As filed with the U.S. Securities and Exchange Commission on June 10, 2019.

Registration No. 333-231757

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Dermavant Sciences Ltd.

(Exact name of registrant as specified in its charter)

 

Bermuda		2834		Not Applicable
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

Suite 1, 3rd Floor

11-12 St. James’s Square

London SW1Y 4LB

United Kingdom

+44 207 400 3347

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

 

 

Todd Zavodnick

Chief Executive Officer

Dermavant Sciences, Inc.

2398 E. Camelback Road, Suite 1060

Phoenix, AZ 85016

(520) 526-9884

(Name, address, including zip code, and telephone number, including

area code, of agent for service)

 

 

 

Copies to:
Frank F. Rahmani John T. McKenna Alison A. Haggerty Cooley LLP 3175 Hanover Street Palo Alto, CA 94304 (650) 843-5000		Christopher Van Tuyl General Counsel Dermavant Sciences, Inc. 2398 E. Camelback Road, Suite 1060 Phoenix, AZ 85016 (520) 526-9884		Nathan Ajiashvili B. Shayne Kennedy Latham & Watkins LLP 885 Third Avenue New York, NY 10022 (212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ☐

 

 

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 7(a)(2)(B) of the Securities Act. ☒

 

 

CALCULATION OF REGISTRATION FEE

 

TITLE OF SECURITIES BEING REGISTERED		AMOUNT TO BE REGISTERED (1)		PROPOSED MAXIMUM  OFFERING PRICE PER  SHARE (2)		PROPOSED MAXIMUM AGGREGATE OFFERING PRICE (1)(2)		AMOUNT OF REGISTRATION FEE (3)
Common shares, $0.00001 par value per common share		8,855,000		$14.00		$123,970,000		$15,026

(1)

Includes an additional 1,155,000 common shares that the underwriters have the option to purchase.

(2)

Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act.

(3)

The registrant previously paid $12,120 in connection with a prior filing of this Registration Statement.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JUNE 10, 2019

 

 

PRELIMINARY PROSPECTUS

7,700,000 Shares

 

Common Shares

We are offering 7,700,000 common shares. This is our initial public offering and no public market currently exists for our common shares. We expect the initial public offering price to be between $12.00 and $14.00 per common share.

We have applied to list our common shares on The Nasdaq Global Market under the symbol “DRMT.” Upon the closing of this offering, we will be a “controlled company” within the meaning of applicable listing rules of The Nasdaq Global Market.

Roivant Sciences Ltd., or RSL, our controlling shareholder, has the right to appoint two directors to our board of directors, each of whom has three votes on all matters presented to the board of directors. Upon the closing of this offering, such directors will continue to hold a majority of the voting power on all matters presented to the board of directors. See “Description of Share Capital—Election and Removal of Directors.”

We are an “emerging growth company” as defined under the federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements.

Investing in our common shares involves risks. See “Risk Factors” beginning on page 15.

Neither the Securities and Exchange Commission in the United States nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

Consent under the Exchange Control Act 1972 (and its related regulations) has been obtained from the Bermuda Monetary Authority for the issue and transfer of our common shares to and between residents and non-residents of Bermuda for exchange control purposes provided our common shares remain listed on an appointed stock exchange, which includes The Nasdaq Global Market. In granting such consent, neither the Bermuda Monetary Authority nor the Registrar of Companies in Bermuda accepts any responsibility for our financial soundness or the correctness of any of the statements made or opinions expressed in this prospectus.

 

 

 

		PER SHARE				TOTAL
Public offering price		$				$
Underwriting discounts and commissions (1)		$				$
Proceeds to us, before expenses		$				$

 

 

(1)

We refer you to the section titled “Underwriting” for additional information regarding underwriter compensation.

RSL has indicated an interest in purchasing up to an aggregate of $35.0 million of our common shares in this offering at the initial public offering price per share. However, because indications of interest are not binding agreements or commitments to purchase, RSL may elect to purchase more, less or no shares in this offering or the underwriters may elect to sell more, less or no shares in this offering to RSL. The underwriters will receive the same discount from any of our common shares purchased by RSL as they will from any other of our common shares sold to the public in this offering. Any shares purchased by RSL in this offering will be subject to a 180-day lock-up agreement with the underwriters.

Delivery of the common shares is expected to be made on or about                 , 2019. We have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase up to 1,155,000 additional common shares. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $                     and the total proceeds to us, before expenses, will be $                    .

 

Jefferies		SVB Leerink		Guggenheim Securities

Prospectus dated                     , 2019

TABLE OF CONTENTS

 

 

 

		PAGE
PROSPECTUS SUMMARY			1
RISK FACTORS			15
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS			69
INDUSTRY AND MARKET DATA			71
USE OF PROCEEDS			72
DIVIDEND POLICY			74
CAPITALIZATION			75
DILUTION			76
SELECTED CONSOLIDATED FINANCIAL DATA			78
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			79
BUSINESS			92
MANAGEMENT			142
EXECUTIVE COMPENSATION			148
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS			154
PRINCIPAL SHAREHOLDERS			159
DESCRIPTION OF SHARE CAPITAL			161
SHARES ELIGIBLE FOR FUTURE SALE			169
BERMUDA COMPANY CONSIDERATIONS			171
MATERIAL BERMUDA, U.K. AND U.S. FEDERAL INCOME TAX CONSIDERATIONS			177
UNDERWRITING			184
LEGAL MATTERS			191
EXPERTS			191
WHERE YOU CAN FIND ADDITIONAL INFORMATION			191
EXCHANGE CONTROLS			191
ENFORCEMENT OF CIVIL LIABILITIES UNDER U.S. FEDERAL SECURITIES LAWS			192
INDEX TO FINANCIAL STATEMENTS			F-1

 

 

We are responsible for the information contained in this prospectus and in any free writing prospectus we prepare or authorize. We have not, and the underwriters have not, authorized anyone to provide you with different information, and we and the underwriters take no responsibility for any other information others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the cover of this prospectus.

Persons who come into possession of this prospectus and any applicable free writing prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.

All references in this prospectus to “$” are to U.S. dollars, all references to “£” are to pounds sterling, all references to “CAD$” are to Canadian dollars and all references to “€” are to euros. Unless otherwise indicated, certain pounds sterling, Canadian dollars and euros amounts contained in this prospectus have been translated into U.S. dollars at the rates of exchange in effect at the time of entry into or assumption of the applicable agreement. These translations should not be considered representations that any such amounts have been, could have been or could be converted into pounds sterling, Canadian dollars or euros at these or any other exchange rates as of that or any other date.

 

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RISK FACTORS

Investing in our common shares involves a high degree of risk. You should carefully consider the risks described below, together with the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus, before making your decision to invest in our common shares. We cannot assure you that any of the events discussed in the risk factors below will not occur. These risks could harm our business, results of operations, financial condition and cash flows and if so our future prospects would likely be harmed. If any of such events were to happen, the trading price of our common shares could decline, and you could lose all or part of your investment.

Risks Related to Our Business, Financial Position and Capital Requirements

We have a limited operating history and have never generated any product revenue.

We are a clinical-stage biopharmaceutical company with a limited operating history. We were incorporated in September 2015, and our operations to date have been limited to acquiring rights to our portfolio of product candidates as well as generating operating plans and organizational infrastructure for our day-to-day operations, preparing for and conducting clinical trials and preparing for commercialization of our product candidates, if approved. We have not yet demonstrated an ability to successfully complete a large-scale, pivotal clinical trial, obtain marketing approval, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, we have no meaningful operations upon which to evaluate our business, and predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing pharmaceutical products.

Our ability to generate product revenue and become profitable depends upon our ability to successfully complete the development of, and obtain the necessary regulatory approvals for, our product candidates in development. We have never been profitable, have no products approved for commercial sale, and have not generated any product revenue.

Even if we receive regulatory approval for tapinarof or any product candidate, we do not know when or if such product candidate will generate product revenue. Our ability to generate product revenue depends on a number of factors, including, but not limited to, our ability to:

 

∎

successfully complete clinical trials and obtain regulatory approval for the marketing of tapinarof or any of our other product candidates;

 

∎

add operational, financial and management information systems personnel, including personnel to support our clinical, manufacturing and planned future commercialization efforts and operations as a public company;

 

∎

initiate and continue relationships with third-party suppliers and manufacturers and have commercial quantities of our product candidates manufactured at acceptable cost and quality levels and in compliance with the U.S. Food and Drug Administration, or FDA, and other regulatory requirements;

 

∎

attract and retain experienced management and advisory teams;

 

∎

launch commercial sales of our products, whether alone or in collaboration with others, including establishing sales, marketing and distribution systems for our product candidates;

 

∎

set an acceptable price for any approved product candidates and obtain coverage and adequate reimbursement from third-party payors;

 

∎

achieve market acceptance of our products in the medical community and with third-party payors and consumers; and

 

∎

maintain, expand and protect our intellectual property portfolio.

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses, or when or if, we will be able to achieve or maintain profitability. Our expenses could increase beyond expectations if we are required by the FDA or comparable non-U.S. regulatory authorities to perform studies or clinical trials in addition to those that we currently anticipate. Even if any of our

 

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product candidates is approved for commercial sale, we anticipate incurring significant costs associated with its commercial launch. If we cannot successfully execute any one of the foregoing, our business may not succeed and your investment will be negatively impacted.

We expect to incur significant losses for the foreseeable future and may never achieve or maintain profitability. Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.

Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that a product candidate will fail to gain regulatory approval or fail to become commercially viable. We have never generated any product revenue, and we cannot estimate with precision the extent of our future losses. We do not currently have any products that are available for commercial sale and we may never generate product revenue or achieve profitability. Our net loss was $42.7 million and $255.3 million for the years ended March 31, 2018 and 2019, respectively. As of March 31, 2019, we had an accumulated deficit of $325.4 million.

We expect to continue to incur substantial and increasing losses through the commercialization of any of our product candidates, if approved. None of our product candidates have been approved for marketing anywhere in the world, and they may never receive such approval. As a result, we are uncertain when or if we will achieve profitability and, if so, whether we will be able to sustain it. Our ability to generate product revenue and achieve profitability is dependent on our ability to complete the development of our product candidates, obtain necessary regulatory approvals for such product candidates, and manufacture and successfully market our product candidates alone or in collaboration with others. We cannot assure you that we will be profitable even if we successfully commercialize any of our product candidates. If we do successfully obtain regulatory approval to market tapinarof or any of our product candidates, our revenue will be dependent upon, in part and among other things, the size of the markets in the territories for which we gain regulatory approval, the number of competitors in such markets, the accepted price for any such product candidate and whether we own the commercial rights for those territories. If the indication approved by regulatory authorities is narrower than we expect, or the treatment population is narrowed by competition, physician choice or treatment guidelines, we may not generate significant revenue from sales of any of our product candidates, even if approved. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Failure to become and remain profitable may adversely impact the market price of our common shares and our ability to raise capital and continue operations.

We expect our research and development expenses in connection with our development programs for our various product candidates to continue to be significant. In addition, as we prepare for and if we obtain regulatory approval for tapinarof or any of our other product candidates, we expect to incur increased sales, marketing and manufacturing expenses. As a result, we expect to continue to incur significant and increasing operating losses and negative cash flows for the foreseeable future. These losses have harmed and will continue to harm our results of operations, financial position and working capital.

Our independent registered public accounting firm has issued a going concern opinion on our consolidated financial statements as of March 31, 2018 and 2019, expressing substantial doubt that we can continue as an ongoing business due to insufficient capital for us to fund our operations. Our consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty. If we are unable to successfully complete this offering, we will need to create alternate financing or operational plans to continue as a going concern.

Our business is heavily dependent on the successful development, regulatory approval and commercialization of our product candidates, particularly tapinarof.

We currently have no products that are approved for commercial sale and may never be able to develop marketable products. We expect that a substantial portion of our efforts and expenditures over the next few years will be devoted to the continued clinical evaluation of our lead product candidate tapinarof and the commercialization of tapinarof following regulatory approval, if received, as well as the continued clinical and preclinical evaluation of our other product candidates. Accordingly, our business currently depends heavily on the successful completion of our clinical trials for our product candidates and subsequent regulatory approval and commercialization of such product candidates.

 

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We cannot be certain that tapinarof or any of our other product candidates will receive regulatory approval, or be successfully commercialized even if we receive regulatory approval. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of products are, and will remain, subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries that each have differing regulations. We are not permitted to market any of our product candidates in the United States until we receive approval of a NDA or in any foreign country until we receive the requisite approvals from the appropriate authorities in such countries for marketing authorization. In addition, we have not yet demonstrated our ability to complete later-stage or pivotal clinical trials for any of our product candidates.

We have not submitted an NDA for any of our product candidates to the FDA or any comparable application to any other regulatory authority. Obtaining approval of an NDA or similar regulatory approval is an extensive, lengthy, expensive and inherently uncertain process, and the FDA or other foreign regulatory authorities may delay, limit or deny approval of any of our product candidates for many reasons, including:

 

∎

we may not be able to demonstrate that any of our product candidates are safe or effective as a treatment for any of our currently targeted indications to the satisfaction of the FDA or other relevant regulatory authorities;

 

∎

the relevant regulatory authorities may require additional pre-approval studies or clinical trials which would increase our costs and prolong our development timelines;

 

∎

the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA or other relevant regulatory authorities for marketing approval;

 

∎

the FDA or other relevant regulatory authorities may disagree with the number, design, size, conduct or implementation of our clinical trials, including the design of our proposed pivotal Phase 3 clinical trials of tapinarof for the treatment of psoriasis;

 

∎

the contract research organizations, or CROs, that we retain to conduct clinical trials may take actions outside of our control, or otherwise commit errors or breaches of protocols, that adversely impact our clinical trials and ability to obtain market approvals;

 

∎

the FDA or other relevant regulatory authorities may not find the data from nonclinical studies or clinical trials sufficient to demonstrate that the clinical and other benefits of these products outweigh their safety risks;

 

∎

the FDA or other relevant regulatory authorities may disagree with our interpretation of data or significance of results from the nonclinical studies and clinical trials of any product candidate, or may require that we conduct additional studies;

 

∎

the FDA or other relevant regulatory authorities may not accept data generated from our clinical trial sites;

 

∎

if our NDA or other foreign application is reviewed by an advisory committee, the FDA or other relevant regulatory authority, as the case may be, may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA or other relevant regulatory authority, as the case may be, require, as a condition of approval, additional nonclinical studies or clinical trials, limitations on approved labeling or distribution and use restrictions;

 

∎

the FDA or other relevant regulatory authorities may require development of a risk evaluation and mitigation strategy, or REMS, or its equivalent, as a condition of approval;

 

∎

the FDA or other relevant regulatory authorities may require additional post-marketing studies and/or a patient registry, which would be costly;

 

∎

the FDA or other relevant regulatory authorities may find the chemistry, manufacturing and controls data insufficient to support the quality of our product candidates;

 

∎

the FDA or other relevant regulatory authorities may identify deficiencies in the manufacturing processes or facilities of our third-party manufacturers; or

 

∎

the FDA or other relevant regulatory authorities may change their approval policies or adopt new regulations.

Even if we do receive regulatory approval to market any product candidate, any such approval may be subject to limitations on the indicated uses or patient populations for which we may market the product. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development programs, we cannot assure you that any of our product candidates will be successfully developed or commercialized.

 

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In addition, because each of our product candidates targets one or more indications in the medical dermatology field, if any of our product candidates encounter safety or efficacy problems, developmental delays, regulatory issues, supply issues, or other problems, our development plans for the affected product candidate and some or all of our other product candidates could be significantly harmed, which would harm our business. Further, competitors who are developing products in the dermatology field or that target the same indications as us with products that have a similar mechanism of action may experience problems with their products that could identify problems that would potentially harm our business.

We will require additional capital to fund our operations, and if we fail to obtain necessary financing, we may not be able to complete the development and commercialization of tapinarof or any other product candidate.

We expect to spend substantial capital to complete the development of, seek regulatory approvals for and commercialize our lead product candidate tapinarof as well as our other product candidates. These expenditures will include costs associated with our various license agreements pursuant to which we are obligated to cover the development and commercialization costs of our product candidates, make payments in connection with the achievement of certain regulatory milestones prior to generating any product sales, make significant further payments upon the achievement of certain sales milestones and make tiered royalty payments in connection with the sale of approved products, if any. In addition, under a funding agreement with NovaQuest, we are required to make significant milestone and other quarterly payments to NovaQuest upon the achievement of certain regulatory and commercial milestones for tapinarof in either psoriasis or atopic dermatitis in the United States, the European Union and Japan. These obligations will terminate in the event of revocation or withdrawal by the FDA, us, our affiliates or any sublicensee for health or safety reasons. We will be required to make significant payments to NovaQuest if development of tapinarof is terminated, including if we fail to use commercially reasonable efforts (defined as the level of effort and resources dedicated by a similar public pharmaceutical company with over $1.0 billion in market capitalization to the development, prior to regulatory approval, or manufacturing and commercialization, following regulatory approval, of a product candidate in a similar stage of development or with similar commercial potential as tapinarof) to actively continue development of tapinarof as required under the NovaQuest Agreement, except under certain limited circumstances relating to technical failure (up to $117.5 million plus 12% interest), or if we terminate development of tapinarof for one indication and receive approval for the other (up to $440.6 million over 15 years), which payments are not refundable. NovaQuest is not obligated to refund to us any payments previously made to them under the NovaQuest Agreement. In the event development of tapinarof is terminated for both indications, or we terminate tapinarof for a single indication, we may not be able to generate sufficient revenues, if any, and cash flows to make the required termination payments, or additional milestone payments that will be required for the other indication, as applicable, to NovaQuest on a timely basis or at all. All of the assets (including intellectual property rights) relating to tapinarof and related compounds are subject to a second-priority lien in favor of NovaQuest under security agreements entered into in connection with the funding agreement, which lien is contractually subordinated to a first priority lien securing all of our assets, including tapinarof, in favor of Hercules under the Loan Agreement. If we are unable to make any of the milestone, quarterly or termination payments described above due to insufficient liquidity, revenues or otherwise, NovaQuest may foreclose on its lien over our assets relating to tapinarof. In addition, if we are unable to comply with our obligations under the Loan Agreement, including making any required payments or maintaining any required minimum cash balances, Hercules may foreclose on its lien securing all of our assets, including tapinarof, and NovaQuest may also foreclose on its second-priority lien securing all of the assets (including intellectual property rights) relating to tapinarof and related compounds, subject to certain limitations and waiting periods under the Intercreditor Agreement. Hercules may also foreclose on its lien if we are unable to pay our debts as they become due, including after the passage of 90 days after certain amounts payable to NovaQuest become due under the NovaQuest Agreement. In any such case, our business, financial condition, results of operations and prospects would be harmed.

Even with the net proceeds from this offering, we will require additional capital to complete the development and potential commercialization of tapinarof and our other product candidates. Because the length of time and activities associated with successful development of our product candidates are highly uncertain, we are unable to estimate with certainty the actual funds we will require for development and any approved marketing and commercialization activities. Our future funding requirements, both near- and long-term, will depend on many factors, including, but not limited to:

 

∎

the initiation, timing, progress, costs and results of our Phase 3 clinical trials of tapinarof for the treatment of psoriasis and atopic dermatitis as well as potential ancillary Phase 2b or other clinical trials of tapinarof;

 

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∎

the initiation, timing, costs and results of future clinical trials for cerdulatinib, DMVT-504 and our preclinical product candidates;

 

∎

the outcome, timing and cost of meeting regulatory requirements established by the FDA and other comparable foreign regulatory authorities;

 

∎

the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;

 

∎

the cost of defending potential intellectual property disputes, including patent infringement actions brought by third parties against us or any of our current or future product candidates;

 

∎

the effect of competing market developments;

 

∎

the cost and timing of completion of commercial-scale manufacturing activities;

 

∎

the cost of establishing sales, marketing and distribution capabilities for our products in regions where we choose to commercialize our products on our own; and

 

∎

the initiation, progress, timing and results of our commercialization of our product candidates, if approved for commercial sale.

We believe our existing cash, including borrowings under the Loan Agreement, together with the net proceeds from this offering, will be sufficient for us to fund our operating expenses and capital expenditure requirements into at least the fourth quarter of calendar year 2020. This estimate is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. We do not have any committed external source of funds other than certain investment obligations from RSL relating to our contingent payment obligations to GSK. However, any such obligation from RSL is limited and there can be no assurance that we will otherwise have sufficient capital resources to fund any of our additional payment obligations. We cannot be certain that additional capital will be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of any product candidate, or potentially discontinue operations altogether. In addition, attempting to secure additional capital may divert the time and attention of our management from day-to-day activities and harm our product candidate development efforts. Because of the numerous risks and uncertainties associated with the development and potential commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays, operating expenditures and capital requirements associated with our current product development programs.

We may be required to pay substantial additional amounts under the NovaQuest Agreement with respect to Swiss withholding taxes.

