responsible for oversight of manufacturing of our product candidates, we do not have control over our contract manufacturers’ compliance with these regulations and standards. For example, in a general inspection unrelated to teplizumab at a fill/finish manufacturing facility the FDA identified deficiencies which are required to be addressed by that manufacturing facility as a condition to an approval of teplizumab. Failure by any of our contract manufacturers to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure to grant approval to market any of our product candidates, delays, suspensions or withdrawals of approvals, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business. In addition, although we have audit and certain other oversight rights under our contracts with our contract manufacturers, we do not have control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. Failure by our contract manufacturers to comply with or maintain any of these standards could adversely affect our ability to develop, obtain regulatory approval for or market any of our product candidates.

 

If, for any reason, these third parties are unable or unwilling to perform, we may not be able to terminate our agreements with them, to the extent applicable, and we may not be able to locate alternative manufacturers or formulators or enter into favorable agreements with them and we cannot be certain that any such third parties will have the manufacturing capacity to meet future requirements. If these manufacturers or any alternate manufacturer of finished drug product experiences any significant difficulties in its respective manufacturing processes for our drug substance or finished drug products or should cease doing business with us, we could experience significant interruptions in the supply of any of our product candidates or may not be able to create a supply of our product candidates at all. Were we to encounter manufacturing issues, our ability to produce a sufficient supply of any of our product candidates might be negatively affected. Our inability to coordinate the efforts of our third-party manufacturers, or the lack of capacity available at our third-party manufacturers, could impair our ability to supply any of our product candidates at required levels. Because of the significant regulatory requirements that we would need to satisfy in order to qualify a new active drug substances or finished drug products manufacturer, if we face these or other difficulties with our current manufacturers, we could experience significant interruptions in the supply of any of our product candidates if we decided to transfer the manufacture of any of our product candidates to one or more alternative manufacturers in an effort to deal with the manufacturing issues.

 

Any manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations and result in lost sales. Additionally, we rely on third parties to supply the raw materials needed to manufacture our potential products. Any reliance on suppliers may involve several risks, including a potential inability to obtain critical materials and reduced control over production costs, delivery schedules, reliability and quality. Any unanticipated disruption to a contract manufacturer caused by problems at suppliers could delay shipment of any of our product candidates, increase our cost of goods sold and result in lost sales.

 

We cannot guarantee that our future manufacturers and suppliers will be able to reduce the costs of commercial scale manufacturing of any of our product candidates over time. If the commercial-scale manufacturing costs of any of our product candidates are higher than expected, these costs may significantly impact our operating results. In order to reduce costs, we may need to develop and implement process improvements. However, in order to do so, we will need, from time to time, to notify or make submissions with regulatory authorities, and the improvements may be subject to approval by such regulatory authorities. We cannot be sure that we will receive these necessary approvals or that these approvals will be granted in a timely fashion. We also cannot guarantee that we will be able to enhance and optimize output in our commercial manufacturing process. If we cannot enhance and optimize output, we may not be able to reduce our costs over time.

 

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Each of our contract manufacturers for our product candidates is a single source supplier. If any of the contract manufacturers in the supply chain for one of our product candidates experiences a delay or is unable to deliver the products or components necessary to manufacture the subject product, our ability to produce the affected product would be materially impaired.

 

Although we believe we currently have supply to support potential teplizumab supply demands for several years, we do not have an ongoing commitment from AGC Biologics for commercial supply of teplizumab or with any other contract manufacturers of our other product candidates. Our current agreement with AGC Biologics for the supply of teplizumab as well as agreements with other contract manufacturers of our other product candidates operate on a statement of work basis. If teplizumab is approved for commercial use but we are unable to reach agreement with AGC Biologics on the production of teplizumab for commercial use, or if we are unable to maintain commercial relationships with contract manufacturers of our other product candidates, we may not have sufficient supply of teplizumab to fulfill customer orders or sufficient supply for our other clinical trials. Identifying, qualifying and transferring manufacturing to secondary sources is a time-consuming process and there is no guaranty that we would be able to reach an agreement with a secondary source on acceptable terms, which could have a material adverse effect on our sales, results or operations and financial condition.

 

Our experience manufacturing teplizumab is limited and if the FDA requires any changes to our manufacturing process, including to address the FDA’s PK comparability considerations identified in the teplizumab CRL, or if we encounter any manufacturing issues, we may experience delays in commercialization, or in our ongoing and planned clinical trials, including the PROTECT study.

 

We have limited experience manufacturing teplizumab and we currently rely on single-source, third-party manufacturers to supply us with drug substance and drug product. We historically relied upon an existing supply of teplizumab drug substance produced by Eli Lilly to manufacture drug product at our third-party manufacturer for use in our clinical trials of teplizumab. We have entered into agreements with our third-party manufacturers to manufacture teplizumab for our anticipated clinical trial needs and with all except AGC for the potential commercialization of teplizumab. We believe supplies of teplizumab sufficient to supply the PROTECT study and to fulfill our initial years of commercial needs in the United States have been manufactured by our third-party manufacturers.