There is a risk that Swiss taxing authorities will treat any payments made under the NovaQuest Agreement as payments on equity for Swiss tax purposes or otherwise as withholdable payments, which would make certain portions of such payments subject to Swiss withholding taxes, currently at a rate of 35%. If Swiss withholding taxes are imposed on certain payments made under the NovaQuest Agreement, we will be required to pay substantial additional amounts so that NovaQuest receives the amount that it would have received had no such withholding taxes been imposed. Although we believe that no such withholding taxes should be imposed, if such taxes are imposed and we are unable to avoid paying these substantial additional amounts, we may not have sufficient liquidity to make required payments under the NovaQuest Agreement or continue to operate our business and product development efforts, in which case our financial condition, results of operations, and cash flow would be harmed.

Raising additional funds by issuing securities may cause dilution to existing shareholders, raising additional funds through debt financings may involve restrictive covenants, and raising funds through lending and licensing arrangements may restrict our operations or require us to relinquish proprietary rights.

We expect that significant additional capital will be needed in the future to continue our planned operations. Until such time, if ever, that we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, strategic alliances and license and development agreements or other collaborations. To the extent that we raise additional capital by issuing equity securities, our existing shareholders’ ownership may experience substantial dilution, and the terms of these securities may include liquidation or other preferences that could harm the rights of a common shareholder. In particular, RSL is obligated to invest, or cause to be invested, in us up to £100.0 million (approximately $133 million) to ensure DSG’s ability to satisfy its contingent payment obligations to GSK due upon regulatory approval of tapinarof in the United States and

 

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may elect to receive additional common shares of DSL in consideration for any such funding at a 20% discount to the trading price for our common shares. If RSL receives additional common shares following any such funding, the resulting issuance of additional common shares to RSL would substantially dilute our existing shareholders’ ownership. Additionally, any agreements for future debt or preferred equity financings, if available, may involve covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise develop and market ourselves.

We rely on our license agreements to provide rights to the core intellectual property relating to certain of our product candidates. Any termination or loss of significant rights under any such agreement would adversely impact our development or commercialization of such product candidates.

We have licensed our core intellectual property relating to certain of our product candidates from various collaborators, including Eisai, Portola Pharmaceuticals, Inc., or Portola, AstraZeneca AB, or AstraZeneca, and TheraVida under several license agreements. If, for any reason, any of our license agreements are terminated or we otherwise lose those rights, it would harm our business. Our license agreements will impose on us obligations relating to exclusivity, territorial rights, development, commercialization, funding, payment, diligence, sublicensing, insurance, intellectual property protection and other matters. If we breach any material obligations, or use the intellectual property licensed to us in an unauthorized manner, we may be required to pay damages to our collaborators and they may have the right to terminate the applicable licenses, which would result in us being unable to develop, manufacture and sell one or more of our product candidates, if approved. In addition, under certain of our license agreements, the licensor has the first right to file, prosecute (including any postgrant proceeding) and maintain all licensed patents, and we may not have any control over such actions unless such licensor elects not to exercise its rights.

Our license, acquisition and funding agreements obligate us to make certain milestone payments, some of which will be triggered prior to our commercialization of tapinarof or any other product candidate.

Certain of the milestone payments payable by us to GSK, Welichem, Eisai, Portola, Astellas Pharma Inc., or Astellas, AstraZeneca, TheraVida and NovaQuest are due upon events that will occur prior to our planned commercialization of the applicable product candidates. Accordingly, we will be required to make such payments prior to the time at which we are able to generate revenue, if any, from sales any of our product candidates, if approved. For example, upon any NDA approval from the FDA for tapinarof, but prior to commencement of commercialization or sales of tapinarof, we will be required to begin making significant quarterly payments and milestone payments to NovaQuest. We are also required to make significant payments to NovaQuest upon certain termination events with respect to tapinarof. There can be no assurance that we will have the funds necessary to make such payments, or be able to raise such funds when needed, on terms acceptable to us, or at all. Furthermore, if we are forced to raise additional funds, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise develop and market ourselves. If we are unable to raise additional funds or maintain sufficient liquidity to make our payment obligations if and when they become due, including payment obligations to NovaQuest under the NovaQuest Agreement, we may be in material breach of our license, acquisition and funding agreements and our counterparties may seek legal action or remedies against us, which would harm our business, financial condition, results of operations and prospects.

We do not retain worldwide rights to our product candidates. Any adverse developments that occur during any clinical trials conducted by third parties in other jurisdictions may affect our ability to obtain regulatory approval or commercialize our product candidates.

Our licensing and other partners and their respective affiliates, over whom we have no control, as well as RSL and its affiliates, have retained rights to develop and commercialize certain of our product candidates in various geographies outside of the United States as well as for certain indications outside the medical dermatology field. In addition, such parties, including RSL, may sublicense such rights to further parties with our consent. If serious adverse events

 

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or other adverse developments occur during any clinical trials of our product candidates conducted by third parties, the FDA or other regulatory authorities may delay, limit or deny approval of any such product candidates or require us to conduct additional clinical trials as a condition to marketing approval, which would increase our costs. If we receive FDA approval for any product candidate and a new or serious safety issue is identified in connection with use of any such product candidate or in clinical trials of such product candidate conducted by third parties, the FDA may withdraw their approval of the product or otherwise restrict our ability to market and sell such product candidate. In addition, treating physicians may be less willing to administer our product due to concerns over such adverse events, which would limit our ability to commercialize such product, if approved.

We currently have a limited number of employees who are employed by our wholly owned subsidiaries and we rely on RSI, RSG and a professional employer organization to provide various administrative, business development, clinical development and other services.

As of March 31, 2019, we had no employees, and our wholly owned subsidiary, DSI, had 48 employees. We currently rely in part on the services provided by RSI and RSG, wholly owned subsidiaries of RSL, pursuant to services agreements, or the Services Agreements, as further described under “Certain Relationships and Related Party Transactions—Affiliate Services Agreements.” Personnel and support staff who provide services to us under these Services Agreements are not required to treat management and administration of our business as their primary responsibility or act exclusively for us, and we do not expect them to do so. Under the Services Agreements, RSI and RSG have the discretion to determine who, among their employees, will perform services for us. RSI and RSG have limited resources. If either RSI or RSG fails to perform its obligations in accordance with the terms of the Services Agreements or to effectively manage services provided to us, the operations of our business may be harmed.

In the event of a default under or termination of the Services Agreements, we may be unable to contract with substitute service providers on similar terms, in a timely fashion, or at all, and the costs of substituting service providers may be substantial. In addition, the level of support we receive from RSI and RSG has decreased and we expect that it will continue to decrease in the near term. As a result, we will be required to replace many of these services with our own internally developed teams or engage external professional service providers. We primarily intend to develop these capabilities internally, and may incur increased costs as we hire and train additional personnel. Any termination of our relationship with RSI or RSG, or decrease in provision of services by RSI and RSG, and any delay or failure in appointing or finding a suitable replacement provider, if one exists, or in developing these capabilities internally, could make it difficult for us to operate our business and continue the clinical development and potential commercialization of any of our product candidates, and the operations of our business would be harmed.

We also contract with a professional employer organization, TriNet HR Corporation, or TriNet, which co-employs DSI’s employees. We and TriNet share and allocate responsibilities and liabilities. TriNet assumes much of the responsibilities and liabilities for the business of employment such as risk management, human resources management, benefits administration, workers compensation, payroll and payroll tax compliance. If TriNet fails to comply with applicable laws, or its obligations under this arrangement, our relationship with our employees could be damaged. We could, under certain circumstances, be held liable for a failure by TriNet to appropriately pay, or withhold and remit required taxes from payments to, our employees. In such a case, our potential liability could be significant and could harm our business.

We may not be able to manage our business effectively if we are unable to attract and retain key personnel.

We may not be able to attract or retain qualified management and commercial, scientific and clinical personnel due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses. If we are not able to attract and retain necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategies.

We are highly dependent on the skills and leadership of our senior management team and key employees. Our senior management and key employees may terminate their positions with us at any time. If we lose one or more members of our senior management team or key employees, our ability to successfully implement our business strategies could be adversely impacted. Replacing these individuals may be difficult, cause disruption and may take an extended period of time due to the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize products successfully. Competition to

 

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hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate additional key personnel. This competition may be particularly intense in North Carolina, where we have operations. We do not maintain “key person” insurance for any members of our senior management team or other employees.

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

We expect to hire, either directly, or through any current or future subsidiaries of ours, additional employees for our managerial, finance and accounting, clinical, scientific and engineering, regulatory, operational, manufacturing, medical affairs, business development and sales and marketing teams. We may have difficulties identifying, hiring and integrating new personnel. Future growth would impose significant additional responsibilities on our management, including the need to identify, recruit, maintain, motivate and integrate additional employees, consultants and contractors. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations across our entities, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of our product candidates. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate or grow revenue could be reduced, and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize any of our product candidates and compete effectively will partly depend on our ability to effectively manage any future growth.

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

Our or our affiliates’ employees, independent contractors, principal investigators, consultants, commercial collaborators, service providers and other vendors or potential collaborators may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could harm our results of operations.

We are exposed to the risk that our or our affiliates’ employees and contractors, including principal investigators, CROs, consultants, commercial collaborators, service providers and other vendors may engage in misconduct or other illegal activity. Misconduct by these parties could include intentional, reckless or negligent conduct or other unauthorized activities that violate the laws and regulations of the FDA or other similar regulatory bodies, including those laws that require the reporting of true, complete and accurate information to such regulatory bodies; manufacturing and the FDA’s Good Clinical Practice, or GCP, or current Good Manufacturing Practice, or cGMP, standards; federal, state and foreign healthcare fraud and abuse laws and data privacy; or laws that require the true, complete and accurate reporting of financial information or data. In particular, sales, marketing and other business arrangements in the healthcare industry are subject to extensive laws intended to prevent fraud, kickbacks, self-dealing, bribery, corruption, antitrust violations and other abusive practices. These laws may restrict or prohibit a wide range of business activities, including research, manufacturing, distribution, pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Activities subject to these laws also involve the improper use or misrepresentation of information obtained in the course of clinical trials, creating fraudulent data in our nonclinical studies or clinical trials or illegal misappropriation of drug product, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee or third-party misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with such laws or regulations. Additionally, we are subject to the risk that a person, including any person who may have engaged in any fraud or misconduct, or government agency could allege such fraud or other misconduct, even if none occurred. Furthermore, we rely on our CROs and clinical trial sites to adequately report data from our ongoing clinical trials. For example, any failure by such parties to adequately report safety signals to us in a timely manner from any such trials may also affect the approvability of our

 

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product candidates or cause delays and disruptions for the approval of any of our product candidates, if at all. If our or our affiliates’ employees, independent contractors, principal investigators, consultants, commercial collaborators, service providers or other vendors are alleged or found to be in violation of any such regulatory standards or requirements, or become subject to a corporate integrity agreement or similar agreement and curtailment of our operations, it could have a significant impact on our business and financial results, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, suspension or delay in our clinical trials, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, FDA debarment, contractual damages, reputational harm, diminished profits and future earnings, and additional reporting requirements and oversight, any of which could harm our ability to operate our business and our results of operations.

We may not be successful in our efforts to identify and acquire or in-license additional product candidates, or to enter into collaborations or strategic alliances for the development and commercialization of any such future product candidates.

We may seek to identify and acquire or in-license novel product candidates in the medical dermatology field. The process by which we identify product candidates may fail to yield product candidates for clinical development for a number of reasons, including those discussed in these risk factors and also:

 

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the process by which identify and decide to acquire product candidates may not be successful, including through the business development support we receive from RSL and its subsidiaries pursuant to the Services Agreements;

 

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potential product candidates may, upon further study, be shown to have harmful side effects or other characteristics that indicate that they are unlikely to be products that will receive marketing approval and achieve market acceptance;

 

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potential product candidates may not be effective in treating their targeted diseases; or

 

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the acquisition or in-licensing transactions can entail numerous operational and functional risks, including exposure to unknown liabilities, disruption of our business, or incurrence of substantial debt or dilutive issuances of equity securities to pay transaction consideration or costs, higher than expected acquisition or integration costs.

We may choose to focus our efforts and resources on a potential product candidate that ultimately proves to be unsuccessful. We also cannot be certain that, following an acquisition or in-licensing transaction, we will achieve the revenue or specific net income that justifies such transaction. Further, time and resources spent identifying, acquiring and developing potential product candidates may distract management’s attention from our primary business or other development programs. If we are unable to identify and acquire suitable product candidates for clinical development, this would adversely impact our business strategy, our financial position and share price.

In the future, we may also decide to collaborate with other pharmaceutical companies for the development and potential commercialization of our product candidates in the United States or other countries or territories of the world. We will face significant competition in seeking appropriate collaborators. We may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for our product candidates because they may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. If and when we collaborate with a third party for development and commercialization of a product candidate, we can expect to relinquish some or all of the control over the future success of that product candidate to the third party. Our ability to reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors.

International expansion of our business exposes us to business, legal, regulatory, political, operational, financial and economic risks associated with conducting business outside of the United States.

Part of our business strategy involves potential expansion internationally with third-party collaborators to seek regulatory approval for our product candidates outside the United States. Doing business internationally involves a number of risks, including but not limited to:

 

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multiple conflicting and changing laws and regulations such as tax laws, export and import restrictions, employment laws, anti-bribery and anti-corruption laws, regulatory requirements and other governmental approvals, permits and licenses;

 

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failure by us or our collaborators to obtain appropriate licenses or regulatory approvals for the sale or use of our product candidates, if approved, in various countries;

 

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difficulties in managing foreign operations;

 

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complexities associated with managing multiple payor-reimbursement regimes or self-pay systems;

 

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financial risks, such as longer payment cycles, difficulty enforcing contracts and collecting accounts receivable and exposure to foreign currency exchange rate fluctuations;

 

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reduced protection for intellectual property rights;

 

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natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions; and

 

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failure to comply with the United States Foreign Corrupt Practices Act, or FCPA, including its books and records provisions and its anti-bribery provisions, the United Kingdom Bribery Act 2010, or U.K. Bribery Act, and similar anti-bribery and anti-corruption laws in other jurisdictions, for example by failing to maintain accurate information and control over sales or distributors’ activities.

Any of these risks, if encountered, could significantly harm our future international expansion and operations and, consequently, negatively impact our financial condition, results of operations and cash flows.

Legal, political and economic uncertainty surrounding the planned exit of the United Kingdom from the European Union are a source of instability and uncertainty.

The United Kingdom held a referendum on June 23, 2016 to determine whether the United Kingdom should leave the European Union, or EU, or remain as a member state, the outcome of which was in favor of leaving the EU, which is commonly referred to as Brexit. Under Article 50 of the 2009 Lisbon Treaty, the United Kingdom will cease to be a member state when a withdrawal agreement is entered into (such agreement will also require parliamentary approval) or, failing that, two years following the notification of an intention to leave under Article 50, unless the European Council (together with the United Kingdom) unanimously decides to extend this period. On March 29, 2017, the United Kingdom formally notified the European Council of its intention to leave the EU. In April 2019, the European Council and the United Kingdom agreed to extend the deadline by which they must agree to a withdrawal agreement to October 31, 2019. It is unclear whether they will successfully reach an agreement prior to that date, and it currently appears likely that Brexit will continue to involve a process of lengthy negotiations between the United Kingdom and EU Member States to determine the future terms of the United Kingdom’s relationship with the European Union.

Lack of clarity about future U.K. laws and regulations as the United Kingdom determines which EU rules and regulations to replace or replicate in the event of a withdrawal, including financial laws and regulations, tax and free trade agreements, intellectual property rights, supply chain logistics, environmental, health and safety laws and regulations, immigration laws and employment laws, could decrease foreign direct investment in the United Kingdom, increase costs, depress economic activity and restrict access to capital. In addition, if the United Kingdom and the EU are unable to negotiate acceptable withdrawal terms or if other EU Member States pursue withdrawal, barrier-free access between the United Kingdom and other EU Member States or among the European Economic Area overall could be diminished or eliminated. The long-term effects of Brexit will depend on any agreements (or lack thereof) between the United Kingdom and the EU and, in particular, any arrangements for the United Kingdom to retain access to EU markets either during a transitional period or more permanently.

Such a withdrawal from the EU is unprecedented, and it is unclear how the United Kingdom’s access to the European single market for goods, capital, services and labor within the EU, or the European single market, and the wider commercial, legal and regulatory environment, will impact our U.K. operations. We may also face new regulatory costs and challenges that could have an adverse effect on our operations and development programs. Even prior to any change to the United Kingdom’s relationship with the EU, the announcement of Brexit has created economic uncertainty surrounding the terms of Brexit, and its consequences could negatively impact our financial condition, results of operations and cash flows.

Our business and operations would suffer in the event of system failures, cyber-attacks or a deficiency in our cyber-security.

Our computer systems, as well as those of various third parties on which we rely, including RSL and its affiliates, our CROs and other contractors, consultants and law and accounting firms, may sustain damage from computer viruses,

 

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unauthorized access, data breaches, phishing attacks, cybercriminals, natural disasters (including hurricanes and earthquakes), terrorism, war and telecommunication and electrical failures. We rely on our third-party providers to implement effective security measures and identify and correct for any such failures, deficiencies or breaches. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our drug development programs. For example, the loss of nonclinical or clinical trial data from completed, ongoing or planned trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of or damage to our data or applications, or inappropriate disclosure of personal, confidential or proprietary information, we could incur liability and the further development of any product candidate could be delayed.

The failure to successfully implement an enterprise resource planning system could adversely impact our business and results of operations.

We are in the process of evaluating a transition from reliance on company-wide enterprise resource planning, or ERP, systems maintained by RSI and RSG to implementation of our own ERP systems. ERP implementations are complex and time-consuming projects that require transformations of business and financial processes in order to reap the benefits of the ERP system; any such transformation involves risk inherent in the conversion to a new computer system, including loss of information and potential disruption to normal operations. Additionally, if the ERP system is not effectively implemented as planned, or the system does not operate as intended, the effectiveness of our internal controls over financial reporting could be harmed or our ability to assess those controls adequately could be delayed. Significant delays in documenting, reviewing and testing our internal control could cause us to fail to comply with our U.S. Securities and Exchange Commission, or SEC, reporting obligations related to our management’s assessment of our internal control over financial reporting. In addition, if we experience interruptions in service or operational difficulties and are unable to effectively manage our business during or following the implementation of the ERP, our business and results of operations could be harmed.

Potential product liability lawsuits against us could cause us to incur substantial liabilities and limit commercialization of any products that we may develop.

The use of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval exposes us to the risk of product liability claims. Product liability claims might be brought against us by consumers, health care providers, other pharmaceutical companies or others taking or otherwise coming into contact with our products. On occasion, large monetary judgments have been awarded in class action lawsuits where drugs have had unanticipated harmful effects. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs. In addition, regardless of merit or eventual outcome, product liability claims may result in:

 

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impairment of our business reputation and significant negative media attention;

 

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delay or termination of clinical trials, or withdrawal of participants from our clinical trials;

 

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significant costs to defend related litigation;

 

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distraction of management’s attention from our primary business;

 

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substantial monetary awards to patients or other claimants;

 

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inability to commercialize any product candidate, if approved;

 

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product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

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decreased demand for any product candidate, if approved; and

 

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loss of revenue.

The product liability insurance we currently carry, and any additional product liability insurance coverage we acquire in the future, may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and in the future we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If we obtain marketing approval for any product candidate, we intend to acquire insurance coverage to include the sale of commercial products; however, we may be unable to obtain product liability insurance on commercially reasonable terms or in adequate amounts. A successful product liability claim or series of claims brought against us could cause our share

 

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price to decline and, if judgments exceed our insurance coverage, could harm our results of operations and business, including preventing or limiting the commercialization of any of our product candidates, if approved.

Changes in funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new products and services from being developed or commercialized in a timely manner, which could negatively impact our business.

The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.

Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would harm our business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could harm our business.

The terms of our loan agreement with Hercules place restrictions on our operating and financial flexibility.

In May 2019, we and our subsidiaries entered into the Loan Agreement with Hercules, under which we, together with our non-U.S. subsidiaries, borrowed an aggregate of $20.0 million. Our obligations under the Loan Agreement are fully and unconditionally guaranteed by DSI and any of our future U.S. subsidiaries. The Loan Agreement is secured by all of our assets, including intellectual property, subject to certain customary exceptions.

The Loan Agreement subjects us and our subsidiaries to various affirmative and restrictive covenants, including a covenant to maintain a minimum cash balance of up to $15.0 million in the event that certain financing or clinical milestones are not achieved by December 31, 2019, a covenant against the occurrence of a “change in control,” financial reporting obligations, and certain limitations on the incurrence of indebtedness, liens (including on our intellectual property and other assets), investments, distributions (including dividends), collateral, transfers, mergers or acquisitions, taxes, corporate changes, and deposit accounts. Compliance with these covenants may limit our flexibility in operating our business and our ability to take actions that might be advantageous to us and our shareholders. For example, if we fail to meet our minimum cash covenant and we are unable to raise additional funds or obtain a waiver or other amendment to the Loan Agreement, we may be required to delay, limit, reduce or terminate certain of our clinical development efforts.

Additionally, we may be required to repay the entire amount of outstanding indebtedness under the Loan Agreement in cash if we fail to stay in compliance with our covenants or suffer some other event of default under the Loan Agreement. Under the Loan Agreement, an event of default will occur if, among other things: we fail to make payments under the Loan Agreement; we breach any of our covenants under the Loan Agreement, subject to specified cure periods with respect to certain breaches; there occurs an event that has a material adverse effect on (i) our business, operations, properties, assets or financial condition, (ii) our ability to perform or satisfy our obligations under the Loan Agreement as they become due or Hercules’ ability to enforce its rights or remedies with respect to our obligations under the Loan Agreement, or (iii) the collateral or liens securing our obligations under the Loan Agreement; we or our assets become subject to certain legal proceedings, such as bankruptcy proceedings; we are unable to pay our debts as they become due, including the passage of 90 days after certain amounts payable to NovaQuest become due under the NovaQuest Agreement; or we default on contracts with third parties which would permit Hercules to accelerate the maturity of such indebtedness or that could have a material adverse effect on us. We may not have enough available cash or be able to raise additional funds through equity or debt financings to repay such indebtedness at the time any such event of default occurs. In that case, we may be required to delay, limit, reduce or terminate our clinical development efforts or grant to others rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Hercules could also exercise its rights as collateral agent to take possession and dispose of the collateral securing the loan for its benefit, which collateral includes all of our property (including our intellectual property). Our business, financial condition and results of operations could be substantially harmed as a result of any of these events.

 

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Risks Related to Development, Regulatory Approval and Commercialization

Clinical trials are very expensive, time-consuming, difficult to design and implement, and involve uncertain outcomes.

All of our product candidates are still in preclinical or clinical development and will require extensive clinical testing before we are prepared to submit an NDA or other similar application for regulatory approval. We cannot provide you any assurance that we will submit an NDA for regulatory approval for any product candidate within our projected timeframes or whether any such application will be approved by the relevant regulatory authorities. Clinical trials are very expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. For instance, the FDA or other regulatory authorities may not agree with our proposed analysis plans or trial design for any clinical trials of our product candidates, including for our pivotal Phase 3 clinical trials for tapinarof in the treatment of psoriasis, and during any such review, may identify unexpected efficacy or safety concerns, which may delay the approval of an NDA or similar application. Furthermore, if the FDA requires us to perform another systemic carcinogenicity study for tapinarof prior to NDA submission, in addition to the systemic carcinogenicity study previously performed for tapinarof, our submission of an NDA for tapinarof could be delayed. The FDA may also find that the benefits of any product candidate in any applicable indication do not outweigh its risks in a manner sufficient to grant regulatory approval. The clinical trial process is also time-consuming and costly and relies on the collaboration with many CROs and clinical trial sites.

Failures can occur at any stage of clinical trials, and we could encounter problems that cause us to abandon or repeat clinical trials. In addition, results from clinical trials may require further evaluation, delaying the next stage of clinical development or submission of an NDA. Further, product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through nonclinical studies and initial clinical trials, and such product candidates may exhibit safety signals in later stage clinical trials that they did not exhibit in preclinical or earlier-stage clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in or the discontinuation of advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials, including in the dermatology field. Likewise, the results of early clinical trials of any of our product candidates, many of which were not conducted by us, may not be predictive of the results of our planned development programs, and there can be no assurance that the results of studies conducted by collaborators or other third parties will be viewed favorably or are indicative of our own future trial results.

The commencement and completion of clinical trials may be delayed by several factors, including:

 

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failure to obtain regulatory authorization to commence a trial or reaching consensus with regulatory authorities regarding the design or implementation of our studies;

 

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unforeseen safety issues, or subjects experience severe or unexpected adverse events;

 

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occurrence of serious adverse events in trials of the same class of agents conducted by other sponsors;

 

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lack of effectiveness during clinical trials;

 

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resolving any dosing issues, including those raised by the FDA;

 

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inability to reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

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slower than expected rates of patient recruitment or failure to recruit suitable patients to participate in a trial;

 

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failure to add a sufficient number of clinical trial sites;

 

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unanticipated impact from changes in or modifications to protocols or clinical trial design, including those that may be required by the FDA or other regulatory authorities;

 

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inability or unwillingness of clinical investigators or study participants to follow our clinical and other applicable protocols or applicable regulatory requirements;

 

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an institutional review board, or IRB, refusing to approve, suspending, or terminating the trial at an investigational site, precluding enrollment of additional subjects, or withdrawing their approval of the trial;

 

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premature discontinuation of study participants from clinical trials or missing data;

 

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failure to manufacture or release sufficient quantities of our product candidates or placebo or failure to obtain sufficient quantities of active comparator medications for our clinical trials, if applicable, that in each case meet our quality standards, for use in clinical trials;

 

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inability to monitor patients adequately during or after treatment; or

 

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inappropriate unblinding of trial results.

Further, we, the FDA or other regulatory authority may suspend our clinical trials in an entire country at any time, or an IRB may suspend its clinical trial sites within any country, if it appears that we or our collaborators are failing to conduct a trial in accordance with regulatory requirements, including cGMP regulations, that we are exposing participants to unacceptable health risks, or if the FDA or other regulatory authority, as the case may be, finds deficiencies in our IND or equivalent applications for other countries or the manner in which the clinical trials are conducted. Therefore, we cannot predict with any certainty the schedule for commencement and completion of future clinical trials. If we experience delays in the commencement or completion of our clinical trials, or if we terminate a clinical trial prior to completion, the commercial prospects of our product candidates could be harmed, and our ability to generate product revenue from any of our product candidates, if approved, may be delayed. In addition, any delays in our clinical trials could increase our costs, cause a decline in our share price, slow down the approval process, and jeopardize our ability to commence product sales and generate revenue. Any of these occurrences may harm our business, financial condition and results of operations. In addition, many of the factors that cause or lead to a termination or suspension of, or delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates. We may make formulation or manufacturing changes to our product candidates, in which case we may need to conduct additional preclinical or clinical studies to bridge our modified product candidates to earlier versions. Any delays to our clinical trials that occur as a result could shorten any period during which we may have the exclusive right to commercialize our product candidates and our competitors may be able to bring products to market before we do, and the commercial viability of our product candidates could be significantly reduced.

Moreover, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive compensation in connection with such services. Under certain circumstances, we may be required to report some of these relationships to the FDA or other regulatory authorities. The FDA or other regulatory authorities may conclude that a financial relationship between us and a principal investigator has created a conflict of interest or otherwise affected the integrity of the study. The FDA or other regulatory authority may therefore question the integrity of the data generated at the applicable clinical trial site and the utility of the clinical trial itself may be jeopardized. This could result in a delay in approval, or rejection, of our marketing applications by the FDA or other regulatory authority, as the case may be, and may ultimately lead to the denial of marketing approval of any of our product candidates.

In addition, prior to our acquisition of the rights to our various product candidates, we had no involvement with or control over the nonclinical or clinical development of such product candidates. We are dependent on our licensing partners having conducted such research and development in accordance with the applicable protocols and legal, regulatory and scientific standards, having accurately reported the results of all clinical trials and other research they conducted prior to our acquisition of the rights to our product candidates, having correctly collected and interpreted the data from these trials and other research, and having supplied us with complete information, data sets and reports required to adequately demonstrate the results reported through the date of our acquisition of these assets. Problems related to predecessors could result in increased costs and delays in the development of any of our product candidates, which could harm our ability to generate any future revenue from sales of any of our product candidates, if approved.

Even if our clinical trials are completed as planned, we cannot be certain that their results will support these claims for differentiation or the effectiveness or safety of any of our product candidates. The FDA has substantial discretion in the review and approval process and may disagree that our studies support the differentiated claims we propose. We cannot guarantee that we will obtain approval for the differentiated claims we propose, if at all.

 

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Interim, top-line or preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, we may publicly disclose preliminary or top-line data from our clinical trials, which is based on a preliminary analysis of then-available top-line data, and the results and related findings and conclusions are subject to change following a full analyses of all data related to the particular trial. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the top-line results that we report may differ from future results of the same trials, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Top-line data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, top-line data should be viewed with caution until the final data are available. We may also disclose interim data from our clinical trials. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Adverse differences between preliminary or interim data and final data could significantly harm our business prospects.

Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product candidate or product and our business in general. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine is the material or otherwise appropriate information to include in our disclosure, and any information we determine not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views, activities or otherwise regarding a particular drug, product candidate or our business. If the top-line data that we report differ from actual results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for and commercialize our product candidates, our business, operating results, prospects or financial condition may be harmed.

Enrollment and retention of patients in clinical trials is an expensive and time-consuming process and could be made more difficult or rendered impossible by multiple factors outside our control.

We may encounter delays or difficulties in enrolling, or be unable to enroll, a sufficient number of patients to complete any of our clinical trials on our current timelines, or at all, and even once enrolled we may be unable to retain a sufficient number of patients to complete any of our trials. Enrollment in our clinical trials may be slower than we anticipate, leading to delays in our development timelines. For example, we may face difficulty enrolling or maintaining a sufficient number of patients in our clinical trials due to the existing alternative treatments approved for the treatment of any of our targeted indications, such as topical corticosteroids or topical steroid-free therapies for atopic dermatitis or psoriasis, as patients may decline to enroll or decide to withdraw from our clinical trials due to the risk of receiving placebo. Patient enrollment and retention in clinical trials depends on many factors, including the size of the patient population, the nature of the trial protocol, our ability to recruit clinical trial investigators with the appropriate competencies and experience, the existing body of safety and efficacy data with respect to the study drug, the number and nature of competing treatments and ongoing clinical trials of competing drugs for the same indication, the proximity of patients to clinical sites, the eligibility criteria for the trial and the proportion of patients screened that meets those criteria, our ability to obtain and maintain patient consents, our ability to successfully complete prerequisite studies before enrolling certain patient populations, such as any pediatric safety study for tapinarof in children required before we may enroll pediatric patients in Phase 3 trials of tapinarof for the treatment of atopic dermatitis, and the risk that patients enrolled in clinical trials will drop out of the trials before completion. If the data from our pediatric safety study of tapinarof for the treatment of atopic dermatitis in children do not meet FDA requirements, we may be required to delay Phase 3 trials of tapinarof for the treatment of atopic dermatitis or alter our trial protocol.

Furthermore, any negative results or new safety signals we may report in clinical trials of our product candidates may make it difficult or impossible to recruit and retain patients in other clinical trials. Similarly, negative results reported by our competitors about their drug candidates may negatively affect patient recruitment in our clinical trials. Also,

 

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marketing authorization of competitors in this same class of drugs may impair our ability to enroll patients into our clinical trials, delaying or potentially preventing us from completing recruitment of one or more of our trials.

Delays or failures in planned patient enrollment or retention may result in increased costs, program delays or both, which could have a harmful effect on our ability to develop tapinarof or any of our other product candidates, or could render further development impossible. In addition, we expect to rely on CROs and clinical trial sites to ensure proper and timely conduct of our future clinical trials, and, while we intend to enter into agreements governing their services, we will be limited in our ability to compel their actual performance.

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

The markets for dermatological therapies are competitive and are characterized by significant technological development and new product introduction. For example, there are several large and small pharmaceutical companies focused on delivering therapeutics for our targeted inflammatory and medical dermatological indications. We anticipate that, if we obtain regulatory approval of our product candidates, we will face significant competition from other approved therapies or drugs that become available in the future for the treatment of our target indications. If approved, our product candidates may also compete with unregulated, unapproved and off-label treatments. Even if another branded or generic product or an over-the-counter, or OTC, product is less effective than our product candidates, a less effective branded, generic or OTC product may be more quickly adopted by physicians and patients than our competing product candidates based upon cost or convenience. Certain of our product candidates, if approved, will present novel therapeutic approaches for the approved indications and will have to compete with existing therapies, some of which are widely known and accepted by physicians and patients. To compete successfully in this market, we will have to demonstrate that the relative cost, safety and efficacy of our approved products, if any, provide an attractive alternative to existing and other new therapies to gain a share of some patients’ discretionary budgets and for physicians’ attention within their clinical practices. Some of the companies that offer competing products also have a broad range of other product offerings, large direct sales forces and long-term customer relationships with our target physicians, which could inhibit our market penetration efforts. Such competition could lead to reduced market share for our product candidates and contribute to downward pressure on the pricing of our product candidates, which could harm our business, financial condition, operating results and prospects.

We are aware of several companies that are working to develop drugs that would compete against our product candidates for the treatment of psoriasis and atopic dermatitis. For example, tapinarof will face competition from injectable biologic therapies such as Humira, which is marketed by AbbVie and Eisai, and oral PDE4 inhibitors such as OTEZLA, which is marketed by Celgene. To a lesser extent, tapinarof would also face potential competition from companies that are developing and/or already market TCS and Vitamin D analogues. With respect to tapinarof, topical cerdulatinib and lotamilast for the treatment of atopic dermatitis, we would face potential competition from DUPIXENT, a biologic therapy, marketed by Regeneron, PF-04965842, a JAK1 inhibitor oral therapy by Pfizer, and upadacitinib, an oral JAK inhibitor by AbbVie. We will also face competition from companies that market branded and generic corticosteroids, topical calcineurin inhibitors and topical PDE4 inhibitors.

With respect to DMVT-504 for the systemic treatment of PFH, we would face potential competition from companies that market topical anticholinergics (including Qbrexza, marketed by Dermira), office-based procedures (including Botox, marketed by Allergan) and surgical treatments for the removal of sweat glands. With respect to topical cerdulatinib for the topical treatment of vitiligo, we would face potential competition from off-label use of branded and generic TCS, topical calcineurin inhibitors, phototherapies and systemic corticosteroids. There are also product candidates under development that could potentially be used to treat vitiligo and compete with topical cerdulatinib, including OTEZLA and ATI-50002, a JAK inhibitor being developed by Aclaris Therapeutics.

Many of our existing or potential competitors have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of product candidates, as well as in obtaining regulatory approvals of those product candidates in the United States and in foreign countries. Many of our current and potential future competitors also have significantly more experience commercializing drugs that have been approved for marketing. Mergers and acquisitions in the pharmaceutical and biotechnology industries could result in even more resources being concentrated among a smaller number of our competitors. Competition may

 

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reduce the number and types of patients available to us to participate in clinical trials, because some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors.

Due to less stringent regulatory requirements in certain foreign countries, there are many more dermatological products and procedures available for use in those international markets than are approved for use in the United States. In certain international markets, there are also fewer limitations on the claims that our competitors can make about the effectiveness of their products and the manner in which they can market their products. As a result, we expect to face more competition in these markets than in the United States.

Our ability to compete successfully will depend largely on our ability to:

 

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develop and commercialize therapies that are superior to other products in the market;

 

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demonstrate through our clinical trials that our product candidates are differentiated from existing and future therapies;

 

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attract qualified scientific, product development and commercial personnel;

 

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obtain patent or other proprietary protection for our technologies and product;

 

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obtain required regulatory approvals, including approvals to market our product candidates in ways that are differentiated from existing and future therapies and OTC products and treatments;

 

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successfully commercialize our product candidates, if approved;

 

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obtain coverage and adequate reimbursement from, and negotiate competitive pricing with, third-party payors; and

 

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

The availability of our competitors’ products could limit the demand and the price we are able to charge for any product candidate we develop. The inability to compete with existing or subsequently introduced drugs or OTC treatments would have an adverse impact on our business, financial condition and prospects.

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

Our product candidates and the activities associated with their development and commercialization, including their design, research, testing, manufacture, safety, efficacy, recordkeeping, labeling, packaging, storage, approval, advertising, promotion, sale and distribution are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by similar regulatory authorities outside the United States. Failure to obtain marketing approval for, and thus commercialize any of our product candidates, could negatively impact our ability to generate any revenue from product sales.

We have not received approval from regulatory authorities to market any product candidate in any jurisdiction, and it is possible that none of our product candidates we may seek to develop will ever obtain the appropriate regulatory approvals necessary for us to commence product sales. Neither we nor any collaborator is permitted to market any of our product candidates in the United States or any other jurisdiction until we receive regulatory approval of an NDA from the FDA or similar regulatory authorities outside of the United States.

The time required to obtain approval of an NDA by the FDA or similar regulatory authorities outside of the United States is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authority. Prior to submitting an NDA to the FDA or any comparable application to any other foreign regulatory authorities for approval of any product candidate, we will need to complete pivotal Phase 3 clinical trials to demonstrate favorable results with respect to safety, tolerability and efficacy. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions.

Securing marketing approvals requires the submission of extensive nonclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the safety and efficacy of our product candidates for the specified indications. We expect to rely on third-party CROs and consultants to assist us

 

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in filing and supporting the applications necessary to gain marketing approvals. Securing marketing approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the regulatory authorities. Delays or errors in the submission of applications for marketing approval or issues, including those related to gathering the appropriate data and the inspection process, may ultimately delay or affect our ability to obtain regulatory approval, commercialize our product candidates and generate product revenue.

If the FDA does not conclude that certain of our product candidates satisfy the requirements for the Section 505(b)(2) regulatory approval pathway, or if the requirements for such product candidates under Section 505(b)(2) are not as we expect, the approval pathway for those product candidates will likely take significantly longer, cost significantly more and entail significantly greater complications and risks than anticipated, and in either case may not be successful.

We may seek FDA approval through the Section 505(b)(2) regulatory pathway for our product candidate DMVT-504. The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, added Section 505(b)(2) to the Federal Food, Drug and Cosmetic Act, or FDCA. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference. Section 505(b)(2), if applicable to us under the FDCA, would allow an NDA we submit to FDA to rely in part on data in the public domain or the FDA’s prior conclusions regarding the safety and effectiveness of approved compounds, which could expedite the development program for our product candidates by potentially decreasing the amount of clinical data that we would need to generate in order to obtain FDA approval. If the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway as anticipated, we may need to conduct additional clinical trials, provide additional data and information, and meet additional standards for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA approval for these product candidates, and complications and risks associated with these product candidates, would likely substantially increase. We could need to obtain additional funding, which could result in significant dilution to the ownership interests of our then existing stockholders to the extent we issue equity securities or convertible debt. We cannot assure you that we would be able to obtain such additional financing on terms acceptable to us, if at all. Moreover, inability to pursue the Section 505(b)(2) regulatory pathway would likely result in new competitive products reaching the market more quickly than our product candidates, which would likely adversely impact our competitive position and prospects. Even if we are allowed to pursue the Section 505(b)(2) regulatory pathway, we cannot assure you that our product candidates will receive the requisite approvals for commercialization.

In addition, notwithstanding the approval of a number of products by the FDA under Section 505(b)(2) over the last few years, certain brand-name pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may change its 505(b)(2) policies and practices, which could delay or even prevent the FDA from approving any NDA that we submit under Section 505(b)(2). In addition, the pharmaceutical industry is highly competitive, and Section 505(b)(2) NDAs are subject to special requirements designed to protect the patent rights of sponsors of previously approved drugs that are referenced in a Section 505(b)(2) NDA. These requirements may give rise to patent litigation and mandatory delays in approval of our NDAs for up to 30 months or longer depending on the outcome of any litigation. It is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition. In addition, even if we are able to utilize the Section 505(b)(2) regulatory pathway, there is no guarantee this would ultimately lead to accelerated product development or earlier approval.

Moreover, even if our product candidates are approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses for which the products may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the products.

 

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Our product candidates may cause adverse effects or have other properties that could delay or prevent their regulatory approval, cause us to suspend or discontinue clinical trials, abandon further development or limit the scope of any approved label or market acceptance.

Adverse events associated with our product candidates in our clinical trials could cause us, other reviewing entities, clinical trial sites or regulatory authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval. If an unacceptable frequency or severity of adverse events or new safety signals, or unacceptable or significant underlying causes of these adverse events, are reported in our clinical trials for any of our product candidates, our ability to obtain regulatory approval for such product candidates may be negatively impacted. Treatment-related side effects arising from our product candidates or those from other companies targeting similar dermatological indications could also affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. In addition, these side effects may not be appropriately recognized or managed by the treating medical staff. Any of these occurrences may harm our business, financial condition and prospects.