 

In order to obtain regulatory approval for teplizumab, third-party manufacturers have been required to consistently produce teplizumab in commercial quantities and of specified quality on a repeated basis and document their ability to do so. The required number of batches of teplizumab have been manufactured at our CMO’s by the processes we intend to use for commercialization. The quality and consistency of these lots, along with their comparability to teplizumab manufactured previously for clinical studies, will need to be approved by the FDA, which, on April 23, 2021, reported to the Company that it concluded that the teplizumab manufactured by the current third-parties is not comparable to drug product used in the “At-Risk” TN-10 study, and that it cannot be certain if this observation is not clinically relevant. See “The potential approval of teplizumab in the United States is subject to satisfactorily addressing issues raised by the FDA in its CRL to the teplizumab BLA, including the FDA’s conclusion that the drug pharmacokinetic profiles of the two drug products evaluated in our PK/PD bridging study for teplizumab are not comparable, product quality issues, and the requirement that a fill/finish manufacturing facility used by the Company for teplizumab resolve deficiencies identified by the FDA during a general inspection not specific to teplizumab. This may require further development activities, additional data, analyses and modeling and will likely affect the potential for and timing of any re- submission by the Company for an approval of teplizumab for the delay of clinical T1D in at-risk patients.” Additionally, in the July 2, 2021 CRL received by the Company, the FDA stated that as PK remains the primary endpoint for demonstration of comparability between the two products, the Company will need to establish PK comparability appropriately between the intended commercial product and the clinical trial product or provide other data that adequately justify why PK comparability is not necessary.

 

Changes in product candidate manufacturing or formulation may result in additional costs or delay.

 

As product candidates are developed through preclinical studies to late-stage clinical trials towards approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods and formulation, are altered in an effort to optimize processes. During the course of a development program, sponsors may also change the contract manufacturers used to produce the product candidates. Also, if we, through third-parties, engage in the scale-up of manufacturing, we may encounter unexpected issues relating to the manufacturing process or the quality, purity and stability of the product, and we may be required to refine or alter our manufacturing processes to address these issues. Such changes carry the risk that they will not achieve these intended objectives. Any of these changes could cause our product candidates to perform differently and affect the results of clinical trials. Such changes may also require additional testing, notification or approval by the FDA, the competent authorities of the European Union Member States, MHRA or other regulatory authorities. This could delay completion of clinical trials; require the conduct of bridging clinical trials or studies, or the repetition of one or more clinical trials; increase clinical trial costs; delay approval of our product candidates and jeopardize our ability to commence product sales and generate revenue.

 

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We expect to rely on third parties to conduct clinical trials for our product candidates. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize any of our product candidates and our business would be substantially harmed.

 

We rely on third-party CROs and vendors to conduct and manage our clinical programs including contracting with clinical sites to perform our clinical trials. We plan to rely heavily on these parties for execution of clinical trials for our product candidates and will control only certain aspects of their activities. Nevertheless, we will be responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on CROs and clinical sites will not relieve us of our regulatory responsibilities. We and our CROs are required to comply with GCPs, which are regulations and guidelines enforced by the FDA, the Competent Authorities of the Member States of the EEA and comparable foreign regulatory authorities for any products in clinical development. The FDA and its foreign equivalents enforce these GCP regulations through periodic inspections of trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable GCPs, 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 or other regulatory authorities will determine that any of our clinical trials comply with GCPs. In addition, our clinical trials must be conducted with products produced under GMP regulations and will require a large number of test subjects. Our failure or the failure of our CROs or clinical sites 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 the clinical trials for our product candidates in consultation with CROs, we expect that the CROs will manage all of the clinical trials conducted at contracted clinical sites. As a result, many important aspects of our drug development programs are delegated to third-parties. In addition, the CROs and clinical sites may not perform all of their obligations under arrangements with us or in compliance with regulatory requirements. If the CROs or clinical sites 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 any of our product candidates for the subject indication may be delayed or our development program materially and irreversibly harmed. We fully cannot control the amount and timing of resources these CROs and clinical sites will devote to our program or any of our product candidates. 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, which could significantly delay commercialization and require significantly greater expenditures.

 

If any of our relationships with these third-party CROs or clinical sites terminate, we may not be able to enter into arrangements with alternative CROs or clinical sites. 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 such clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our financial results and the commercial prospects for any of our product candidates would be harmed, our costs could increase and our ability to generate revenue could be delayed.

 

The outcome of pre-clinical testing and early clinical trials may not be predictive of the success of later clinical trials, and the results of our clinical trials may not satisfy the requirements of the FDA or comparable foreign regulatory authorities.

 

We currently have no products approved for sale and we cannot guarantee that we will ever have marketable products. Clinical failure can occur at any stage of clinical development. Clinical trials may produce negative or inconclusive results, and we or any future collaborators may decide, or regulators may require us, to conduct additional clinical trials or pre-clinical studies. We will be required to demonstrate with substantial evidence through well-controlled clinical trials that our product candidates are safe and effective for use in a diverse population before we can seek marketing approvals for their commercial sale. Success in pre-clinical studies and early-stage clinical trials does not mean that future larger registration clinical trials will be successful. This is because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety and efficacy to the satisfaction of the FDA and comparable foreign regulatory authorities despite having progressed through pre-clinical studies and early-stage clinical trials.