If any of our product candidates is approved and then causes serious or unexpected side effects, a number of potentially significant negative consequences could result, including:

 

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regulatory authorities may withdraw, suspend or limit their approval of the product or require a REMS (or equivalent outside the United States) to impose restrictions on its distribution or other risk management measures;

 

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we may be required to recall a product;

 

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additional restrictions may be imposed on the marketing of the particular product or the manufacturing processes for the product or any component thereof;

 

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regulatory authorities may require the addition of labeling statements, such as warnings or contraindications, require other labeling changes or require field alerts or other communications to physicians, pharmacies or the public;

 

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we may be required to change the way the product is administered or distributed, conduct additional clinical trials, change the labeling of a product or be required to conduct additional post-marketing studies or surveillance;

 

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we may be required to repeat a preclinical study or clinical trial or terminate a program, even if other studies or trials related to the program are ongoing or have been successfully completed;

 

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

 

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we could elect to discontinue the sale of our product;

 

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the product may become less competitive; and

 

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our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercializing our product candidates, if approved.

Certain of our product candidates, if approved, may compete with each other for their targeted indications and as a result, reduce their commercial success.

We are currently developing tapinarof to treat, and evaluating cerdulatinib and lotamilast for the treatment of, atopic dermatitis in various patient groups. To the extent that two or more such product candidates are approved for the treatment of atopic dermatitis, physicians and patients may prefer to use one product over any others, and the revenue we would derive from such products could be reduced. If such products all compete for treatment of atopic dermatitis, the incremental revenue derived from any one product would be less than if such products did not treat the same indication.

The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and even if we obtain approval for a product candidate in one country or jurisdiction, we may never obtain approval for or commercialize it in any other jurisdiction, which would limit our ability to realize our full market potential.

Prior to obtaining approval to commercialize tapinarof or any other product candidate in any jurisdiction, we or our collaborators must demonstrate with substantial evidence from well controlled clinical trials, and to the satisfaction

 

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of the FDA or comparable foreign regulatory agencies, that such product candidates are safe and effective for their intended uses. Results from nonclinical studies and clinical trials can be interpreted in different ways. Even if we believe the nonclinical or clinical data for a product candidate are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. In order to market any products in any particular jurisdiction, we must establish and comply with numerous and varying regulatory requirements on a country-by-country basis regarding safety and efficacy. Approval by the FDA does not ensure approval by regulatory authorities in any other country or jurisdiction outside the United States. In addition, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not guarantee regulatory approval in any other country. Approval processes vary among countries and can involve additional product testing and validation, as well as additional administrative review periods. Seeking regulatory approval could result in difficulties and costs for us and require additional nonclinical studies or clinical trials, which could be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our products in those countries. We do not have any product candidates approved for sale in any jurisdiction, including in international markets, and we do not have experience in obtaining regulatory approval. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of any product we develop will be unrealized.

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

Any product candidate for which we obtain marketing approval will be subject to extensive and ongoing regulatory requirements, including for the manufacturing processes, post-approval clinical data, labeling, packaging, distribution, adverse event reporting, storage, recordkeeping, conduct of potential post-market studies and post-market submission requirements, export, import, advertising and promotional activities for such product, among other things, by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, establishment of registration and drug listing requirements, continued compliance with cGMP requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of drug product samples to physicians, recordkeeping and GCP requirements for any clinical trials that we conduct post-approval. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval or the FDA or other regulatory authorities may require that contraindications, warnings or precautions-including in some cases, a boxed warning be included in the product labeling, which could limit sales of the product.

Regulatory authorities closely regulate the post-approval marketing and promotion of drugs to ensure drugs are marketed only for the approved indications and in accordance with the provisions of the approved labeling. Regulatory authorities impose stringent restrictions on manufacturers’ communications regarding off-label use, and if we do not market our products for their approved indications, we may be subject to enforcement action for off-label marketing. Violations of the Federal Food, Drug, and Cosmetic Act in the United States and other comparable regulations in foreign jurisdictions relating to the promotion of prescription drugs may lead to enforcement actions and investigations by the FDA, Department of Justice, State Attorneys General and other foreign regulatory agencies alleging violations of United States federal and state health care fraud and abuse laws, as well as state consumer protection laws and comparable laws in foreign jurisdictions.

In addition, later discovery of previously unknown adverse events or other problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements may yield various results, including:

 

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restrictions on the manufacture of such products;

 

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restrictions on the labeling or marketing of such products, including a “black box” warning or contraindication on the product label or communications containing warnings or other safety information about the product;

 

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restrictions on product distribution or use;

 

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requirements to conduct post-marketing studies or clinical trials, or any regulatory holds on our clinical trials;

 

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requirement of a REMS (or equivalent outside the United States);

 

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Warning or Untitled Letters;

 

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withdrawal of the products from the market;

 

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recall of products;

 

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fines, restitution or disgorgement of profits or revenues;

 

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suspension or withdrawal of marketing approvals;

 

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refusal to permit the import or export of such products;

 

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product seizure; or

 

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injunctions or the imposition of civil or criminal penalties.

The FDA and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of tapinarof or any future product candidate. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or to 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.

For example, certain policies of the current U.S. administration may impact our business and industry. Namely, the Trump administration has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict how these executive actions, including the Executive Orders will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on the FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.

Non-compliance by us or any future collaborator with regulatory requirements, including safety monitoring or pharmacovigilance, and with requirements related to the development of products for the pediatric population can also result in significant financial penalties.

Even if tapinarof or any of our other product candidates receives marketing approval, it may fail to achieve market acceptance by physicians, patients, third-party payors or others in the medical community necessary for commercial success.

Even if tapinarof or any of our other product candidates receives marketing approval, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. If it does not achieve an adequate level of acceptance, we may not generate significant product revenue or become profitable. The degree of market acceptance of a product candidate, if approved for commercial sale, will depend on a number of factors, including but not limited to:

 

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the safety, efficacy, risk-benefit profile and potential advantages compared to alternative or existing treatments, such as TCS for the treatment of psoriasis and atopic dermatitis, which physicians may perceive to be adequately effective for some or all patients;

 

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side effects that may be attributable to our product candidates and the difficulty of or costs associated with resolving such side effects;

 

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limitations or warnings contained in the labeling approved for our product candidates by FDA or other applicable regulatory authorities;

 

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any restrictions on the use of our products, and the prevalence and severity of any side effects;

 

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the content of the approved product label;

 

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the effectiveness of sales and marketing efforts;

 

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the cost of treatment in relation to alternative treatments, including any similar generic treatments and OTC treatments;

 

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our ability to offer our products for sale at competitive prices;

 

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the convenience and ease of administration compared to alternative treatments;

 

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the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies over existing therapies;

 

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the strength of marketing and distribution support;

 

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the availability of third-party coverage and adequate reimbursement at any given price level of each of our product candidates;

 

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utilization controls imposed by third-party payors, such as prior authorizations and step edits; and

 

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any restrictions on the use of any of our product candidates, if approved.

We cannot assure you that our current or future product candidates, if approved, will achieve market acceptance among physicians and patients. Any failure by our product candidates that obtain regulatory approval or clearance to achieve market acceptance or commercial success would harm our results of operations.

If we are unable to establish sales, marketing and distribution capabilities, either on our own or in collaboration with third parties, we may not be successful in commercializing any of our product candidates, if approved.

We do not currently have any infrastructure for the sales, marketing, or distribution of any product, and the cost of establishing and maintaining such an organization may exceed the cost-effectiveness of doing so. In order to market any product that may be approved, we must build our sales, distribution, marketing, managerial and other nontechnical capabilities or make arrangements with third parties to perform these services. To achieve commercial success for any product for which we obtain marketing approval, we will need a sales and marketing organization.

We expect to build a focused sales, distribution and marketing infrastructure to market our product candidates in North America, if approved. There are significant expenses and risks involved with establishing our own sales, marketing and distribution capabilities, including our ability to hire, retain and appropriately incentivize qualified individuals, provide adequate training to sales and marketing personnel, and effectively manage geographically dispersed sales and marketing teams to generate sufficient demand. Any failure or delay in the development of our internal sales, marketing and distribution capabilities could delay any product launch, which would adversely impact its commercialization. If the commercial launch of any of our product candidates, if approved, for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

Factors that may inhibit our efforts to commercialize our products on our own include:

 

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our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;

 

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the inability of sales personnel to obtain access to physicians or attain adequate numbers of physicians to prescribe any drugs;

 

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the inability to obtain sufficient access and reimbursement for our product candidates, if approved; and

 

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unforeseen costs and expenses associated with creating a sales and marketing organization.

If we are unable to build our own sales force or negotiate a collaborative relationship for the commercialization of any product candidate, we may be forced to delay potential commercialization or reduce the scope of our sales or marketing activities. If we elect to increase our expenditures to fund commercialization activities ourselves, we will need to obtain additional capital, which may not be available to us on acceptable terms, or at all. If we do not have sufficient funds, we will not be able to bring any product candidate to market or generate product revenue. We could enter into arrangements with collaborative partners at an earlier stage than otherwise would be ideal and we may be required to relinquish certain rights to one or more of our product candidates or otherwise agree to terms unfavorable to us, any of which may harm our business, operating results and prospects.

If we are unable to establish adequate sales, marketing, and distribution capabilities, either on our own or in collaboration with third parties, we will not be successful in commercializing any of our product candidates and may not become profitable. We will be competing with many companies that currently have extensive and well-funded marketing and sales operations. Without an internal team or the support of a third party to perform marketing and sales functions, we may be unable to compete successfully against these more established companies.

 

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The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. If we are found or alleged to have improperly promoted off-label uses, we may become subject to significant liability.

The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products, as our product candidates would be, if approved. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. If we are found to have promoted such off-label uses, we may become subject to significant liability. 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 or permanent injunctions under which specified promotional conduct is changed or curtailed. If we cannot successfully manage the promotion of our product candidates, if approved, we could become subject to significant liability, which would harm our business and financial condition.

If we obtain approval to commercialize tapinarof or any other products outside of the United States, a variety of risks associated with international operations could harm our business.

If tapinarof or any of our other product candidates is approved for commercialization outside of the United States, we expect that we will be subject to additional risks related to entering into international business relationships, including:

 

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different regulatory requirements for drug approvals and rules governing drug commercialization in foreign countries;

 

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reduced or no protection of intellectual property rights;

 

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unexpected changes in tariffs, trade barriers and regulatory requirements;

 

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

 

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

 

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foreign reimbursement, pricing and insurance regimes;

 

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foreign taxes;

 

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any foreign partners or collaborators not fulfilling their respective regulatory reporting requirements and any foreign regulatory authorities taking actions with respect to such failures, which would be reportable to the FDA;

 

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any foreign partners or collaborators not informing us of any new post-marketing safety signals in a timely manner;

 

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

 

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

 

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potential noncompliance with the FCPA, the U.K. Bribery Act or similar antibribery and anticorruption laws in other jurisdictions;

 

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

 

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

We have no prior experience in commercializing any product, and many biopharmaceutical companies have found the process of marketing their products in foreign countries to be very challenging.

 

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Our current and future relationships with investigators, health care professionals, consultants, third-party payors, and customers are subject to applicable healthcare regulatory laws, which could expose us to penalties.

Our business operations and current and future arrangements with investigators, healthcare professionals, consultants, third-party payors, patient support, charitable organizations and customers expose us to broadly applicable fraud and abuse and other healthcare laws and regulations. These laws regulate the business or financial arrangements and relationships through which we conduct our operations, including how we research, market, sell, and distribute products for which we obtain marketing approval. Such laws include, among others:

 

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the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid. The term “remuneration” has been broadly interpreted to include anything of value. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it to have committed a violation; in addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act. Violations of the federal Anti-Kickback Statute may result in civil monetary penalties up to $100,000 for each violation, plus up to three times the remuneration involved. Civil penalties for such conduct can further be assessed under the federal False Claims Act. Violations can also result in criminal penalties, including criminal fines and imprisonment of up to 10 years. Similarly, violations can result in exclusion from participation in government healthcare programs, including Medicare and Medicaid;

 

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the federal false claims laws, including the False Claims Act, which imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent, knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim, or knowingly making or causing to be made, a false statement to avoid, decrease or conceal an obligation to pay money to the federal government. When an entity is determined to have violated the federal civil False Claims Act, the government may impose civil fines and penalties ranging from $11,181 to $22,363 for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs;

 

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the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or making false or fraudulent statements relating to healthcare matters; similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;

 

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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, which also impose obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security, and transmission of individually identifiable health information on health plans, health care clearing houses, and most providers and their business associates, defined as independent contractors or agents of covered entities that create, receive or obtain protected health information in connection with providing a service for or on behalf of a covered entity;

 

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the federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics, and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the government information related to payments or other “transfers of value” made to physicians, certain other healthcare providers, and teaching hospitals, and requires applicable manufacturers and group purchasing organizations to report annually to the government ownership and investment interests held by the physicians described above and

 

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their immediate family members and payments or other “transfers of value” to such physician owners (covered manufacturers are required to submit reports to the government by the 90th day of each calendar year); and

 

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analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to our business practices, including but not limited to, research, distribution, sales, and marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; and state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, and state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Efforts to ensure that our current and future business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations, agency guidance or case law involving applicable healthcare laws. If our operations are found to be in violation of any of these or any other health regulatory laws that may apply to us, we may be subject to significant penalties, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement, individual imprisonment, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs or similar programs in other countries or jurisdictions, contractual damages, reputational harm, diminished profits and future earnings, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement and curtailment or restructuring of our operations, any of which could adversely impact our ability to operate our business and our results of operations. Even the mere issuance of a subpoena or the fact of an investigation alone, regardless of the merit, may result in negative publicity, a drop in our share price and other harm to our business, financial condition and results of operations. Defending against any such actions can be costly, time-consuming and may require significant financial and personnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired.

Changes in healthcare law and implementing regulations, as well as changes in healthcare policy, may impact our business in ways that we cannot currently predict and may have a significant adverse effect on our business and results of operations.

There have been, and continue to be, several legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of product candidates, restrict or regulate postapproval activities and affect our ability to profitably sell any product candidates for which we obtain marketing approval. Among policy makers and payors in the United States there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access and the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the Affordable Care Act, substantially changed the way healthcare is financed by both the government and private insurers, and significantly impacts the U.S. pharmaceutical industry. The Affordable Care Act, among other things: (1) introduced a new average manufacturer price definition for drugs and biologics that are inhaled, infused, instilled, implanted or injected and not generally dispensed through retail community pharmacies; (2) increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and expanded rebate liability from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well; (3) established a branded prescription drug fee that pharmaceutical manufacturers of branded prescription drugs must pay to the federal government; (4) expanded the list of covered entities eligible to participate in the 340B drug pricing program by adding new entities to the program; (5) established a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer point-of-sale discounts (which through subsequent legislative amendments, was increased to 70% from 50% starting in 2019) off negotiated

 

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prices of applicable branded drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D; (6) extended manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations; (7) expanded eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals, including individuals with income at or below 133% of the federal poverty level, thereby potentially increasing manufacturers’ Medicaid rebate liability; (8) created a licensure framework for follow-on biologic products; and (9) established a Center for Medicare and Medicaid Innovation at the Centers for Medicare and Medicaid Services to test innovative payment and service delivery models to lower Medicare and Medicaid spending.

Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the Affordable Care Act. For example, the Tax Cuts and Jobs Act of 2017, or TCJA, was enacted, which includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas ruled that the individual mandate is a critical and inseverable feature of the Affordable Care Act, and therefore, because it was repealed as part of the TCJA, the remaining provisions of the Affordable Care Act are invalid as well. While the Trump administration and CMS have both stated that the ruling will have no immediate effect, it is unclear how this decision, subsequent appeals, if any, and other efforts to repeal and replace the Affordable Care Act will impact the Affordable Care Act and our business.

Other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. These changes include aggregate reductions to Medicare payments to providers of 2% per fiscal year pursuant to the Budget Control Act of 2011 and subsequent laws, which began in 2013 and will remain in effect through 2027, unless additional Congressional action is taken. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types of providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. New laws may result in additional reductions in Medicare and other healthcare funding, which may materially adversely affect customer demand and affordability for our products and, accordingly, the results of our financial operations. Also, there has been heightened governmental scrutiny recently over the manner in which pharmaceutical companies set prices for their marketed products, which have resulted in several Congressional inquiries and proposed federal legislation, as well as state efforts, designed to, among other things, bring more transparency to product pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. At the federal level, the Trump administration’s budget proposal for fiscal year 2019 contains further drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. Further, the Trump administration released a “Blueprint,” or plan, to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase drug manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products, and reduce the out of pocket costs of drug products paid by consumers. The Department of Health and Human Services, or HHS, has already started the process of soliciting feedback on some of these measures and, at the same, is immediately implementing others under its existing authority. While some proposed measures will require authorization through additional legislation to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. Most recently, the Trump administration released a “Blueprint,” or plan, to reduce the cost of drugs. The Trump administration’s Blueprint contains certain measures that the U.S. Department of Health and Human Services is already working to implement. At the state level, individual states in the United States are increasingly active in 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

 

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marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

We expect that these and other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and lower reimbursement, and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government-funded programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our drugs, once marketing approval is obtained.

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

Market acceptance and sales of any approved product that we develop will depend in part on the extent to which coverage and adequate reimbursement for these products and related treatments will be available from third-party payors, including government health administration authorities and private health insurers. There is no assurance that any of our product candidates, if approved, would achieve adequate coverage and reimbursement levels.

In the United States, no uniform policy of coverage and reimbursement for products exists among third-party payors. Third-party payors decide which drugs they will pay for and establish reimbursement levels. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own coverage and reimbursement policies. However, decisions regarding the extent of coverage and amount of reimbursement to be provided for any product candidates that we develop through approval will be made on a plan-by-plan basis. One payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage and adequate reimbursement for the product. Additionally, a third-party payor’s decision to provide coverage for a drug does not imply that an adequate reimbursement rate will be approved. Each plan determines whether or not it will provide coverage for a drug, what amount it will pay the manufacturer for the drug, on what tier of its formulary the drug will be placed and whether to require step therapy. The position of a drug on a formulary generally determines the co-payment that a patient will need to make to obtain the drug and can strongly influence the adoption of a drug by patients and physicians. Patients who are prescribed treatments for their conditions and providers prescribing such services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. Further, from time to time, typically on an annual basis, payment rates are updated and revised by third-party payors. Such updates could impact the demand for our products, to the extent that patients who are prescribed our products, if approved, are not separately reimbursed for the cost of the product.

The process for determining whether a third-party payor will provide coverage for a product may be separate from the process for setting the price of a product or for establishing the reimbursement rate that such a payor will pay for the product. Even if we do obtain adequate levels of reimbursement, third-party payors, such as government or private healthcare insurers, carefully review and increasingly question the coverage of, and challenge the prices charged for, products. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Increasingly, third-party payors are requiring that pharmaceutical companies provide them with predetermined discounts from list prices and are challenging the prices charged for products. We may also be required to conduct expensive pharmacoeconomic studies to justify the coverage and the amount of reimbursement for particular medications. We cannot be sure that coverage and reimbursement will be available for any product that we commercialize and, if reimbursement is available, what the level of reimbursement will be. Inadequate coverage or reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. If coverage and adequate reimbursement are not available, or are available only to limited levels, we may not be able to successfully commercialize any product candidates that we develop.

Additionally, there have been a number of legislative and regulatory proposals to change the healthcare system in the United States and in some foreign jurisdictions that could affect our ability to sell any future drugs profitably. There can be no assurance that any of our product candidates, if approved, will be considered medically reasonable and necessary, that they will be considered cost-effective by third-party payors, that coverage or an adequate level of reimbursement will be available, or that reimbursement policies and practices in the United States and in foreign

 

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countries where our products are sold will not harm our ability to sell our product candidates profitably, if they are approved for sale.

Risks Related to Our Dependence on Third Parties

We do not have our own manufacturing capabilities and will rely on third parties to produce clinical supplies and commercial supplies of our product candidates.

We do not own or operate, and we do not have current plans to own or operate, facilities for product manufacturing, storage and distribution or testing. Pursuant to our clinical manufacturing and supply agreement with GSK, GSK has agreed to provide us with an existing supply of tapinarof drug product and drug substance as well as additional supply of tapinarof drug product for clinical trials, which we may only utilize in preclinical and clinical work. If GSK fails to fulfill its continuing obligations under this agreement or if GSK terminates their obligations to assist us early, our development of tapinarof could be significantly delayed or otherwise harmed.

In addition, we and GSK entered into a letter agreement pursuant to which GSK agreed to undertake certain capital improvements at GSK’s manufacturing site in Cork, Ireland to support manufacturing and supply obligations of tapinarof to us, such expenditures to be reimbursed by us on a monthly basis. Further, as required under the asset purchase agreement between DSG and GSK, or the GSK Agreement, in April 2019, we and GSK entered into a commercial manufacturing and supply agreement, or the Commercial Supply Agreement, pursuant to which we will obtain tapinarof drug product and drug substance from GSK. Under the Commercial Supply Agreement, GSK will provide development services to prepare for the manufacture and supply of tapinarof at commercial scale. We will obtain commercial supply of tapinarof drug product on a cost plus basis under the Commercial Supply Agreement. If we are unable to enforce such letter agreement or the Commercial Supply Agreement, if GSK does not fulfill its terms under such agreements or we experience delays in such improvements, our ability to supply tapinarof for our clinical trials and clinical development of tapinarof or upon commercialization of tapinarof, if approved, may be harmed. For each of our other product candidates, we obtain supply of drug product for clinical trials and development from various CMOs pursuant to statements of work under master service agreements that we maintain with RSG. If we are unable to initiate or continue our relationship with one or more of third-party contractors, including after any termination of our supply arrangements with RSG, we could experience delays in our development efforts as we locate and qualify new manufacturers.

Third-party vendors may be difficult to identify for our product candidate process and formulation development and manufacturing due to special capabilities required, and they may not be able to meet our quality standards. Any significant delay in the supply of a product candidate, or the raw material components thereof, for an ongoing clinical trial due to the need to replace a third-party manufacturer could considerably delay completion of our clinical trials, product testing and potential regulatory approval of our product candidates. If our manufacturers or we are unable to purchase these raw materials after regulatory approval has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be a shortage in supply, which would impair our ability to generate revenue from the sale of our product candidates.

The facilities used by our contract manufacturers to manufacture our product candidates must be approved by the FDA pursuant to inspections that will be conducted after we submit our NDA to the FDA. We do not control the manufacturing process of, and are completely dependent on, our contract manufacturing partners for compliance with cGMP requirements for manufacture of drug products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or comparable foreign regulatory authorities, we will not be able to secure or maintain regulatory approval for our product candidates. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or comparable foreign regulatory authorities do not approve these facilities for the manufacture of our product candidates or if they withdraw 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. Further, our reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates ourselves, including:

 

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failure of the drug substance transferred from GSK to meet our product specifications and quality requirements;

 

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inability to meet our product specifications and quality requirements consistently;

 

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delay or inability to procure or expand sufficient manufacturing capacity;

 

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

 

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

 

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failure to comply with applicable laws, regulations and standards, including cGMP and similar foreign standards;

 

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deficient or improper record-keeping;

 

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

 

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

 

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

 

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lack of qualified backup suppliers for those components that are currently purchased from a sole or single source supplier;

 

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operations of our third-party manufacturers or suppliers could be disrupted by conditions unrelated to our business or operations, including the bankruptcy of the manufacturer or supplier or other regulatory sanctions related to the manufacture of another company’s products;

 

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

 

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

Any of these events could lead to clinical trial delays, cost overruns, delay or failure to obtain regulatory approval or impact our ability to successfully commercialize our product candidates, if approved, as well as potential product liability litigation, product recalls or product withdrawals. Some of these events could be the basis for FDA or other regulatory authority action, including injunction, recall, seizure, or total or partial suspension of production of our product candidates.

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

As product candidates proceed through preclinical studies to late-stage clinical trials towards potential approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods and formulation, are altered along the way in an effort to optimize processes and results. 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 planned clinical trials or other future clinical trials conducted with the altered materials. Such changes may also require additional testing, FDA notification or FDA approval. This could delay completion of clinical trials, require the conduct of bridging clinical trials 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 sales and generate revenue.

We are reliant on third parties to conduct, supervise and monitor our clinical trials, and if those third parties perform in an unsatisfactory manner or fail to comply with applicable requirements, it may harm our business.

We currently do not have the ability to independently conduct nonclinical studies that comply with Good Laboratory Practice, or GLP, requirements. We also do not currently have the ability to independently conduct any clinical trials. We rely exclusively on CROs and clinical trial sites, which need to comply with GCP, to ensure the proper and timely conduct of our clinical trials, and we have limited influence over their actual performance.

We rely upon CROs to monitor and manage data for our clinical programs, as well as for the execution of nonclinical studies. We control only certain aspects of our CROs’ activities. Nevertheless, we are 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 the CROs does not relieve us of our regulatory responsibilities.

We and our CROs are required to comply with GLP and GCP regulations and guidelines enforced by the FDA, and are also required by the competent authorities of the member states of the European Economic Area and other

 

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comparable foreign regulatory authorities to comply with the International Council for Harmonization guidelines for any of our product candidates that are in nonclinical and clinical development. The regulatory authorities enforce GCP regulations through periodic inspections of trial sponsors, principal investigators and clinical trial sites. Although we rely on CROs to conduct our GLP-compliant nonclinical studies and GCP-compliant clinical trials, we remain responsible for ensuring that each of our GLP nonclinical studies and GCP clinical trials is conducted in accordance with its investigational plan and protocol and applicable laws and regulations, and our reliance on the CROs does not relieve us of our regulatory responsibilities. If we or our CROs fail to comply with GCP requirements, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may reject our marketing applications or require us to perform additional clinical trials before approving our marketing applications. Accordingly, if we or our CROs fail to comply with these regulations or other applicable laws, regulations or standards, or fail to recruit a sufficient number of subjects, we may be required to repeat clinical trials, which would delay the relevant regulatory approval process. Failure by our CROs to properly execute study protocols in accordance with applicable law could also create product liability and healthcare regulatory risks for us as sponsors of those studies.

While we will have agreements governing their activities, our CROs are not our employees, and we will not control whether or not they devote sufficient time and resources to our future clinical and nonclinical programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials, or other drug development activities, which could harm our competitive position. We face the risk of potential unauthorized disclosure or misappropriation of our intellectual property by CROs, which may reduce our trade secret and intellectual property protection and allow our potential competitors to access and exploit our proprietary technology. If our CROs do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our (or their own) clinical protocols or regulatory requirements or for any other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize any product candidate that we develop. As a result, our financial results and the commercial prospects for any product candidate that we develop could be harmed, our costs could increase and our ability to generate revenue could be delayed.

If our relationships with these CROs terminate, we may not be able to enter into arrangements with alternative CROs or do so on commercially reasonable terms or in a timely manner. Switching or adding additional CROs involves substantial cost and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can adversely impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have an adverse impact on our business, financial condition and prospects.

Risks Related to Our Intellectual Property

If we are unable to obtain and maintain patent protection for our technology and products, or if the scope of the patent protection obtained is not sufficiently broad, we may not be able to compete effectively in our markets.

We rely, and will continue to rely, upon a combination of patents, trademarks, trade secret protection and confidentiality agreements with employees, consultants, collaborators, advisors and other third parties to protect the intellectual property related to our current and future drug development programs and product candidates. Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our technology and product candidates. We seek to protect our proprietary position by filing patent applications in the United States and abroad related to our current and future drug development programs and product candidates, successfully defend our intellectual property rights against third-party challenges and successfully enforce our intellectual property rights to prevent third-party infringement. The patent prosecution process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.

It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. We may choose not to seek patent protection for certain innovations or products and may choose not to pursue patent protection in certain jurisdictions, and under the laws of certain jurisdictions,

 

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patents or other intellectual property rights may be unavailable or limited in scope and, in any event, any patent protection we obtain may be limited. As a result, some of our product candidates are not, and in the future may not be, protected by patents. We generally apply for patents in those countries where we intend to make, have made, use, offer for sale, or sell products and where we assess the risk of infringement to justify the cost of seeking patent protection. However, we do not seek protection in all countries where we intend to sell products and we may not accurately predict all the countries where patent protection would ultimately be desirable. If we fail to timely file a patent application in any such country, we may be precluded from doing so at a later date. The patent applications that we own or in-license may fail to result in issued patents with claims that cover any of our product candidates in the United States or in other foreign countries. We may also inadvertently make statements to regulatory agencies during the regulatory approval process that may be inconsistent with positions that have been taken during prosecution of our patents, which may result in such patents being narrowed, invalidated or held unenforceable.

The patents and patent applications that we own or in-license may fail to result in issued patents with claims that protect any of our product candidates in the United States or in other foreign countries. We cannot guarantee any current or future patents will provide us with any meaningful protection or competitive advantage. For example, any issued patents might not cover the pharmaceutical composition or topical formulations of the product candidates that are ultimately commercialized. There is no assurance that all of the potentially relevant prior art relating to our patents and patent applications has been found, which can prevent a patent from issuing from a pending patent application, or be used to invalidate a patent. The examination process may require us to narrow our claims, which may limit the scope of patent protection that we may obtain. Even if patents do successfully issue based on our patent applications, and even if such patents cover our product candidates, uses of our product candidates, or other aspects related to our product candidates, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed, invalidated or held unenforceable, any of which could limit our ability to prevent competitors and other third parties from developing and marketing similar products or limit the length of terms of patent protection we may have for our products and technologies. Other companies may also design around technologies we have patented, licensed or developed. In addition, the issuance of a patent does not give us the right to practice the patented invention. Any successful opposition to these patents or any other patents owned by or licensed to us in the future could deprive us of rights necessary for the successful commercialization of any of our product candidates, if approved. Third parties may have blocking patents that could prevent us from marketing our products or practicing our own patented technology. Further, if we encounter delays in regulatory approvals, the period of time during which we could market a product candidate under patent protection could be reduced. If any of our patents are challenged, invalidated, circumvented by third parties or otherwise limited or expire prior to the commercialization of our products, and if we do not own or have exclusive rights to other enforceable patents protecting our products or other technologies, competitors and other third parties could market products and use processes that are substantially similar to, or superior to, ours and our business would suffer.

If the patent applications we hold or have in-licensed with respect to our development programs and product candidates fail to issue, if their breadth or strength of protection is threatened, or if they fail to provide meaningful exclusivity for any of our product candidates, it could dissuade companies from collaborating with us to develop product candidates, and threaten our ability to commercialize, future products. Our pending applications cannot be enforced against third parties practicing the technology claimed in such applications unless and until a patent issues from such applications. Any such outcome could harm our business.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions, and has in recent years been the subject of much litigation. The standards that the USPTO and its foreign counterparts use to grant patents are not always applied predictably or uniformly. In addition, the laws of foreign countries may not protect our rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. For example, European patent law restricts the patentability of methods of treatment of the human body more than U.S. law does. Publications of discoveries in scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot know with certainty whether we were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we were the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, enforceability and

 

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commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents being issued which protect our technology or product candidates, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection.

Patent reform legislation in the United States, including the Leahy-Smith America Invents Act, or the Leahy-Smith Act, could increase those uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. The Leahy-Smith Act was signed into law on September 16, 2011 and includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art and provide more efficient and cost-effective avenues for competitors to challenge the validity of patents. These include allowing third-party submission of prior art to the USPTO during patent prosecution and additional procedures to attack the validity of a patent by USPTO administered post-grant proceedings, including post-grant review, inter partes review, and derivation proceedings. After March 15, 2013, under the Leahy-Smith Act, the United States transitioned to a first inventor to file system in which, assuming that the other statutory requirements are met, the first inventor to file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed invention. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications, our ability to obtain future patents, and the enforcement or defense of our issued patents, all of which could harm our business, financial condition, results of operations and prospects.

Moreover, we may be subject to a third-party pre-issuance submission of prior art to the USPTO or become involved in opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging our owned or licensed patent rights. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Moreover, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after it is filed. Various extensions may be available; however, the life of a patent, and the protection it affords, is limited. Without patent protection for our current or future product candidates, we may be open to competition from generic versions of such products. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

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

Filing, prosecuting and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. The requirements for patentability may differ in certain countries, particularly developing countries, and the breadth of patent claims allowed can be inconsistent. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and may also export infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may

 

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compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

We do not have patent rights in certain foreign countries in which a market may exist. Moreover, in foreign jurisdictions where we do have patent rights, proceedings to enforce such rights could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, and our patent applications at risk of not issuing. Additionally, such proceedings could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Thus, we may not be able to stop a competitor from marketing and selling in foreign countries products and services that are the same as or similar to our products and services, and our competitive position in the international market would be harmed.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

We do not have rights to protect or enforce intellectual property rights in China, its territories or South Korea.

We do not have rights to develop, manufacture, use or commercialize lotamilast, cerdulatinib or DMVT-503 or file or enforce patents relating to these assets in China, including Hong Kong, Macau or Taiwan, or South Korea, as such rights have been assigned to an affiliate, Sinovant Sciences HK Limited, or Sinovant, which is an affiliate of RSL. Further, we do not have rights to develop, manufacture, use or commercialize DMVT-504 or file or enforce patents relating to DMVT-504 in (1) South Korea and the Democratic People’s Republic of Korea, as such rights were retained by TheraVida, or (2) China, including Hong Kong, Macau or Taiwan, as such rights have been assigned to Sinovant. In addition, we do not have rights to develop, manufacture, use or commercialize tapinarof or file or enforce patents relating to tapinarof in China, including Hong Kong, Macau or Taiwan, as such rights were retained by Welichem. One or more third parties may challenge the current patents, or patents that may issue in the future, in China, its territories or South Korea where Sinovant has the right to defend and enforce such patents. TheraVida, Welichem or Sinovant may not coordinate the defense and enforcement of such patents with us, which could impair our ability to defend or enforce corresponding patents in other jurisdictions.

We have limited intellectual property rights relating to lotamilast and cerdulatinib outside of our field of use.

Under the assignment agreement with RSG for lotamilast, we must cooperate with RSG in the filing, prosecution, maintenance or patent proceedings with respect to any licensed patents, joint patents or RSG owned patents that relate to lotamilast and fall within both of our assigned fields of use, where (i) our field of use covers topical application to the skin (except ophthalmic or pulmonary methods of administration) for any indication as well as any dermatologic indication, and (ii) RSG’s field of use is anything outside of our field of use. If we and RSG cannot agree on a decision with respect to the filing, prosecution, maintenance or patent proceeding related to such patents or patent applications, RSG has the right to make the final decision. We control the filing, prosecution, maintenance and patent proceedings with respect to any licensed patents, joint patents or RSG owned patents that relate to lotamilast and falls solely within our assigned fields of use. We do not have the right to enforce any licensed patents, joint patents or RSG owned patents that relate to lotamilast and fall within both of our assigned fields of use or that fall solely outside of our field of use, unless we first consult with RSG on any such enforcement action. We have the right to enforce any lotamilast-related licensed patents that relate solely to our assigned field of use or where the alleged infringement pertains solely to our field of use. In addition, under the Portola License Agreement, we have no rights to prosecute any patents owned by and licensed to us by Portola unless Portola elects to cease the prosecution or maintenance of such patent. Further we only have the right to enforce patents owned by and licensed to us by

 

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Portola in respect of specified third party infringements within our licensed field of use, and only then if the claims of such patents are not directed solely to the composition of matter of cerdulatinib.

Patent terms may be inadequate to protect our competitive position on our product candidates for an adequate amount of time.

Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest U.S. non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents covering our product candidates are obtained, once the patent life has expired, we may be open to competition from competitive products, including generics or biosimilars. For example, while the USPTO has issued the patent covering claims directed to the topical formulation of tapinarof with a natural expiration date in 2036, the patent family directed to the method of using tapinarof to treat psoriasis and atopic dermatitis has a natural expiration date of 2020 in the United States and in foreign jurisdictions, subject to any extension of patent term that may be available in a particular jurisdiction, which may never be obtained. The patent family directed to the method of using tapinarof to treat psoriasis and atopic dermatitis will not be eligible for PTE because its natural expiration date is expected to occur prior to our planned first submission of an NDA for tapinarof. As a result, following the natural expiration of such method-of-use patent for tapinarof in 2020, we will only have patent protection for tapinarof through our formulation patent, which may not provide adequate protection from competitive products developed by 505(b)(2) NDA or 505(j) applicants as compared to the protection afforded by the method-of-use patent. Competitors may be able to design around the formulation covered by our formulation patent. One or more competitors may circumvent this patent by filing a marketing application with the FDA under Sections 505(b)(2) or 505(j) of the Federal Food, Drug and Cosmetic Act for a competitive drug containing the active moiety in tapinarof and successfully challenging the validity of the formulation patent or successfully designing around the formulation patent. In addition, any successful challenge via Inter Partes Review or Post-Grant Review before listing of the formulation patent in the Orange Book will result in the loss of the automatic 30-month stay of FDA approval upon the filing of a 505(b)(2) or 505(j) application. Any successful challenge against the formulation patent could result in a generic version of tapinarof being commercialized before the expiration of the formulation patent. If our formulation patent is successfully challenged or designed around, our business, results of operations, financial condition and prospects would be harmed.

Provisional applications directed to topical formulations containing DMVT-503 are currently pending in the United States and if pursued and issued, would have a natural expiration date of 2039. The patent family directed to the composition of matter of DMVT-503 has a natural expiration date of 2028 in the United States and in foreign jurisdictions, subject to any extension of patent term that may be available in a particular jurisdiction, which may never be obtained. The patent family directed to cerdulatinib as a composition of matter has a natural expiration date of 2029. The patent family directed to the composition of matter of lotamilast has a natural expiration date of 2030 in the United States and 2027 in foreign jurisdictions, subject to any extension of patent term that may be available in a particular jurisdiction, which may never be obtained. The patent family related to topical formulations containing lotamilast, has a natural expiration date of 2037, if issued, and is currently pending in the United States and in foreign jurisdictions. Provisional applications directed to other topical formulations containing lotamilast are currently pending in the United States and if pursued, would have a natural expiration date of 2038. The patent families directed to pharmaceutical compositions of DMVT-504 have a natural expiration date of 2026 and 2031 in the United States and in foreign jurisdictions, subject to any extension of patent term that may be available in a particular jurisdiction, which may never be obtained. The patent family related to the methods of treating primary focal hyperhidrosis with DMVT-504, has a natural expiration date of 2036, if issued, and is currently pending in the United States and in foreign jurisdictions, but may not ultimately be issued. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

If we do not obtain protection under the Hatch-Waxman Amendments by extending the patent term, our business may be harmed.

Our commercial success will largely depend on our ability to obtain and maintain patent and other intellectual property in the United States and other countries with respect to our proprietary technology, drug candidates and our

 

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target indications. Given the amount of time required for the development, testing and regulatory review of new drug candidates, patents protecting our drug candidates might expire before or shortly after such candidates begin to be commercialized. We expect to seek extensions of patent terms in the United States and, if available, in other countries where we are prosecuting patents.

Depending upon the timing, duration and specifics of FDA marketing approval of our drug candidates, one or more of our U.S. patents may be eligible for limited patent term extension, or PTE, under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years beyond the normal expiration of the patent as compensation for patent term lost during development and the FDA regulatory review process, which is limited to the approved indication (and potentially additional indications approved during the period of extension) covered by the patent. This extension is limited to only one patent that covers the approved product, the approved use of the product, or a method of manufacturing the product. However, the applicable authorities, including the FDA and the USPTO in the United States, and any equivalent regulatory authority in other countries, may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than we request. We may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time-period or the scope of patent protection afforded could be less than we request. Even if we are able to obtain an extension, the patent term may still expire before or shortly after we receive FDA marketing approval.

If we are unable to extend the expiration date of our existing patents or obtain new patents with longer expiry dates, our competitors may be able to take advantage of our investment in development and clinical trials by referencing our clinical and preclinical data to obtain approval of competing products following our patent expiration and launch their product earlier than might otherwise be the case.

If we do not obtain protection under the Hatch-Waxman Amendments by obtaining data exclusivity, our business may be harmed.

Our commercial success will largely depend on our ability to obtain and market exclusivity in the United States and other countries with respect to our drug candidates and their target indications. Depending upon the timing, duration and specifics of FDA marketing approval of our drug candidates, certain of our product candidates may be eligible for marketing exclusivity. The FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to obtain approval of an NDA for a new chemical entity, or NCE. A drug is an NCE 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. If market exclusivity is granted for an NCE, during the exclusivity period, the FDA may not accept for review or approve an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement to one of the patents listed in the FDA’s publication Approved Drug Products with Therapeutic Equivalence Evaluations, which we refer to as the Orange Book, with the FDA by the innovator NDA holder. The FDCA also provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example new indications, dosages, dosage forms or strengths of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and prohibits the FDA from approving an ANDA, or a 505(b)(2) NDA submitted by another company with overlapping conditions associated with the new clinical investigations for the three-year period. Clinical investigation exclusivity does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of an NDA for the same drug. However, an applicant submitting an NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

If we are unable to obtain such marketing exclusivity for our product candidates, our competitors may be able to take advantage of our investment in development and clinical trials by referencing our clinical and preclinical data to obtain approval of competing products and launch their product earlier than might otherwise be the case.

 

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The validity, scope and enforceability of any patents listed in the Orange Book that cover our product candidates can be challenged by third parties.