 

From time to time, we may publish or report interim or preliminary data from our clinical trials. Interim or preliminary data from clinical trials that we may conduct may not be indicative of the final results of the trial and are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Interim or preliminary data also remain subject to audit and verification procedures that may result in the final data being materially different from the interim or preliminary data. As a result, interim or preliminary data should be viewed with caution until the final data are available.

 

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In some instances, there can be significant variability in safety and efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in trial protocols, differences in size and type of the patient populations, differences in and adherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. We do not know whether any clinical trials we may conduct will demonstrate consistent or adequate efficacy and safety sufficient to obtain marketing approval to market our product candidates.

 

Third-party coverage and reimbursement and health care cost containment initiatives and treatment guidelines may constrain our future revenues.

 

Our ability to successfully market our product candidates will depend in part on the level of reimbursement that government health administration authorities, private health coverage insurers and other organizations provide for the cost of our products and related treatments. Countries in which any of our product candidates are sold through reimbursement schemes under national health insurance programs frequently require that manufacturers and sellers of pharmaceutical products obtain governmental approval of initial prices and any subsequent price changes. In certain countries, including the United States, government-funded and private medical care plans can exert significant indirect pressure on prices. We may not be able to sell our product candidates profitably if adequate prices are not approved or coverage and reimbursement is unavailable or limited in scope. Increasingly, third-party payors attempt to contain health care costs in ways that are likely to impact our development of products including:

 

  failing to approve or challenging the prices charged for health care products;
  introducing reimportation schemes from lower priced jurisdictions;
  limiting both coverage and the amount of reimbursement for new therapeutic products;
  denying or limiting coverage for products that are approved by the regulatory agencies but are considered to be experimental or investigational by third-party payors; and
  refusing to provide coverage when an approved product is used in a way that has not received regulatory marketing approval.

 

Moreover, recently there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their commercial products. There have been several recent Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the cost of drugs under Medicare, and reform government program reimbursement methodologies for drugs. While any proposed measures will require authorization through additional legislation to become effective, Congress has indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. See “Healthcare reform and other governmental and private payor initiatives may have an adverse effect upon, and could prevent, our product candidates’ commercial success, if approved.

 

Risks Relating to Our Intellectual Property Rights

 

We depend on rights to certain pharmaceutical compounds that are licensed to us. We do not control these pharmaceutical compounds and any loss of our rights to them could prevent us from selling our products.

 

We are dependent on licenses from third parties for all but one of our pharmaceutical compounds. We do not own the patents that underlie these licenses. Our rights to use the pharmaceutical compounds we license are subject to the continuation of and compliance with the terms of those licenses. Thus, the patents and patent applications applicable to our product candidates were not written by us or our attorneys, and we did not have control over the drafting and prosecution. The former patent owners and our licensors might not have given the same attention to the drafting and prosecution of these patents and applications as we would have if we had been the owners of the patents and applications and had control over the drafting. Moreover, under certain of our licenses, patent prosecution activities remain under the control of the licensor. We cannot be certain that drafting of the licensed patents and patent applications, or patent prosecution, by the licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights.

 

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Our rights to develop and commercialize the product candidates we license are subject to the validity of the owner’s intellectual property rights. Enforcement of our licensed patents or defense or any claims asserting the invalidity of these patents is often subject to the control or cooperation of our licensors. Legal action could be initiated against the owners of the intellectual property that we license and an adverse outcome in such legal action could harm our business because it might prevent such companies or institutions from continuing to license intellectual property that we may need to operate our business. In addition, such licensors may resolve such litigation in a way that benefits them but adversely affects our ability to develop and commercialize our product candidates.

 

In addition, our rights to practice the inventions claimed in the licensed patents and patent applications are subject to our licensors abiding by the terms of those licenses and not terminating them. Our licenses may be terminated by the licensor if we are in material breach of certain terms or conditions of the license agreement or in certain other circumstances. Certain of our licenses contained in our license agreements contain provisions that allow the licensor to terminate the license if (i) we breach any payment obligation or other material provision under the agreement and fail to cure the breach within a fixed time following written notice of termination, (ii) we or any of our affiliates, licensees or sublicensees directly or indirectly challenge the validity, enforceability, or extension of any of the licensed patents, (iii) we declare bankruptcy or dissolve, (iv) we fail to maintain a licensed product in active development or fail to use commercially reasonable efforts to develop or commercialize a licensed product. Our rights under the licenses are subject to our continued compliance with the terms of the license, including the payment of royalties due under the license. Termination of these licenses could prevent us from marketing some or all of our products. Because of the complexity of our products and the patents we have licensed, determining the scope of the license and related royalty obligations can be difficult and can lead to disputes between us and the licensor. An unfavorable resolution of such a dispute could lead to an increase in the royalties payable pursuant to the license. If a licensor believed we were not paying the royalties due under the license or were otherwise not in compliance with the terms of the license, the licensor might attempt to revoke the license. If such an attempt were successful, we might be barred from producing and selling some or all of our products.

 

It is difficult and costly to protect our intellectual property rights, and we cannot ensure the protection of these rights.

 

Our commercial success will depend, in part, on obtaining and maintaining patent protection for our technologies, products and processes, successfully defending these patents against third-party challenges and successfully enforcing these patents against third party competitors. The patent positions of pharmaceutical companies can be highly uncertain and involve complex legal, scientific and factual questions for which important legal principles remain unresolved. Changes in either the patent laws or in interpretations of patent laws may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowable or enforceable in our patents. The existing patents and patent applications relating to our product candidates and related technologies may be challenged, invalidated or circumvented by third parties and might not protect us against competitors with similar products or technologies.

 

The degree of future protection for our proprietary rights is uncertain, because legal means afford only limited protection and may not adequately protect our rights, permit us to gain or keep our competitive advantage, or provide us with any competitive advantage at all. For example, others have filed, and in the future are likely to file, patent applications covering products and technologies that are similar, identical or competitive to any of our product candidates, or important to our business. We cannot be certain that any patent application owned by a third party will not have priority over patent applications filed by us, or that we will not be involved in interference, opposition or invalidity proceedings before United States or foreign patent offices. Additionally, the composition of matter patents for teplizumab have expired, and although we have filed method of use patents for teplizumab, these may not provide adequate protection from competitors.

 

In the future we may rely on know-how and trade secrets to protect technology, especially in cases when we believe patent protection is not appropriate or obtainable. However, know-how and trade secrets are difficult to protect. While we intend to require employees, academic collaborators, consultants and other contractors to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or other proprietary or licensed information. Typically, research collaborators and scientific advisors have rights to publish data and information in which we may have rights. If we cannot maintain the confidentiality of our proprietary technology and other confidential information, our ability to receive patent protection and our ability to protect valuable information owned by us may be imperiled. Enforcing a claim that a third-party entity illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts are sometimes less willing to protect trade secrets than patents. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

 

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If we fail to obtain or maintain patent protection or trade secret protection for our product candidates or our technologies, third parties could use our proprietary information, which could impair our ability to compete in the market and adversely affect our ability to generate revenues and attain profitability.

 

We may also rely on the trademarks we may develop to distinguish our products from the products of our competitors. We cannot guarantee that any trademark applications filed by us or our licensors will be approved. Third parties may also oppose such trademark applications, or otherwise challenge our use of the trademarks. In the event that the trademarks we use are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands. Further, we cannot provide assurance that competitors will not infringe the trademarks we use, or that we will have adequate resources to enforce these trademarks.

 

Our product candidates may infringe the intellectual property rights of others, which could increase our costs and delay or prevent our development and commercialization efforts.

 

Our success depends in part on avoiding infringement of the proprietary technologies of others. The pharmaceutical industry has been characterized by frequent litigation regarding patent and other intellectual property rights. Identification of third-party patent rights that may be relevant to our proprietary technology is difficult because patent searching is imperfect due to differences in terminology among patents, incomplete databases and the difficulty in assessing the meaning of patent claims. Additionally, because patent applications are maintained in secrecy until the application is published, we may be unaware of third-party patents that may be infringed by commercialization of any of our product candidates or any future product candidate. There may be certain issued patents and patent applications claiming subject matter that we may be required to license in order to research, develop or commercialize any of our product candidates, and we do not know if such patents and patent applications would be available to license on commercially reasonable terms, or at all. Any claims of patent infringement asserted by third parties would be time-consuming and may:

 

  result in costly litigation;
  divert the time and attention of our technical personnel and management;
  prevent us from commercializing a product until the asserted patent expires or is held finally invalid or not infringed in a court of law;
  require us to cease or modify our use of the technology and/or develop non-infringing technology; or
  require us to enter into royalty or licensing agreements.

 

Third parties may hold proprietary rights that could prevent any of our product candidates from being marketed. Any patent-related legal action against us claiming damages and seeking to enjoin commercial activities relating to any of our product candidates or our processes could subject us to potential liability for damages and require us to obtain a license to continue to manufacture or market any of our product candidates or any future product candidates. We cannot predict whether we would prevail in any such actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. In addition, we cannot be sure that we could redesign our product candidates or any future product candidates or processes to avoid infringement, if necessary. Accordingly, an adverse determination in a judicial or administrative proceeding, or the failure to obtain necessary licenses, could prevent us from developing and commercializing any of our product candidates or a future product candidate, which could harm our business, financial condition and operating results.

 

A number of companies, including several major pharmaceutical companies, have conducted, or are conducting, research in immune-mediated diseases within the therapeutic fields in which we intend to operate, which has resulted, or may result, in the filing of many patent applications related to this research. If we were to challenge the validity of these or any issued United States patent in court, we would need to overcome a statutory presumption of validity that attaches to every issued United States patent. This means that, in order to prevail, we would have to present clear and convincing evidence as to the invalidity of the patent’s claims. If we were to challenge the validity of these or any issued United States patent in an administrative trial before the Patent Trial and Appeal Board in the United States Patent and Trademark Office, we would have to prove that the claims are unpatentable by a preponderance of the evidence. There is no assurance that a jury and/or court would find in our favor on questions of infringement, validity or enforceability.

 

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We may be subject to claims that we have wrongfully hired an employee from a competitor or that we or our employees have wrongfully used or disclosed alleged confidential information or trade secrets of their former employers.

 

As is commonplace in our industry, we will employ individuals who were previously employed at other pharmaceutical companies, including our competitors or potential competitors. We may be subject in the future to claims that our employees or prospective employees are subject to a continuing obligation to their former employers (such as non-competition or non-solicitation obligations) and that such obligations has been breached or claims that our employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. 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.