If one of our product candidates is approved by the FDA, one or more third parties may challenge the current patents, or patents that may issue in the future, within our portfolio which could result in the invalidation of, or render unenforceable, some or all of the relevant patent claims or a finding of non-infringement. For example, if a third party files an application under Section 505(b)(2) or an ANDA for a generic drug containing any of our product candidates, including tapinarof (which, following the natural expiration of our method of use patent family, will be protected only by our formulation patent), and relies in whole or in part on studies conducted by or for us, the third party will be required to certify to the FDA that either: (1) there is no patent information listed in the Orange Book with respect to our NDA for the applicable approved drug candidate; (2) the patents listed in the Orange Book have expired; (3) the listed patents have not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patents are invalid or will not be infringed by the manufacture, use or sale of the third party’s generic drug. A certification that the new drug will not infringe the Orange Book-listed patents for the applicable approved drug candidate, or that such patents are invalid, is called a paragraph IV certification. If the third party submits a paragraph IV certification to the FDA, a notice of the paragraph IV certification must also be sent to us once the third party’s ANDA is accepted for filing by the FDA. We may then initiate a lawsuit to defend the patents identified in the notice. The filing of a patent infringement lawsuit within 45 days of receipt of the notice automatically prevents the FDA from approving the third party’s ANDA until the earliest of 30 months or the date on which the patent expires, the lawsuit is settled, or the court reaches a decision in the infringement lawsuit in favor of the third party. If we do not file a patent infringement lawsuit within the required 45-day period, the third party’s ANDA will not be subject to the 30-month stay of FDA approval.

Moreover, a third party may challenge the current patents, or patents that may issue in the future, within our portfolio which could result in the invalidation of some or all of the patents that might otherwise be eligible for listing in the Orange Book for one of our products. If a third party successfully challenges all of the patents that might otherwise be eligible for listing in the Orange Book for one of our products, we will not be entitled to the 30-month stay of FDA approval upon the filing of an ANDA for a generic drug containing any of our product candidates, and relies in whole or in part on studies conducted by or for us.

Litigation or other proceedings to enforce or defend intellectual property rights are often very complex in nature, may be very expensive and time-consuming, may divert our management’s attention from our core business, and may result in unfavorable results that could limit our ability to prevent third parties from competing with our drug candidates.

If we fail to comply with our obligations under any license, collaboration or other agreements, we may be required to pay damages and could lose intellectual property rights that are necessary for developing and protecting our product candidates.

We have licensed or acquired certain intellectual property rights covering our current product candidates from a number of third parties, including GSK, AstraZeneca, TheraVida, Portola and Eisai. We are heavily dependent on our agreements with such third parties for our current product candidates. If, for any reason, one or more of our agreements with such third parties is terminated or we otherwise lose those rights, it could harm our business. Our license and other agreements impose, and any future collaboration agreements or license agreements we enter into are likely to impose various development, commercialization, funding, milestone, royalty, diligence, sublicensing, insurance, patent prosecution and enforcement or other obligations on us. If we breach any material obligations, or use the intellectual property licensed to us in an unauthorized manner, we may be required to pay damages and the licensor may have the right to terminate the license, which could result in us being unable to develop, manufacture and sell products that are covered by the licensed technology, or having to negotiate new or reinstated licenses on less favorable terms, or enable a competitor to gain access to the licensed technology.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for noncompliance with these requirements.

Periodic maintenance fees on any issued patent are due to be paid to the USPTO and other foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign national or international patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions

 

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during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse of patent rights include, but are not limited to, failure to timely file national and regional stage patent applications based on our international patent application, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we or our licensors fail to maintain the patents and patent applications covering any of our product candidates, our competitors might be able to enter the market earlier than anticipated, which would harm our business.

We may need to license intellectual property from third parties, and such licenses may not be available or may not be available on commercially reasonable terms.

A third party may hold intellectual property, including patent rights, that are important or necessary to the development of our product candidates. It may be necessary for us to use the patented or proprietary technology of third parties to commercialize our drug candidates, in which case we would be required to obtain a license from these third parties on commercially reasonable terms. Such a license may not be available, or it may not be available on commercially reasonable terms, in which case our business would be harmed.

The risks described elsewhere pertaining to our intellectual property rights also apply to the intellectual property rights that we in-license, and any failure by us or our licensors to obtain, maintain, defend and enforce these rights could harm our business. In some cases we may not have control over the prosecution, maintenance or enforcement of the patents that we license, and may not have sufficient ability to provide input into the patent prosecution, maintenance and defense process with respect to such patents, and our licensors may fail to take the steps that we believe are necessary or desirable in order to obtain, maintain, defend and enforce the licensed patents.

Third-party claims or litigation alleging infringement of patents or other proprietary rights, or seeking to invalidate patents or other proprietary rights, may delay or prevent the development and commercialization of any of our product candidates.

Our commercial success depends in part on our avoiding infringement and other violations of the patents and proprietary rights of third parties. However, our research, development and commercialization activities may be subject to claims that we infringe or otherwise violate patents or other intellectual property rights owned or controlled by third parties. There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, derivation and administrative law proceedings, inter partes review and post-grant review before the USPTO, as well as oppositions and similar processes in foreign jurisdictions. Numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we and our collaborators are developing product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, and as we gain greater visibility and market exposure as a public company, the risk increases that our product candidates or other business activities may be subject to claims of infringement of the patent and other proprietary rights of third parties. Third parties may assert that we are infringing their patents or employing their proprietary technology without authorization.

There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our product candidates. Because patent applications can take many years to issue, there may be currently pending patent applications that may later result in issued patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of any of our product candidates, any molecules formed during the manufacturing process or any final product itself, the holders of any such patents may be able to block our ability to commercialize such product candidate unless we obtained a license under the applicable patents, or until such patents expire. Similarly, if any third-party patent was to be held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination therapy, the holders of any such patent may be able to block our ability to develop and commercialize the applicable product candidate unless we obtained a license or until such patent expires. In either case, such a license may not be available on commercially reasonable terms or at all. In addition, we may be subject to claims

 

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that we are infringing other intellectual property rights, such as trademarks or copyrights, or misappropriating the trade secrets of others, and to the extent that our employees, consultants or contractors use intellectual property or proprietary information owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. For example, we are aware of a third party with pending patent applications in the United States, and Europe, which, if issued, would naturally expire in 2030 that describe methods of decreasing a side effect induced by a muscarinic activator in a patient comprising administering to the patient a muscarinic inhibitor that could potentially be relevant to DMVT-504. We are also aware of a third party with a pending patent application in the United States, which if issued, would naturally expire in 2035, that describes a method of treating a disease of the skin comprising administering a DGAT1 inhibitor, such as DMVT-503.

Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful infringement or other intellectual property claim against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our affected products, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates, and we have done so from time to time. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize one or more of our product candidates, which could harm our business significantly. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.

Some of our competitors may be able to sustain the costs of complex intellectual property litigation more effectively than we can because they have substantially greater resources. In addition, intellectual property litigation, regardless of its outcome, may cause negative publicity, adversely impact prospective customers, cause product shipment delays, or prohibit us from manufacturing, marketing or otherwise commercializing our products, services and technology. Any uncertainties resulting from the initiation and continuation of any litigation could adversely impact our ability to raise additional funds or otherwise harm our business, results of operation, financial condition or cash flows.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments, which could adversely impact the price of our common shares. If securities analysts or investors perceive these results to be negative, it could adversely impact the price of our common shares. The occurrence of any of these events may harm our business, results of operation, financial condition or cash flows.

We cannot provide any assurances that third-party patents do not exist which might be enforced against our drugs or product candidates, resulting in either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties or other forms of compensation to third parties.

We may not identify relevant third-party patents or may incorrectly interpret the relevance, scope or expiration of a third-party patent, which might harm our ability to develop and market our products.

We cannot guarantee that any of our or our licensors’ patent searches or analyses, including the identification of relevant patents, the scope of patent claims or the expiration of relevant patents, are complete or thorough, nor can we be certain that we have identified each and every third-party patent and pending application in the United States and abroad that is or may be relevant to or necessary for the commercialization of our product candidates in any jurisdiction. Patent applications in the United States and elsewhere are not published until approximately 18 months after the earliest filing for which priority is claimed, with such earliest filing date being commonly referred to as the priority date. In addition, U.S. patent applications filed before November 29, 2000 and certain U.S. patent applications filed after that date that will not be filed outside the United States remain confidential until patents issue. Therefore, patent applications covering our products could have been filed by others without our knowledge.

 

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Additionally, pending patent applications that have been published can, subject to certain limitations, be later amended in a manner that could cover our product candidates or the use of our products.

The scope of a patent claim is determined by an interpretation of the law, the written disclosure in a patent and the patent’s prosecution history. Our interpretation of the relevance or the scope of a patent or a pending application may be incorrect, which may negatively impact our ability to market our products. We may incorrectly determine that our products are not covered by a third-party patent or may incorrectly predict whether a third party’s pending application will issue with claims of relevant scope. Our determination of the expiration date of any patent in the United States or abroad that we consider relevant may be incorrect, and our failure to identify and correctly interpret relevant patents may negatively impact our ability to develop and market our products.

If we fail to identify and correctly interpret relevant patents, we may be subject to infringement claims. We cannot guarantee that we will be able to successfully settle or otherwise resolve such infringement claims. If we fail in any such dispute, in addition to being forced to pay damages, we may be temporarily or permanently prohibited from commercializing any of our products that are held to be infringing. We might, if possible, also be forced to redesign products or services so that we no longer infringe the third-party intellectual property rights. Any of these events, even if we were ultimately to prevail, could require us to divert substantial financial and management resources that we would otherwise be able to devote to our business.

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

Competitors may infringe or otherwise violate our patents, the patents of our licensors or our other intellectual property rights. To counter infringement or unauthorized use, we may be required to file legal claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. As a result, we cannot predict with certainty how much protection, if any, will be given to our patents if we attempt to enforce them and they are challenged in court. Further, even if we prevail against an infringer in U.S. district court, there is always the risk that the infringer will file an appeal and the district court judgment will be overturned at the appeals court and/or that an adverse decision will be issued by the appeals court relating to the validity or enforceability of our patents. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing. The initiation of a claim against a third party may also cause the third party to bring counter claims against us such as claims asserting that our patents are invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, non-enablement or lack of written description or statutory subject matter. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant material information from the USPTO, or made a materially misleading statement, during prosecution. Third parties may also raise similar validity claims before the USPTO in post-grant proceedings such as ex parte reexaminations, inter partes review, or post-grant review, or oppositions or similar proceedings outside the United States, in parallel with litigation or even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. We cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. For the patents and patent applications that we have licensed, we may have limited or no right to participate in the defense of any licensed patents against challenge by a third party. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of any future patent protection on our current or future product candidates. Such a loss of patent protection could harm our business.

We may not be able to detect or prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States. Our business could be harmed if in litigation the prevailing party does not offer us a license on commercially reasonable terms. Any litigation or other proceedings to enforce our intellectual property rights may fail, and even if successful, may result in substantial costs and distract our management and other employees.

 

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Even if we establish infringement, the court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may or may not be an adequate remedy. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could harm the price of our common shares.

Because the patents we own are owned by our wholly-owned subsidiary, DSG, we may not be in a position to obtain a permanent injunction against a third party that is found to infringe our patents.

Any patents that we own are assigned to our wholly-owned subsidiary, DSG. If a third party is found to be infringing such patents, we may not be able to permanently enjoin the third party from making, using or selling the infringing product or activity for the remaining life of such patent in the United States or foreign jurisdictions because the patent is assigned to our wholly-owned subsidiary, DSG, which is not the entity that would be commercializing a potentially competitive product or service.

Because of the expense and uncertainty of litigation, we may not be in a position to enforce our intellectual property rights against third parties.

Because of the expense and uncertainty of litigation, we may conclude that even if a third party is infringing our issued patent, any patents that may be issued as a result of our pending or future patent applications or other intellectual property rights, the risk-adjusted cost of bringing and enforcing such a claim or action may be too high or not in the best interest of our company or our shareholders. In such cases, we may decide that the more prudent course of action is to simply monitor the situation or initiate or seek some other non-litigious action or solution.

Changes in U.S. patent law or the patent law of other countries or jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our products.

The United States has recently enacted and implemented wide-ranging patent reform legislation. In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of our patents and pending patent applications. The United States Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on actions by the United States Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we have licensed or that we might obtain in the future. Similarly, changes in patent law and regulations in other countries or jurisdictions or changes in the governmental bodies that enforce them or changes in how the relevant governmental authority enforces patent laws or regulations may weaken our ability to obtain new patents or to enforce patents that we have licensed or that we may obtain in the future. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by United States and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future. The United States federal government retains certain rights in inventions produced with its financial assistance under the Bayh-Dole Act. The federal government retains a “nonexclusive, nontransferable, irrevocable, paid-up license” for its own benefit. The Bayh-Dole Act also provides federal agencies with “march-in rights.” March-in rights allow the government, in specified circumstances, to require the contractor or successors in title to the patent to grant a “nonexclusive, partially exclusive, or exclusive license” to a “responsible applicant or applicants.” If the patent owner refuses to do so, the government may grant the license itself.

We may not be able to protect our intellectual property rights throughout the world, which could impair our business.

Filing, prosecuting and defending patents covering any of our product candidates throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we may obtain patent protection, but where patent enforcement is not as strong as that in the United States. These products may compete with our products in jurisdictions where we do not have any issued or licensed patents and any future patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing. We do not have patent rights in certain foreign countries in which a market may exist. Moreover, many

 

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companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of some countries do not favor the enforcement of patents and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. Additionally, such proceedings could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Thus, we may not be able to stop a competitor from marketing and selling in foreign countries products and services that are the same as or similar to our products and services, and our competitive position in the international market would be harmed.

Many countries, including European Union countries, India, Japan and China, have compulsory licensing laws under which a patent owner may be compelled under specified circumstances to grant licenses to third parties. In those countries, we may have limited remedies if patents are infringed or if we are compelled to grant a license to a third party, which could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.

Because we expect to rely on third parties to manufacture our product candidates, and we expect to continue to collaborate with third parties on the development of our product candidates, we must, at times, share trade secrets with them. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, consulting agreements or other similar agreements with our advisors, employees, third-party contractors and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, including our trade secrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Any disclosure, either intentional or unintentional, by our employees, the employees of third parties with whom we share our facilities or third-party consultants and vendors that we engage to perform research, clinical trials or manufacturing activities, or misappropriation by third parties (such as through a cybersecurity breach) of our trade secrets or proprietary information could enable competitors to duplicate or surpass our technological achievements, thus eroding our competitive position in our market. Further, adequate remedies may not exist in the event of unauthorized use or disclosure. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor’s discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive position and may harm our business and results of operations.

In addition, these agreements typically restrict the ability of our advisors, employees, third-party contractors and consultants to publish data potentially relating to our trade secrets, although our agreements may contain certain limited publication rights. Policing unauthorized use of our or our licensors’ intellectual property is difficult, expensive and time-consuming, and we may be unable to determine the extent of any unauthorized use. Moreover, enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. Despite our efforts to protect our trade secrets, our competitors may discover our trade secrets, either through breach of our agreements with third parties, independent development or publication of information by any of our third-party collaborators. A competitor’s discovery of our trade secrets would impair our competitive position and have an adverse impact on our business.

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

We do and may employ individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including our licensors, competitors or potential competitors. Although we seek to protect our ownership of intellectual property rights by ensuring that our agreements with our employees,

 

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collaborators and other third parties with whom we do business include provisions requiring such parties to assign rights in inventions to us and to not use the confidential information of their former employer, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of our employees’ former employers or other third parties. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and if we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Such intellectual property rights could be awarded to a third party, and we could be required to obtain a license from such third party to commercialize our technology or product candidates. Such a license may not be available on commercially reasonable terms or at all. Even if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees. Moreover, any such litigation or the threat thereof may harm our reputation, our ability to form strategic alliances or sublicense our rights to collaborators, engage with scientific advisors or hire employees or consultants, each of which would harm our business, results of operations and financial condition.

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

We or our licensors may be subject to claims that former employees, collaborators or other third parties have an interest in our owned or in-licensed patents, trade secrets, or other intellectual property as an inventor or co-inventor. For example, we or our licensors may have inventorship disputes arise from conflicting obligations of employees, consultants or others who are involved in developing our product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or our or our licensors’ ownership of our owned or in-licensed patents, trade secrets or other intellectual property. If we or our licensors fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual property that is important to our product candidates. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Any of the foregoing could harm our business, financial condition, results of operations and prospects.

In addition, while it is our policy to require our employees and contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own. Our and their assignment agreements may not be self-executing or may be breached, and we may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property. We are still in the process of obtaining certain assignments for some of our owned, acquired and licensed patents and patent applications.

If we or our licensors fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we and our licensors are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to management.

Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities, and have a harmful effect on the success of our business.

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could adversely impact the price of our common shares. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. In addition, the uncertainties associated with litigation could compromise our ability to raise the funds necessary to continue our clinical trials and internal research programs, or in-license needed technology or other product candidates. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could

 

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compromise our ability to compete in the marketplace, including compromising our ability to raise the funds necessary to continue our clinical trials, continue our research programs, license necessary technology from third parties, or enter into development collaborations that would help us commercialize our product candidates, if approved.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to seeking patents for our product candidates, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. We seek to protect our trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Monitoring unauthorized uses and disclosures of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be effective. In addition, we may not be able to obtain adequate remedies for any such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.

Any trademarks we have obtained or may obtain may be infringed or successfully challenged, resulting in harm to our business.

We expect to rely on trademarks as one means to distinguish any of our drug candidates that are approved for marketing from the products of our competitors. Once we select new trademarks and apply to register them, our trademark applications may not be approved. Third parties may oppose or attempt to cancel our trademark applications or trademarks, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our drugs, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing new brands. Our competitors may infringe our trademarks and we may not have adequate resources to enforce our trademarks. If we attempt to enforce our trademarks and assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this case, we could ultimately be forced to cease use of such trademarks.

Our intellectual property agreements with third parties may be subject to disagreements over contract interpretation, which could narrow the scope of our rights to the relevant intellectual property or technology.

Certain provisions in our intellectual property agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could affect the scope of our rights to the relevant intellectual property or technology, or affect financial or other obligations under the relevant agreement, either of which could harm our business, financial condition, results of operations and prospects.

We may not be successful in obtaining necessary intellectual property rights to future products through acquisitions and in-licenses.

We may seek to acquire or in-license technologies to grow our product offerings and technology portfolio. However, we may be unable to acquire or in-license intellectual property rights relating to, or necessary for, any such product candidates or technology from third parties on commercially reasonable terms or at all. In that event, we may be unable to develop or commercialize such products or technology. We may also be unable to identify products or technology that we believe are an appropriate strategic fit for our company and protect intellectual property relating to, or necessary for, such product candidates and technology.

The in-licensing and acquisition of third-party intellectual property rights for product candidates is a competitive area, and a number of more established companies are also pursuing strategies to in-license or acquire third-party intellectual property rights for products that we may consider attractive or necessary. These established companies

 

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may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. Furthermore, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. If we are unable to successfully obtain rights to additional technologies or products, our business, financial condition, results of operations and prospects for growth could suffer.

In addition, we expect that competition for the in-licensing or acquisition of third-party intellectual property rights for product candidates and technologies that are attractive to us may increase in the future, which may mean fewer suitable opportunities for us as well as higher acquisition or licensing costs. We may be unable to in-license or acquire the third-party intellectual property rights for products or technology on terms that would allow us to make an appropriate return on our investment.

Intellectual property rights do not necessarily address all potential threats to our competitive advantage.

Once granted, patents may remain open to invalidity challenges including opposition, interference, re-examination, post-grant review, inter partes review, nullification or derivation action in court or before patent offices or similar proceedings for a given period after allowance or grant, during which time third parties can raise objections against such grant. In the course of such proceedings, which may continue for a protracted period of time, the patent owner may be compelled to limit the scope of the allowed or granted claims thus attacked, or may lose the allowed or granted claims altogether.

In addition, the degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, provide a barrier to entry against our competitors or potential competitors, or permit us to maintain our competitive advantage. Moreover, if a third party has intellectual property rights that cover the practice of our technology, we may not be able to fully exercise or extract value from our intellectual property rights. The following examples are illustrative:

 

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others may be able to make formulations or compositions that are the same as or similar to our product candidates, but that are not covered by the claims of the patents that we own;

 

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others may be able to make product that is similar to product candidates we intend to commercialize that is not covered by the patents that we exclusively licensed and have the right to enforce;

 

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we, our licensor or any collaborators might not have been the first to make or reduce to practice the inventions covered by the issued patents or pending patent applications that we own or have exclusively licensed;

 

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we or our licensor or any collaborators might not have been the first to file patent applications covering certain of our inventions;

 

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others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;

 

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it is possible that our pending patent applications will not lead to issued patents;

 

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issued patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges;

 

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our competitors might conduct research and development activities in the United States and other countries that provide a safe harbor from patent infringement claims for certain research and development activities, as well as in countries where we do not have patent rights, and then use the information learned from such activities to develop competitive products for sale in our major commercial markets; and we may not develop additional proprietary technologies that are patentable;

 

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third parties performing manufacturing or testing for us using our products or technologies could use the intellectual property of others without obtaining a proper license;

 

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parties may assert an ownership interest in our intellectual property and, if successful, such disputes may preclude us from exercising exclusive rights over that intellectual property;

 

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we may not develop or in-license additional proprietary technologies that are patentable;

 

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we may not be able to obtain and maintain necessary licenses on commercially reasonable terms, or at all; and

 

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the patents of others may harm our business.