 

Risks Related to Ownership of our Common Stock

 

The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for stockholders.

 

The market price of our common stock has been volatile and can be subject to wide fluctuations in response to various factors, some of which are beyond our control, including, the reporting of results of our clinical trials or partner-sponsored clinical trials involving our programs. Other factors may include those discussed in this “Risk Factors” section of this Quarterly Report on Form 10-Q:

 

  our commercialization, marketing and manufacturing prospects;
  our intentions and our ability to establish collaborations and/or partnerships;
  the timing or likelihood of regulatory filings and approvals;
  our development, commercialization, marketing and manufacturing capabilities;
  our expectations regarding the potential market size and the size of the patient populations for our product candidates;
  the implementation of our business model and strategic plans for our business and technology;
  the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates, along with any product modifications and improvements;
  estimates of our expenses, future revenue, capital requirements, our needs for additional financing and our ability to obtain additional capital;
  our financial performance; and
  developments and projections relating to our competitors and our industry, including competing therapies and procedures.

 

In addition, the stock markets in general, and the markets for biopharmaceutical and biotechnology stocks in particular, have experienced extreme volatility that may have been unrelated to the operating performance of the issuer. These broad market fluctuations may adversely affect the market price or liquidity of our common stock. In the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the issuer.

 

On May 21, 2021, a putative class action complaint was filed in the U.S. District Court for the District of New Jersey (the “Court”), naming the Company, Chief Executive Officer Ashleigh Palmer, and Chief Financial Officer Andrew Drechsler as defendants. The complaint alleges violations of the Securities Exchange Act of 1934 and Rule 10b-5 in connection with disclosures made regarding the teplizumab BLA and teplizumab’s commercialization timeline. The plaintiff seeks to represent a class of shareholders who purchased or otherwise acquired the Company’s securities between November 2, 2020 and April 8, 2021. The complaint seeks unspecified damages. Per the procedures set forth by federal securities laws, applications for appointment of lead plaintiff(s) and lead counsel were due to the Court on July 20, 2021. Two applications for lead plaintiff and lead counsel were submitted to the Court on that date; one of the two movants subsequently withdrew its application.

 

This lawsuit and this type of litigation could result in substantial costs and divert our management’s attention and resources and could also require us to make substantial payments to satisfy judgments or to settle litigation.

 

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An active, liquid and orderly market for our common stock may not develop, which could result in substantial losses for stockholders.

 

Prior to our IPO, there was no public market for shares of our common stock. Although our common stock is listed on The Nasdaq Global Select Market (“Nasdaq”), the market for our shares has demonstrated varying levels of trading activity and an active public market for our shares may not be sustained. The lack of an active market may impair the ability to sell shares at the time a shareholder wish to sell them or at a price that a shareholder may consider reasonable. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other businesses, applications, or technologies using our shares as consideration.

 

We have incurred increased costs as a result of operating as a public company, and our management is now required to devote substantial time to additional compliance initiatives and corporate governance practices.

 

As a public company, we incur significant legal, accounting and other expenses. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of Nasdaq and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and will make some activities more time-consuming and costly.

 

Future capital raises may dilute our existing stockholders’ ownership and/or have other adverse effects on our operations.

 

If we raise additional capital by issuing equity securities, our existing stockholders’ percentage ownership will be reduced, and these stockholders may experience substantial dilution. We may also issue equity securities that provide for rights, preferences and privileges senior to those of our common stock. If we raise additional funds by issuing debt securities, these debt securities would have rights senior to those of our common stock and the terms of the debt securities issued could impose significant restrictions on our operations, including liens on our assets. If we raise additional funds through collaborations and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or to grant licenses on terms that are not favorable to us.

 

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

 

Our executive officers, directors, holders of 5% or more of our capital stock and their respective affiliates beneficially owned approximately 21.5% of our voting stock as of June 30, 2021. Therefore, these stockholders may have the ability to influence us through this ownership position. For example, if these stockholders were to choose to act together, they may be able to significantly influence all matters submitted to our stockholders for approval, including elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

 

Sales of a substantial number of shares of our common stock in the public market could cause our stock price to decline.

 

Sales of a substantial number of shares of our common stock in the public market could cause the market price of our common stock to decline. If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the market price of our common stock could decline.

 

In accordance with the guidelines specified under Rule 10b5-1 of the Exchange Act and our policies regarding stock transactions, a number of our employees, including executive officers, have adopted and may continue to adopt stock trading plans pursuant to which they have arranged to sell shares of our common stock from time to time in the future. Generally, sales under such plans by our executive officers and directors require public filings. Sales by such persons could be viewed negatively by holders and potential purchasers of our common stock, resulting in a decline in the market price of our common stock.

 

In addition, as of June 30, 2021, approximately 15.6 million shares of common stock were subject to outstanding options, reserved for future issuance under our equity incentive plans or subject to outstanding warrants. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the market price of our common stock could decline.

 

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If we are unable to maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our securities may decrease.

 

Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report on our internal control over financial reporting

 

If we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to assert that our internal control over financial reporting is effective or if we are unable to provide an attestation report from our independent registered public accounting firm, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could decrease.

 

Provisions in our organizational documents and provisions under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management.

 

Our amended and restated certificate of incorporation and bylaws contains provisions that could delay or prevent changes in control or changes in our management without the consent of our board of directors. These provisions include the following:

 

  no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
  the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
  the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
  the ability of our board of directors to amend our bylaws without obtaining stockholder approval;
  the required approval of at least 66 2/3% of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors;
  the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer, the president or the board of directors, or at the request of holders of record of at least 20% of our outstanding shares of common stock, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and
  advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.

 

In addition, these provisions would apply even if we were to receive an offer that some stockholders may consider beneficial.

 

We are also subject to the anti-takeover provisions contained in Section 203 of the Delaware General Corporation Law. Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other exceptions, the board of directors has approved the transaction.

 

Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.

 

Our amended and restated certificate of incorporation and bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law.

 

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In addition, as permitted by Section 145 of the Delaware General Corporation Law, our bylaws became effective immediately prior to the completion of the IPO and our indemnification agreements that we have entered into with our directors and officers provide that:

 

  we will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful;
  we may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law;
  we are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification;
  we will not be obligated pursuant to our bylaws to indemnify a person with respect to proceedings initiated by that person against us or our other indemnitees, except with respect to proceedings authorized by our board of directors or brought to enforce a right to indemnification;
  the rights conferred in our bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons; and
  we may not retroactively amend our bylaw provisions to reduce our indemnification obligations to directors, officers, employees and agents.

 

Our certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

 

Our certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws, any action to interpret, apply, enforce, or determine the validity of our certificate of incorporation or bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. In addition, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Securities Act or any other claim for which the federal and state courts have concurrent jurisdiction.

 

The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

 

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

 

We do not intend to pay any cash dividends on our common stock for the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. Therefore, shareholders are not likely to receive any dividends on their common stock for the foreseeable future. Since we do not intend to pay dividends, the ability to receive a return on investment will depend on any future appreciation in the market value of our common stock. There is no guarantee that our common stock will appreciate or even maintain the price at which our holders have purchased it.

 

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General Risk Factors

 

We will need to grow the size of our organization, and we may experience difficulties in managing this growth.

 

As our development and commercialization plans and strategies continue to develop, we intend to expand the size of our employee and consultant/contractor base. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. In addition, our management may have to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. Our future financial performance and our ability to develop and commercialize our product candidates and any other future product candidates and our ability to compete effectively will depend, in part, on our ability to effectively manage our future growth.

 

If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy. In addition, the loss of the services of our co-founders would adversely impact our business prospects.

 

Our management team has expertise in many different aspects of drug development and commercialization. However, our ability to compete in the highly competitive pharmaceuticals industry depends in large part upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We will need to hire additional personnel as we further develop our product candidates. Competition for skilled personnel in our market is intense and competition for experienced scientists may limit our ability to hire and retain highly qualified personnel on acceptable terms. Despite our efforts to retain valuable employees, members of our management, scientific and medical teams may terminate their employment with us on short notice. We have entered into employment agreements with certain of our executive officers. However, these employment arrangements will provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. Moreover, there can be no assurance that anyone we expect to employ in a key management position will be available to join our team when we expect them to, if at all. The loss of the services of any of our executive officers or other key employees, or our inability to hire targeted executives, could potentially harm our business, operating results or financial condition. In particular, we believe that the loss of the services of our co-founders would have a material adverse effect on our business. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level, and senior managers as well as junior, mid-level, and senior scientific and medical personnel.

 

Other pharmaceutical companies with which we compete for qualified personnel have greater financial and other resources, different risk profiles, and a longer history in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than what we have to offer. If we are unable to continue to attract and retain high-quality personnel, the rate and success at which we can develop and commercialize product candidates would be limited.

 

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.

 

We face a potential risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any of our product candidates or any other future product. For example, we may be sued if any product we develop, including any of our product candidates, or any materials that we use in our products 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, negligence, strict liability and a breach of warranties. In the US, claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

  decreased demand for any of our product candidates or any future products that we may develop;
  injury to our reputation;
  withdrawal of clinical trial participants;
  costs to defend the related litigation;
  a diversion of management’s time and our resources;
  substantial monetary awards to trial participants or patients;
  product recalls, withdrawals or labeling, marketing or promotional restrictions;
  the inability to commercialize some or all of our product candidates; and
  a decline in the value of our stock.

 

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Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We maintain product liability insurance covering our clinical trials. Although we will maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.

 

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 markets 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.

 

We are generally a virtual company and may be unable to adequately protect our information technology systems from cyber-attacks, which could result in the disclosure of confidential information, damage our reputation, and subject us to significant financial and legal exposure.

 

We are a virtual company and may be unable to adequately protect our information technology systems from cyber-attacks, which could result in the disclosure of confidential information, damage our reputation, and subject us to significant financial and legal exposure.