Should any of these events occur, they could significantly harm our business and results of operations.

 

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All of the assets (including intellectual property rights) relating to tapinarof and related compounds that we purchased from GSK are subject to a second priority lien in favor of NovaQuest under a security agreement entered into in connection with the NovaQuest Agreement, which lien is contractually subordinated to a first priority lien securing all of our assets, including tapinarof, in favor of Hercules under the Loan Agreement. The foreclosure on such intellectual property or exercise of other remedies available to NovaQuest or Hercules under the NovaQuest Agreement or the Loan Agreement, respectively, could harm our business operations and our future prospects.

All of the assets (including intellectual property rights) relating to tapinarof and related compounds that we purchased from GSK are subject to a second priority lien in favor of NovaQuest under a security agreement entered into in connection with the NovaQuest Agreement, which lien is contractually subordinated to a first priority lien securing all of our assets, including tapinarof, in favor of Hercules under the Loan Agreement. There can be no assurance that we will remain in compliance with our obligations under the NovaQuest Agreement or the Loan Agreement, including making required milestone and other periodic payments under the NovaQuest Agreement. In the event of foreclosure or exercise of other remedies by NovaQuest or Hercules under their respective agreements covering the assets (including such intellectual property) pledged to NovaQuest and Hercules, respectively, our ability to use and develop tapinarof and related compounds purchased from GSK as well as our business operations and future prospects will be harmed.

Risks Related to this Offering and Our Common Shares

No public market for our common shares currently exists, and a public market may not develop or be liquid enough for you to sell your shares quickly or at market price.

Prior to this offering, there has not been a public market for our common shares. If an active trading market for our common shares does not develop following this offering, you may not be able to sell your shares quickly or at the market price. An inactive market may also impair our ability to raise capital to continue to fund operations by selling common shares and may impair our ability to acquire other companies or technologies by using our common shares as consideration. The initial public offering price of our common shares has been determined by negotiations between us and representatives of the underwriters, and it may not be indicative of the market prices of our common shares that will prevail in the trading market.

In addition, our common shares are held by a relatively small number of holders. Our officers and directors have the potential to acquire shares through any equity awards granted to them, subject to vesting conditions. Consequently, our common shares may have a limited public float and low average daily trading volume, which could affect a holder’s ability to sell common shares or the price at which they can be sold. In addition, future sales of substantial amounts of our common shares in the public market by those larger holders, or the perception that these sales could occur, may adversely impact the market price of our common shares and our shares could be difficult for a holder to liquidate.

The market price of our common shares is likely to be highly volatile, and you may lose some or all of your investment.

The market price of our common shares is likely to be highly volatile and may be subject to wide fluctuations in response to a variety of factors, including the following:

 

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any delay in the commencement, enrollment and ultimate completion of our clinical trials;

 

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results of clinical trials of our product candidates or those of our competitors;

 

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any delay in filing an NDA or similar application for any of our product candidates and any adverse development or perceived adverse development with respect to the FDA or other regulatory authority’s review of that NDA or similar application, as the case may be;

 

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failure to successfully develop and commercialize any of our product candidates;

 

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inability to obtain additional funding;

 

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regulatory or legal developments in the United States or other countries or jurisdictions applicable to any of our product candidates;

 

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adverse regulatory decisions;

 

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changes in the structure of healthcare payment systems;

 

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

 

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

 

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

 

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

 

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changes in the market valuations of similar companies;

 

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market conditions in the pharmaceutical and biotechnology sectors and the issuance of new or changed securities analysts’ reports or recommendations;

 

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

 

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variations in our financial results or the financial results of companies that are perceived to be similar to us;

 

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changes in estimates of financial results or investment recommendations by securities analysts;

 

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

 

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additions or departures of key scientific or management personnel;

 

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short sales of our common shares;

 

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sales of a substantial number of shares of our common shares in the public market, or the perception in the market that the holders of a large number of shares intend to sell shares;

 

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sales or purchases of our common shares by our Section 16 officers;

 

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sales of our common shares by us or our shareholders in the future;

 

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negative coverage in the media or analyst reports, whether accurate or not;

 

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issuance of subpoenas or investigative demands, or the public fact of an investigation by a government agency, whether meritorious or not;

 

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size of our public float;

 

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trading liquidity of our common shares;

 

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investors’ general perception of our company and our business;

 

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general economic, industry and market conditions; and

 

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the other factors described in this “Risk Factors” section.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors, as well as general economic, political, regulatory and market conditions, may negatively affect the market price of our common shares, regardless of our actual operating performance. The market price of our common shares may decline below the initial public offering price, and you may lose some or all of your investment.

Volatility in our share price could subject us to securities class action litigation.

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

We will be a “controlled company” within the meaning of the applicable Nasdaq listing rules and, as a result, will qualify for exemptions from certain corporate governance requirements. If we rely on these exemptions, you will not have the same protections afforded to shareholders of companies that are subject to such requirements.

Upon the closing of this offering, RSL will continue to control a majority of the voting power of our outstanding common shares. As a result, we will be a “controlled company” within the meaning of applicable Nasdaq listing rules. Under these rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a “controlled company.” In addition, for so long as the RSL designated directors control all matters presented to our board of directors for a vote, we will be a “controlled

 

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company.” For so long as we remain a “controlled company,” we may elect not to comply with certain corporate governance requirements, including the requirements:

 

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that a majority of the board of directors consists of independent directors;

 

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for an annual performance evaluation of the nominating and corporate governance and compensation committees;

 

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that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

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that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibility.

We intend to use these exemptions upon the closing of this offering and we may continue to use all or some of these exemptions in the future. As a result, you may not have the same protections afforded to shareholders of companies that are subject to all of the Nasdaq corporate governance requirements.

RSL will continue to own a significant percentage of our common shares and will be able to exert significant control over matters subject to shareholder approval.

RSL is currently our sole shareholder, and after this offering is completed, we will continue to be controlled by RSL. Upon the closing of this offering, RSL will beneficially own approximately 68.6% of the voting power of our outstanding common shares, or approximately 65.5% if the underwriters exercise in full their option to purchase additional common shares. These ownership percentages do not reflect the potential purchase of common shares in this offering by RSL. If RSL purchases $35.0 million of our common shares in this offering, assuming an initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, RSL will own approximately 79.6% of our outstanding common shares, or approximately 76.0% if the underwriters exercise their option to purchase 1,155,000 additional common shares in full. Therefore, even after this offering, RSL will have the ability to substantially influence us and exert significant control through this ownership position. For example, RSL and its shareholders may be able to control elections of directors, issuance of equity, including to our employees under equity incentive plans, amendments of our organizational documents, or approval of any merger, amalgamation, sale of assets or other major corporate transaction. RSL’s interests may not always coincide with our corporate interests or the interests of other shareholders, and it may exercise its voting and other rights in a manner with which you may not agree or that may not be in the best interests of our other shareholders. Further, RSL is a privately held company whose ownership and governance structure is not transparent to our other shareholders. There may be changes to the management or ownership of RSL that could impact RSL’s interests in a way that may not coincide with our corporate interests or the interests of other shareholders. So long as RSL continues to own a significant amount of our equity, it will continue to be able to strongly influence and effectively control our decisions.

RSL has the right to appoint two directors to our board of directors, each of whom has three votes.

RSL has the right to appoint two directors to our board of directors, each of whom has three votes on all matters presented to the board of directors. All other directors have one vote on all matters presented to the board of directors. While the directors appointed by RSL are obligated to act in accordance with applicable fiduciary duties, they may have equity or other interests in RSL and, accordingly, their interests may be aligned with RSL’s interests, which may not always coincide with our corporate interests or the interests of our other shareholders. Upon the closing of this offering, the two directors appointed by RSL will be able to determine the outcome of all matters presented to the board of directors.

Our organizational and ownership structure may create significant conflicts of interests.

Our organizational and ownership structure involves a number of relationships that may give rise to certain conflicts of interest between us and minority holders of our common shares, on the one hand, and RSL and its shareholders, on the other hand. Certain of our directors and employees have equity interests in RSL and, accordingly, their interests may be aligned with RSL’s interests, which may not always coincide with our corporate interests or the interests of our other shareholders. Further, our other shareholders may not have visibility into the RSL ownership of any of our directors or officers, which may change at any time through acquisition, disposition, dilution, or otherwise. Any change in our directors’ or officers’ RSL ownership could impact the interests of those holders.

In addition, we are party to certain related party agreements with RSL, RSI and RSG. These entities and their shareholders, including certain of our directors and employees, may have interests which differ from our interests or

 

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those of the minority holders of our common shares. Any material transaction between us and RSL, RSI, RSG or any other subsidiary of RSL is subject to our related party transaction policy, which requires prior approval of such transaction by our audit committee. To the extent we fail to appropriately deal with any such conflicts of interests, it could negatively impact our reputation and ability to raise additional funds and the willingness of counterparties to do business with us, all of which could harm our business, financial condition, results of operations, and cash flows.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our common shares will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If our financial performance fails to meet analyst estimates or one or more of the analysts who cover us downgrade our common shares or change their opinion of our common shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

Because we do not anticipate paying any cash dividends on our common shares in the foreseeable future, capital appreciation, if any, would be your sole source of gain.

We have never declared or paid any cash dividends on our common shares. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. As a result, capital appreciation, if any, of our common shares would be your sole source of gain on an investment in our common shares for the foreseeable future. Additionally, we are subject to Bermuda legal constraints that may affect our ability to pay dividends on our common shares and make other payments. See the section titled “Dividend Policy” for additional information.

Our management will have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds from this offering and our shareholders will not have the opportunity as part of their investment decision to assess whether the net proceeds are being used appropriately. You may not agree with our decisions, and our use of the proceeds may not yield any return on your investment. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our failure to apply the net proceeds of this offering effectively could compromise our ability to pursue our growth strategy and we might not be able to yield a significant return, if any, on our investment of these net proceeds. You will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.

Future sales of our common shares may depress our share price.

After this offering, based on the 16,839,383 common shares outstanding as of March 31, 2019, there will be 24,539,383 common shares outstanding, assuming no exercise by the underwriters of their option to purchase additional common shares. Sales of a substantial number of our common shares in the public market after this offering, or the perception that these sales might occur, could depress the market price of our common shares and could impair our ability to raise capital through the sale of additional equity securities. Of our issued and outstanding common shares, all of the shares sold in this offering will be freely transferable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares sold to our affiliates, including RSL, as such term is defined in Rule 144 promulgated under the Securities Act. The remaining 16,839,383 common shares outstanding after this offering will be restricted as a result of securities laws, lock-up agreements or other contractual restrictions that restrict transfers for 180 days after the date of this prospectus. See the section titled “Underwriting—No Sales of Similar Securities” for a more detailed description of the lock-up period.

We intend to file a registration statement on Form S-8 under the Securities Act to register the total number of our common shares that may be issued under our 2016 Plan. See the section titled “Shares Eligible for Future Sale—Form S-8 Registration Statements” for a more detailed description of the common shares that will be available for future sale upon the registration and issuance of such common shares, subject to any applicable vesting or lock-up period or other restrictions provided under the terms of the applicable plan or the option agreements entered into with the option holders. Sales of these common shares adversely impact the trading price of our common shares. In

 

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addition, in the future we may issue common shares or other securities if we need to raise additional capital. The number of our new common shares issued in connection with raising additional capital could constitute a material portion of our then outstanding common shares.

If you purchase our common shares in this offering, you will incur immediate and substantial dilution in the book value of your common shares.

The assumed initial public offering price of our common shares is substantially higher than the as adjusted net tangible book value per common share of our common shares. Therefore, if you purchase our common shares in this offering, you will pay a price per common share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. Based on the assumed initial public offering price of $13.00 per common share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $13.75 per common share, representing the difference between our as adjusted net tangible book value per common share, after giving effect to this offering, and the initial public offering price. Further, the future exercise of any options to purchase our common shares will cause you to experience additional dilution. See the section titled “Dilution” for additional information.

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.

As a public company, and particularly after we are no longer an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, or the Sarbanes Oxley Act, 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. Our management and other personnel will need to devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. If, notwithstanding our efforts to comply with new or changing laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us, and our business may be harmed. Further, failure to comply with these laws, regulations and standards may make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance, which could make it more difficult for us to attract and retain qualified members to serve on our board of directors or committees or as members of senior management. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs.

As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal controls over financial reporting and any failure to maintain the adequacy of these internal controls may harm investor confidence in our company and, as a result, the value of our common shares.

We will be required, pursuant to Section 404 of the Sarbanes Oxley Act, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal controls over financial reporting for the first fiscal year beginning after the effective date of the registration statement of which this prospectus forms a part. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal controls over financial reporting. Our independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls over financial reporting until our first annual report required to be filed with the SEC following the date we are no longer an emerging growth company, as defined in the JOBS Act. At such time as we are required to obtain auditor attestation, if we then have a material weakness, we would receive an adverse opinion regarding our internal control over financial reporting from our independent registered public accounting firm. We will be required to disclose significant changes made in our internal controls procedures on a quarterly basis.

We are beginning the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, and we may not be able to complete our evaluation, testing and any required remediation in a timely fashion. Our compliance with Section 404 will require that we incur substantial legal, accounting and other compliance expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and finance staff and consultants with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404.

During the evaluation and testing process of our internal controls, if we identify one or more material weaknesses in our internal controls over financial reporting, we will be unable to assert that our internal controls over financial

 

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reporting are effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal controls over financial reporting in the future. Any failure to maintain effective internal controls over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal controls over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal controls over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common shares could decline, and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal controls over financial reporting, or to implement or maintain other effective control systems required of public companies, could also negatively impact our ability to access to the capital markets.

In addition, effective disclosure controls and procedures enable us to make timely and accurate disclosure of financial and non-financial information that we are required to disclose. As a public company, if our disclosure controls and procedures are ineffective, we may be unable to report our financial results or make other disclosures accurately on a timely basis, which could cause our reported financial results or other disclosures to be materially misstated and result in the loss of investor confidence and cause the market price of our common shares to decline.

We are an emerging growth company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common shares less attractive to investors.

We are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including exemption from compliance with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We will remain an emerging growth company until the earlier of (1) (a) March 31, 2024, (b) the date in which we have total annual gross revenue of at least $1.07 billion or (c) the date in which we are deemed to be a large accelerated filer, which means the market value of our common shares that are held by non-affiliates exceeds $700 million as of the prior September 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements including exemption from compliance with the auditor attestation requirements of Section 404 and reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements.

We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our share price may be more volatile.

We are a Bermuda company and it may be difficult for you to enforce judgments against us or our directors and executive officers.

We are a Bermuda exempted company. As a result, the rights of our shareholders are governed by Bermuda law and our memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in another jurisdiction. It may be difficult for investors to enforce in the U.S. judgments obtained in U.S. courts against us based on the civil liability provisions of the U.S. securities laws. It is doubtful whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions. See “Enforcement of Civil Liabilities under U.S. Federal Securities Laws” for additional information.

 

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Bermuda law differs from the laws in effect in the United States and may afford less protection to our shareholders.

We are incorporated under the laws of Bermuda. As a result, our corporate affairs are governed by the Bermuda Companies Act 1981, as amended, or the Companies Act, which differs in some material respects from laws typically applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, amalgamations, mergers and acquisitions, takeovers, shareholder lawsuits and indemnification of directors. Generally, the duties of directors and officers of a Bermuda company are owed to the company only. Shareholders of Bermuda companies typically do not have rights to take action against directors or officers of the company and may only do so in limited circumstances. Shareholder class actions are not available under Bermuda law. The circumstances in which shareholder derivative actions may be available under Bermuda law are substantially more proscribed and less clear than they would be to shareholders of U.S. corporations. The Bermuda courts, however, would ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company’s memorandum of association or bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against the minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company’s shareholders than those who actually approved it.

When the affairs of a company are being conducted in a manner that is oppressive or prejudicial to the interests of some shareholders, one or more shareholders may apply to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order regulating the conduct of the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the company. Additionally, under our bye-laws and as permitted by Bermuda law, each shareholder has waived any claim or right of action against our directors or officers for any action taken by directors or officers in the performance of their duties, except for actions involving fraud or dishonesty. In addition, the rights of our shareholders and the fiduciary responsibilities of our directors under Bermuda law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States, particularly the State of Delaware. Therefore, our shareholders may have more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction within the United States.

Legislation enacted in Bermuda in response to the European Union’s review of harmful tax competition could be harmful to our business.

During 2017, the European Union Economic and Financial Affairs Council, or ECOFIN, released a list of non-cooperative jurisdictions for tax purposes. The stated aim of this list, and accompanying report, was to promote good governance worldwide in order to maximize efforts to prevent tax fraud and tax evasion. In an effort to remain off this list, Bermuda committed to address concerns relating to economic substance by December 31, 2018. In accordance with that commitment, Bermuda has enacted legislation that requires certain entities in Bermuda engaged in “relevant activities” to maintain a substantial economic presence in Bermuda and to satisfy economic substance requirements. The list of “relevant activities” includes carrying on as a business any one or more of: banking, insurance, fund management, financing, leasing, headquarters, shipping, distribution and service center, intellectual property and holding entities. At present, it is unclear what (if anything) the company would be required to do in order to satisfy economic substance requirements in Bermuda, but to the extent we are required to increase our substance in Bermuda to satisfy such requirements, it could result in additional costs that could adversely affect our financial condition or results of operations. If we were required to satisfy economic substance requirements in Bermuda but failed to do so, we could face automatic disclosure to competent authorities in the EU of the information filed by the entity with the Bermuda Registrar of Companies in connection with the economic substance requirements and may also face financial penalties, restriction or regulation of our business activities and/or may be struck off as a registered entity in Bermuda.

There are regulatory limitations on the ownership and transfer of our common shares.

Common shares may be offered or sold in Bermuda only in compliance with the provisions of the Companies Act and the Bermuda Investment Business Act 2003, which regulates the sale of securities in Bermuda. In addition, the Bermuda Monetary Authority must approve all issues and transfers of shares of a Bermuda exempted company. However, the Bermuda Monetary Authority has, pursuant to its statement of June 1, 2005, given its general permission under the Exchange Control Act 1972 and related regulations for the issue and free transfer of our common shares to and among persons who are non-residents of Bermuda for exchange control purposes as long as

 

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the shares are listed on an appointed stock exchange, which includes Nasdaq. Additionally, we have sought and have obtained a specific permission from the Bermuda Monetary Authority for the issue and transfer of our common shares up to the amount of our authorized capital from time to time, and options, warrants, depository receipts, rights, loan notes, debt instruments and our other securities to persons resident and non-resident for exchange control purposes with the need for prior approval of such issue or transfer. The general permission or the specific permission would cease to apply if we were to cease to be listed on Nasdaq or another appointed stock exchange.

Our amended and restated bye-laws enable our board of directors to issue preference shares, which may discourage a change of control.

Our amended and restated bye-laws contain provisions that enable our board of directors to determine the powers, preferences and rights of our preference shares and to issue the preference shares without shareholder approval.

This could discourage, delay or prevent a transaction involving a change in control of our company and may prevent our shareholders from receiving the benefit from any premium to the market price of our common shares offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of this provision may impact the prevailing market price of our common shares if it is viewed as discouraging takeover attempts in the future.

We may become subject to unanticipated tax liabilities and higher effective tax rates.

We are incorporated under the laws of Bermuda, where we are not subject to any income or withholding taxes. We are centrally managed and controlled in the United Kingdom, and, under current U.K. tax law, a company which is centrally managed and controlled in the United Kingdom is regarded as resident in the United Kingdom for taxation purposes. Accordingly, we expect to be subject to U.K. taxation on our income and gains and subject to the U.K.’s controlled foreign company rules, except where an exemption applies. We may be treated as a dual resident company for U.K. tax purposes. As a result, our right to claim certain reliefs from U.K. tax may be restricted, and changes in law or practice in the United Kingdom could result in the imposition of further restrictions on our right to claim U.K. tax reliefs. We may also become subject to income, withholding or other taxes in certain jurisdictions by reason of our activities and operations, and it is also possible that taxing authorities in any such jurisdictions could assert that we are subject to greater taxation than we currently anticipate. Any such additional tax liability could harm our results of operations.

The intended tax effects of our corporate structure and intercompany arrangements depend on the application of the tax laws of various jurisdictions and on how we operate our business.