 

Cyber-attacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. Cyber-attacks could include wrongful conduct by hostile foreign governments, industrial espionage, deployment of harmful malware, denial-of-service, and other means to threaten data confidentiality, integrity and availability. A successful cyber-attack could cause serious negative consequences for our company, including the disruption of operations, the misappropriation of confidential business information and trade secrets, and the disclosure of corporate strategic plans. To date, we have not experienced threats to our data and information technology systems. However, although we devote resources to protect our information technology systems, we realize that cyber-attacks are a threat, and there can be no assurance that our efforts will prevent information security breaches that would result in business, legal or reputational harm to us, or would have a material adverse effect on our operating results and financial condition.

 

We rely on the proper function, availability and security of our information technology systems to operate our business and a cyber-attack or other breach or disruption of these systems could have a material adverse effect on our business and results of operations.

 

We rely on information technology systems to process, transmit and store electronic information in our day-to-day operations. The form and function of such systems may change over time as our business needs change. The nature of our business involves the receipt and storage of personal and financial information regarding our customers. We use our information technology systems to manage or support a variety of business processes and activities, including sales, procurement and supply chain, manufacturing and accounts payable. In addition, we use enterprise information technology systems to record, process, and summarize transactions and other financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal, and tax requirements. Our information technology systems may be susceptible to damage, disruptions or shutdowns due to computer viruses, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, telecommunication failures, user errors or catastrophic events. Any failure by us to maintain or protect our information technology systems and data integrity, including from cyber-attacks, intrusions, disruptions or shutdowns, could result in the unauthorized access to personally identifiable information, theft of intellectual property or other misappropriation of assets or the loss of key data and information, or otherwise compromise our confidential or proprietary information and disrupt our operations. If our information technology systems are breached or suffer severe damage, disruption or shutdown and we are unable to effectively resolve the issues in a timely manner, our business and operating results may be materially and adversely affected.

 

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If our efforts to maintain the privacy and security of our patient, employee, supplier or Company information are not successful, we could incur substantial additional costs and become subject to litigation, enforcement actions and reputational damage.

 

Our business, like that of most biopharmaceutical companies, involves the receipt, storage and transmission of patient information, as well as confidential information about our employees, our suppliers and our Company. Our information systems are vulnerable to an increasing threat of continually evolving cybersecurity risks. Unauthorized parties may attempt to gain access to our systems or information through fraud or other means of deceiving our employees or third-party service providers. Hardware, software or applications we develop or obtain from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information and device security. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are also constantly changing and evolving, and may be difficult to anticipate or detect for long periods of time. The ever-evolving threats mean we must continually evaluate and adapt our systems and processes, and our efforts may not be adequate to safeguard against all data security breaches, misuse of data or sabotage of our systems. Any future significant compromise or breach of our data security, whether external or internal, or misuse of patient, employee, supplier or Company data, could result in additional significant costs, lost sales, fines, lawsuits and damage to our reputation. In addition, as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs.

 

We are subject to stringent privacy laws, information security laws, regulations, policies and contractual obligations related to data privacy and security and changes in such laws, regulations, policies and contractual obligations could adversely affect our business.

 

We are subject to data privacy and protection laws and regulations that apply to the collection, transmission, storage and use of personally-identifying information, which among other things, impose certain requirements relating to the privacy, security and transmission of personal information, including comprehensive regulatory systems in the United States, UK and European Union. The legislative and regulatory landscape for privacy and data protection continues to evolve in jurisdictions worldwide, and there has been an increasing focus on privacy and data protection issues with the potential to affect our business. Failure to comply with any of these laws and regulations could result in enforcement action against us, including fines, imprisonment of company officials and public censure, claims for damages by affected individuals, damage to our reputation and loss of goodwill, any of which could have a material adverse effect on our business, financial condition, results of operations or prospects.

 

There are numerous United States federal and state laws and regulations related to the privacy and security of personal information. For example, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended, and its implementing regulations establish privacy and security standards that limit the use and disclosure of individually identifiable health information, or protected health information, and require the implementation of administrative, physical and technological safeguards to protect the privacy of protected health information and ensure the confidentiality, integrity and availability of electronic protected health information. While we have determined that we are neither a “covered entity” nor a “business associate” directly subject to HIPAA, many of the United States health care providers, including United States clinical trial sites, with which we interact are subject to HIPAA, and we have assumed contractual obligations related to protecting the privacy of personal information. Determining whether protected health information has been handled in compliance with applicable privacy standards and our contractual obligations can be complex and may be subject to changing interpretation. If we are unable to properly protect the privacy and security of protected health information, we could be found to have breached our contracts and we could face civil and criminal penalties. In addition, our operations have been affected by the California Consumer Privacy Act (“CCPA”), which took effect on January 1, 2020. The CCPA gives California consumers (defined to include all California residents) certain rights, including the right to ask covered companies to disclose the types of personal information collected, the categories of sources from which such information was collected, the business purpose for collecting or selling the consumer’s personal information, the categories of third parties with whom a covered company shares personal information, and specific pieces of information collected by a covered company. The CCPA imposes several obligations on covered companies to provide notice to California consumers regarding their data processing activities. The CCPA also gives California consumers the right to ask covered companies to delete a consumer’s personal information and it places limitations on a covered company’s ability to sell personal information, including providing consumers a right to opt out of sales of their personal information.

 

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In addition, we may be subject to privacy and security laws in the various jurisdictions in which we operate, obtain or store personally identifiable information. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing focus on privacy and data protection issues with the potential to affect our business. For example, the processing of personal data in the EEA and the UK, is subject to the General Data Protection Regulation (the “GDPR”), which took effect in May 2018. The GDPR increases obligations with respect to clinical trials conducted in the EEA, such as in relation to the provision of fair processing notices, responding to data subjects who exercise their rights and reporting certain data breaches to regulators and affected individuals. The GDPR also requires us to enter certain contractual arrangements with third parties that process GDPR-covered personal data on our behalf. The GDPR also increases the scrutiny applied to transfers of personal data from the EEA (including from clinical trial sites in the EEA) to countries that are considered by the European Commission to lack an adequate level of data protection, such as the United States. The July 2020 invalidation by the Court of Justice of the European Union of the EU-United States Privacy Shield framework, one of the mechanisms used to legitimize the transfer of personal data from the EEA to the United States, and the imposition of restrictions on the use of other transfer mechanisms made such transfer more complex and challenging and have also  led to increased scrutiny on data transfers from the EEA to the United States generally and may increase our costs of compliance with data privacy legislation. In June 2021, the Court of Justice of the European Union issued a ruling that expanded the scope of the “one stop shop” under the GDPR. According to the ruling, the competent authorities of European Union Member States may, under certain strict conditions, bring claims to their national courts against a company for breaches of the GDPR, including unlawful cross-border processing activities, even such company does not have an establishment in the European Union member state in question and the competent authority bringing the claim is not the lead supervisory authority.  If our or our partners’ or service providers’ privacy or data security measures fail to comply with the GDPR requirements, we may be subject to litigation, regulatory investigations, enforcement notices requiring us to change the way we use personal data and/or fines of up to 20 million Euros or up to 4% of the total worldwide annual turnover of the preceding financial year, whichever is higher, as well as claims by affected individuals, negative publicity, reputational harm and a potential loss of business and goodwill.

 

Data privacy remains an evolving landscape at both the domestic and international level, with new regulations coming into effect and continued legal challenges, and our ongoing efforts to comply with evolving laws and regulations may be costly and require ongoing modifications to our policies, procedures and systems. Our efforts to comply may also be unsuccessful. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our practices. Failure to comply with laws regarding data protection would expose us to risk of enforcement actions taken by data protection authorities in the European Union, the UK, and elsewhere and carries with it the potential for significant penalties if we are found to be non-compliant. Similarly, failure to comply with federal and state laws in the United States regarding privacy and security of personal information could expose us to penalties under such laws. Any such failure to comply with data protection and privacy laws could result in government-imposed fines or orders requiring that we change our practices, claims for damages by data subjects, regulatory investigations and enforcement action, litigation and significant costs for remediation, any of which could adversely affect our business. Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could harm our business, financial condition, results of operations or prospects.

 

If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.

 

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We only recently obtained research coverage by securities and industry analysts. If there are insufficient securities or industry analysts covering us, the market price for our stock would be negatively impacted. If any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock performance, or if our clinical trials and operating results fail to meet the expectations of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Recent Sales of Unregistered Securities

 

None.

 

Issuer Purchases of Equity Securities

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

As disclosed in the Company’s current report on Form 8-K filed May 14, 2021, the Company held its annual meeting of stockholders on May 12, 2021. Among the proposals submitted to a vote of the stockholders was a non-binding advisory vote to approve the frequency of future advisory votes on executive compensation. The stockholders approved, on a non-binding advisory basis, a frequency of 1 year for future non-binding advisory votes to approve the compensation of the Company’s named executive officers (each, a “say-on-pay vote”). There were 26,952,367 votes cast for a frequency of 1 year, 202,912 votes cast for a frequency of every 2 years, 397,598 votes cast for a frequency of every 3 years, 257,798 abstentions and 21,144,928 broker non-votes.

 

Based on these results, the Company’s board of directors has determined that the Company will hold a say on pay vote every 1 year until the next required non-binding advisory vote on the frequency of say-on-pay votes.

 

ITEM 6. EXHIBITS

 

3.1   Second Amended and Restated Certificate of Incorporation of Provention Bio, Inc., effective as of July 19, 2018 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on July 19, 2018).
     
3.2   Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of Provention Bio, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on May 14, 2021).
     
31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) (filed herewith, Exhibit 31.1).
     
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) (filed herewith, Exhibit 31.2).
     
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (filed herewith, Exhibit 32.1).
     
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (filed herewith, Exhibit 32.2).
     
101  

The following materials from Provention Bio, Inc.’s Form 10-Q for the quarter ended June 30, 2021, formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) Condensed Balance Sheets at June 30, 2021 and December 31, 2020, (ii) Condensed Statements of Comprehensive Loss for the three and six months ended June 30, 2021 and 2020, (iii) Condensed Statements of Stockholders’ Equity for the three and six months ended June 30, 2021 and 2020 (iv) Condensed Statements of Cash Flows for the six months ended June 30, 2021 and 2020, and (v) Notes to Condensed Financial Statements.

     
104  

The cover page from this Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in iXBRL (contained in Exhibit 101).

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  PROVENTION BIO, INC.
     
Date: August 5, 2021 By: /s/ Andrew Drechsler
    Andrew Drechsler
    Chief Financial Officer
    (Authorized Officer and Principal Financial Officer)

 

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