We and RSL, our sole shareholder, are incorporated under the laws of Bermuda. We currently have subsidiaries in the United Kingdom, Switzerland and the United States. If we succeed in growing our business, we expect to conduct increased operations through our subsidiaries in various countries and tax jurisdictions, in part through intercompany service agreements between us, our parent company and our subsidiaries. In that case, our corporate structure and intercompany transactions, including the manner in which we develop and use our intellectual property, will be organized so that we can achieve our business objectives in a tax-efficient manner and in compliance with applicable transfer pricing rules and regulations. If two or more affiliated companies are located in different countries or tax jurisdictions, the tax laws and regulations of each country generally will require that transfer prices be the same as those between unrelated companies dealing at arms’ length and that appropriate documentation be maintained to support the transfer prices. While we believe that we operate in compliance with applicable transfer pricing laws and intend to continue to do so, our transfer pricing procedures are not binding on applicable tax authorities.

Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely impacted by changes in foreign currency exchange rates or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. As we intend to operate in numerous countries and taxing jurisdictions, the application of tax laws can be subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions. It is not uncommon for taxing authorities in different countries to have conflicting views, for instance, with respect to, among other things, the manner in which the arm’s length standard is applied for transfer pricing purposes, or with respect to the valuation of intellectual property. In addition, tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. For example, on December 22, 2017, an “Act to provide for

 

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reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” commonly known as the Tax Cuts and Jobs Act, was enacted in the United States, which introduced a comprehensive set of tax reforms. Certain impacts of this legislation have been taken into account, including the reduction of the U.S. corporate income tax rate from the previous top marginal rate of 35% to a flat rate of 21%. Also, in September 2018, the Swiss Parliament approved a new tax bill known as “The Swiss Tax Reform and AHV Financing” legislation, or TRAF, which will enter into force in January 2020. TRAF would implement a set of changes to Swiss federal and cantonal tax laws, such as the amendment of the capital tax to provide a uniform rate of 0.1%, a new patent box regime, and a reduction in the statutory profit tax rate in Canton Basel-Stadt that will result in a combined Swiss federal and cantonal tax rate of 13.04%. We continue to assess the impact of such changes in tax laws on our business and may determine that changes to our structure, practice or tax positions are necessary in light of the Tax Cuts and Jobs Act and TRAF. The Tax Cuts and Jobs Act and TRAF in conjunction with the tax laws of other jurisdictions in which we operate, however, may require consideration of changes to our structure and the manner in which we conduct our business. Such changes may nevertheless be ineffective in avoiding an increase in our consolidated tax liability, which could harm our financial condition, results of operations and cash flows.

If tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arms’ length transactions, they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices, which could result in a higher tax liability to us. In addition, if the country from which the income is reallocated does not agree with the reallocation, both countries could tax the same income, potentially resulting in double taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess interest and penalties, it would increase our consolidated tax liability, which could harm our financial condition, results of operations and cash flows.

Changes in our effective tax rate may reduce our net income in future periods.

Our tax position could be adversely impacted by changes in tax rates, tax laws, tax practice, tax treaties or tax regulations or changes in the interpretation thereof by the tax authorities in Europe (including the United Kingdom and Switzerland), the United States, Bermuda and other jurisdictions as well as being affected by certain changes currently proposed by the Organisation for Economic Co-operation and Development and their action plan on Base Erosion and Profit Shifting. Such changes may become more likely as a result of recent economic trends in the jurisdictions in which we operate, particularly if such trends continue. If such a situation was to arise, it could adversely impact our tax position and our effective tax rate. Failure to manage the risks associated with such changes, or misinterpretation of the laws providing such changes, could result in costly audits, interest, penalties and reputational damage, which could harm our business, results of our operations and our financial condition.

Our actual effective tax rate may vary from our expectation and that variance may be material. A number of factors may increase our future effective tax rates, including: (1) the jurisdictions in which profits are determined to be earned and taxed; (2) the resolution of issues arising from any future tax audits with various tax authorities; (3) changes in the valuation of our deferred tax assets and liabilities; (4) increases in expenses not deductible for tax purposes, including transaction costs and impairments of goodwill in connection with acquisitions; (5) changes in the taxation of share-based compensation; (6) changes in tax laws or the interpretation of such tax laws, and changes in generally accepted accounting principles; and (7) challenges to the transfer pricing policies related to our structure.

U.S. holders that own 10% or more of the vote or value of our common shares may suffer adverse tax consequences because we and/or any of our non-U.S. subsidiaries are expected to be characterized as a “controlled foreign corporation,” or a CFC, under Section 957(a) of the U.S. Internal Revenue Code of 1986, as amended, or the Code.

A non-U.S. corporation is considered a CFC if more than 50% of (1) the total combined voting power of all classes of stock of such corporation entitled to vote, or (2) the total value of the stock of such corporation, is owned, or is considered as owned by applying certain constructive ownership rules, by United States shareholders (U.S. persons who own stock representing 10% or more of the vote or, for taxable years of non-U.S. corporations beginning after December 31, 2017 and for taxable years of shareholders with or within which such taxable years of non-U.S. corporations end, 10% or more of the value) on any day during the taxable year of such non-U.S. corporation. Certain United States shareholders of a CFC generally are required to include currently in gross income such shareholders’ share of the CFC’s “Subpart F income,” a portion of the CFC’s earnings to the extent the CFC holds certain U.S. property, and a portion of the CFC’s “global intangible low-taxed income” (as defined under

 

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Section 951A of the Code). Such United States shareholders are subject to current U.S. federal income tax with respect to such items, even if the CFC has not made an actual distribution to such shareholders. “Subpart F income” includes, among other things, certain passive income (such as income from dividends, interests, royalties, rents and annuities or gain from the sale of property that produces such types of income) and certain sales and services income arising in connection with transactions between the CFC and a person related to the CFC. “Global intangible low-taxed income” may include most of the remainder of a CFC’s income over a deemed return on its tangible assets.

As a result of certain changes in the U.S. tax law introduced by the Tax Cuts and Jobs Act, we believe that we and our non-U.S. subsidiaries would be classified as CFCs in the current taxable year. For U.S. holders who hold 10% or more of the vote or value of our common shares, this may result in adverse U.S. federal income tax consequences, such as current U.S. taxation of Subpart F income and of any such shareholder’s share of our accumulated non-U.S. earnings and profits (regardless of whether we make any distributions), taxation of amounts treated as global intangible low-taxed income under Section 951A of the Code with respect to such shareholder, and being subject to certain reporting requirements with the U.S. Internal Revenue Service, or the IRS. Any such U.S. holder who is an individual generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a U.S. corporation. If you are a U.S. holder who holds 10% or more of the vote or value of our common shares, you should consult your own tax advisors regarding the U.S. tax consequences of acquiring, owning, or disposing our common shares and the impact of the Tax Cuts and Jobs Act, especially the changes to the rules relating to CFCs.

U.S. holders of our common shares may suffer adverse tax consequences if we are characterized as a passive foreign investment company.

Generally, if, for any taxable year, at least 75% of our gross income is passive income, or at least 50% of the value of our assets is attributable to assets that produce passive income or are held for the production of passive income, including cash, we would be characterized as a PFIC for U.S. federal income tax purposes. For purposes of these tests, passive income includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or business. Additionally, a look-through rule generally applies with respect to 25% or more owned subsidiaries. If we are characterized as a PFIC, U.S. holders of our common shares may suffer adverse tax consequences, including having gains realized on the sale of our common shares treated as ordinary income, rather than capital gain, the loss of the preferential tax rate applicable to dividends received on our common shares by individuals who are U.S. holders, and having interest charges apply to distributions by us and the proceeds of sales of our common shares. In addition, special information reporting may be required. See the section titled “Material Bermuda, U.K. and U.S. Federal Income Tax Considerations—U.S. Federal Income Tax Consequences for U.S. Holders—Passive Foreign Investment Company.”

Our status as a PFIC will depend on the nature and composition of our income and the nature, composition and value of our assets from time to time. The 50% passive asset test described above is generally based on the fair market value of each asset, with the value of goodwill and going concern value determined in large part by reference to the market value of our common shares, which may be volatile. If we are a CFC and not publicly traded throughout the relevant taxable year, however, the test may be applied based on the adjusted basis of our assets. Our status may also depend, in part, on how quickly we utilize the cash proceeds from this offering in our business and whether we earn primarily passive income (such as interest income) in the current taxable year or future taxable years. We believe that we would be classified as a CFC in the current taxable year beginning on April 1, 2019. Based on this belief, and the current and expected adjusted basis of our assets, we may be classified as a PFIC with respect to the current taxable year. Because the determination of whether we are a PFIC for any taxable year is a factual determination made annually after the end of each taxable year, there can be no assurance that we will not be considered a PFIC in any taxable year. Our U.S. counsel expresses no opinion with respect to our PFIC status for our current or future taxable years. We will determine whether we were a PFIC or not for each taxable year and make such determination available to U.S. holders.

The tax consequences that would apply if we are classified as a PFIC would also be different from those described above if a U.S. holder were able to make a valid “qualified electing fund,” or QEF, election. At this time, we do not expect to provide U.S. shareholders with the information necessary for a U.S. holder to make a QEF election. Prospective investors should assume that a QEF election will not be available.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the sections titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” but are also contained elsewhere in this prospectus. In some cases, you can identify forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will” and “would,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Forward-looking statements include statements about:

 

∎

the progress, timing, costs and results of our clinical trials, including our Phase 3 clinical trials of tapinarof for the treatment of psoriasis and atopic dermatitis;

 

∎

the evaluation of cerdulatinib, DMVT-504, DMVT-503 and lotamilast and our expectations regarding their continued preclinical and clinical development;

 

∎

the timing of meetings with and feedback from regulatory authorities as well as any submission of filings for regulatory approval of tapinarof or any of our other product candidates;

 

∎

the potential advantages and differentiated profile of our product candidates compared to existing therapies for the applicable indications;

 

∎

our ability to successfully commercialize any of our product candidates, if approved;

 

∎

the rate and degree of market acceptance of any of our product candidates, if approved;

 

∎

our expectations regarding the size of the patient populations for and opportunity for and clinical utility of tapinarof or any other product candidates, if approved for commercial use;

 

∎

our estimates of our expenses, ongoing losses, future revenue, capital requirements and our needs for or ability to obtain additional financing;

 

∎

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

 

∎

our ability to identify, acquire or in-license and develop new product candidates;

 

∎

our ability to identify, recruit and retain key personnel;

 

∎

our use of proceeds from this offering;

 

∎

our financial performance; and

 

∎

developments and projections relating to our competitors or our industry.

You should refer to the section titled “Risk Factors” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

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You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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INDUSTRY AND MARKET DATA

Certain industry data and market data included in this prospectus were obtained from independent third-party surveys, market research, publicly available information, reports of governmental agencies and industry publications and surveys. All of management’s estimates presented herein are based upon management’s review of independent third-party surveys and industry publications prepared by a number of sources and other publicly available information. All of the market data used in this prospectus involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We believe that the information from these industry publications and surveys included in this prospectus is reliable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of common shares in this offering will be approximately $89.6 million, or approximately $103.6 million if the underwriters exercise in full their option to purchase additional common shares, based upon an assumed initial public offering price of $13.00 per common share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per common share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, would increase or decrease the net proceeds to us from this offering by approximately $7.2 million, assuming that the number of common shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of common shares we are offering. Each increase or decrease of 1.0 million in the number of common shares we are offering at the assumed initial public offering price of $13.00 per common share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions would increase or decrease the net proceeds to us from this offering by approximately $12.1 million, assuming the assumed initial public offering price stays the same.

We intend to use the net proceeds from this offering, together with our existing cash, for the following purposes:

 

∎

approximately $45 million to $55 million to fund our two ongoing pivotal Phase 3 clinical trials of tapinarof for the treatment of psoriasis through top-line results and into the open-label extension study, clinical manufacturing and manufacturing process development work and completion of other clinical safety studies and other NDA-enabling activities;

 

∎

approximately $2 million to $4 million to fund our planned Phase 2a clinical trial of topical cerdulatinib for the treatment of vitiligo through top-line results;

 

∎

approximately $1 million to $3 million to complete formulation development work, Phase 2 drug product manufacturing and other non-clinical safety studies for DMVT-504 prior to commencing Phase 2 clinical trials for the treatment of PFH; and

 

∎

the remainder to fund working capital, commercial readiness and general corporate purposes.

We believe that the net proceeds from this offering, together with our existing cash, including borrowings under the Loan Agreement, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements into at least the fourth quarter of calendar year 2020. We have based this estimate on assumptions that may prove to be incorrect, and we could use our available capital resources sooner than we currently expect. Even with the net proceeds from this offering, we will require additional capital to complete the development and potential commercialization of our product candidates, including tapinarof for the treatment of psoriasis. We will also require additional capital to commence Phase 3 clinical trials of tapinarof for the treatment of atopic dermatitis and Phase 2 clinical trials of DMVT-504 for the treatment of PFH. Until such time, if ever, that we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, strategic alliances and license and development agreements or other collaborations.

This expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our development, the status of and results from preclinical studies and clinical trials, as well as any collaborations that we may enter into with third parties, and any unforeseen cash needs.

We believe opportunities may exist from time to time to expand our current business through the acquisition or in-license of complementary product candidates. While we have no current agreements or commitments for any specific acquisitions or in-licenses at this time, we may use a portion of the net proceeds for these purposes.

Our management will have broad discretion in the application of the net proceeds from this offering, and investors will be relying on the judgment of our management regarding the application of the net proceeds of this offering. The

 

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timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. We may choose to invest these net proceeds in short-term, interest bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the United States. The goal with respect to the investment of these net proceeds is capital preservation and liquidity so that such funds are readily available to fund our operations.

 

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DIVIDEND POLICY

We have never declared or paid any dividends on our common shares. We anticipate that we will retain all of our future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. In addition, pursuant to Bermuda law, a company may not declare or pay dividends, or make distributions out of contributed surplus, if there are reasonable grounds for believing that (1) the company is, or would after the payment be, unable to pay its liabilities as they become due or (2) the realizable value of its assets would thereby be less than its liabilities. “Contributed surplus” is defined for purposes of section 54 of the Bermuda Act to include the proceeds arising from donated shares, credits resulting from the redemption or conversion of shares at less than the amount set up as nominal capital and donations of cash and other assets to the company. Under our amended and restated bye-laws, each common share is entitled to dividends if, as and when dividends are declared by our board of directors, subject to any preferred dividend right of the holders of any preference shares.

 

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CAPITALIZATION

The following table sets forth our cash and capitalization as of March 31, 2019 on an:

 

∎

actual basis; and

 

∎

as adjusted basis to give effect to the issuance and sale of 7,700,000 common shares in this offering at an assumed initial public offering price of $13.00 per common share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table together with the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

 

 

		AS OF MARCH 31, 2019
		ACTUAL				AS ADJUSTED (1)
Cash		$	8,714,663			$	98,307,663
Long-term debt (2)		$	99,000,000			$	99,000,000
Shareholder’s (deficit) equity:
Common shares, $0.00001 par value per share; 165,155,766 shares authorized, 16,839,383 shares issued and outstanding, actual; 24,539,383 shares issued and outstanding, as adjusted			168				245
Common shares subscribed			(750	)			(750	)
Shareholder receivable			(1,547,240	)			(1,547,240	)
Additional paid-in capital			219,017,433				308,610,356
Accumulated deficit			(325,366,945	)			(325,366,945	)
Accumulated other comprehensive income			1,465,171				1,465,171
Total shareholder’s (deficit) equity			(106,432,163	)			(16,839,163	)
Total capitalization		$	(7,432,163	)		$	82,160,837

 

 

(1)

Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per common share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, would increase or decrease each of cash, additional paid-in capital, total shareholder’s (deficit) equity and total capitalization on an as adjusted basis by approximately $7.2 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. Each increase or decrease of 1.0 million in the number of common shares we are offering at the assumed initial public offering price of $13.00 per common share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, would increase or decrease each of cash, additional paid-in capital, total shareholder’s (deficit) equity and total capitalization on an as adjusted basis by approximately $12.1 million. The as adjusted information is illustrative only of our capitalization following the closing of this offering and will change based on the actual initial public offering price and other terms of this offering determined at pricing.

(2)

Amounts do not include $20.0 million principal amount of borrowings under the Loan Agreement funded in May 2019.

The number of common shares outstanding in the table above excludes:

 

∎

1,937,317 common shares issuable upon the exercise of stock options outstanding as of March 31, 2019, with a weighted-average exercise price of $13.82 per share (which does not take into account the Option Repricing); and

 

∎

1,034,338 common shares reserved for future issuance under our 2016 Plan, as of March 31, 2019, as well as any automatic increases in the number of common shares reserved for future issuance under this plan.

 

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DILUTION

If you invest in our common shares in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per common share and the as adjusted net tangible book value per common share of our common shares immediately after this offering. Net tangible book value (deficit) per common share is determined by dividing our total tangible assets less total liabilities by the number of outstanding common shares.

As of March 31, 2019, we had a net tangible book deficit of $(108.1) million, or $(6.42) per common share.

After giving effect to the issuance and sale of common shares in this offering at an assumed initial public offering price of $13.00 per common share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value as of March 31, 2019 would have been $(18.5) million, or $(0.75) per common share. This represents an immediate increase in the as adjusted net tangible book value of $5.67 per common share to our existing shareholder, and an immediate dilution in the as adjusted net tangible book value of $13.75 per common share to investors purchasing our common shares in this offering. The following table illustrates this per common share dilution:

 

 

 

Assumed initial public offering price per common share						$	13.00
Net tangible book value per common share as of March 31, 2019		$	(6.42	)
Increase in net tangible book value per common share attributable to new investors participating in this offering			5.67
As adjusted net tangible book value per common share after this offering							(0.75	)
Dilution per common share to investors participating in this offering						$	13.75

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per common share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our as adjusted net tangible book value as of March 31, 2019 by $0.29 per common share, and would increase (decrease) dilution to investors in this offering by $0.71 per common share, assuming that the number of common shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase of 1.0 million in the number of common shares offered by us would increase our as adjusted net tangible book value per common share after this offering by $0.50 per common share and decrease the dilution to new investors by $0.50 per common share, assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A decrease of 1.0 million in the number of common shares offered by us would decrease our as adjusted net tangible book value per common share after this offering by $0.55 per common share and increase the dilution to new investors by $0.55 per common share, assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.

If the underwriters exercise in full their option to purchase up to 1,155,000 additional common shares in this offering, the as adjusted net tangible book value per common share after the offering would be $(0.18) per common share, the increase in the as adjusted net tangible book value per common share to our existing shareholder would be $6.24 per common share and the dilution to new investors purchasing common shares in this offering would be $13.18 per common share.

The following table sets forth as of March 31, 2019, on the as adjusted basis described above, the differences between the number of common shares purchased from us, the total consideration paid and the weighted-average price per common share paid by our existing shareholder and by investors purchasing our common shares in this offering at an assumed initial public offering price of $13.00 per common share, which is the midpoint of the price

 

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range set forth on the cover page on this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us:

 

 

 

		SHARES PURCHASED								TOTAL CONSIDERATION								AVERAGE PRICE PER COMMON SHARE
		NUMBER				PERCENT				AMOUNT				PERCENT
Existing shareholder			16,839,383				69	%		$	82,500,749				45	%		$	4.90
New investors			7,700,000				31				100,100,000				55				13.00
Total			24,539,383				100	%		$	182,600,749				100	%

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per common share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors by $7.7 million, and increase or decrease the percent of total consideration paid by new investors by approximately 1.8% and 2.0%, respectively, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

If RSL purchases $35.0 million of our common shares that they have indicated an interest to purchase in this offering, assuming an initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, RSL will own approximately 79.6% of our outstanding common shares, or approximately 76.0% if the underwriters exercise their option to purchase 1,155,000 additional common shares in full.

The table and discussion above exclude:

 

∎

1,937,317 common shares issuable upon the exercise of stock options outstanding as of March 31, 2019, with a weighted-average exercise price of $13.82 per share (which does not take into account the Option Repricing); and

 

∎

1,034,338 common shares reserved for future issuance under our 2016 Plan, as of March 31, 2019, as well as any automatic increases in the number of common shares reserved for future issuance under this plan.

To the extent any additional options are issued under our 2016 Plan, or we issue additional common shares in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our shareholders.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables set forth our selected consolidated financial data for the periods indicated. We derived the consolidated statement of operations data for the years ended March 31, 2018 and 2019 and our consolidated balance sheet data as of March 31, 2018 and 2019 from our audited consolidated financial statements appearing elsewhere in this prospectus. The data should be read together with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future. Our fiscal year ends on March 31.

 

 

 

		YEARS ENDED MARCH 31,
		2018				2019
Consolidated Statement of Operations Data:
Operating expenses:
Research and development		$	37,402,954			$	252,279,316
General and administrative			4,693,617				20,952,528
Total operating expenses			42,096,571				273,231,844
Change in fair value of long-term debt			—				(18,500,000	)
Other expense			326,946				509,844
Loss before provision for income taxes			(42,423,517	)			(255,241,688	)
Income tax expense			272,937				104,506
Net loss		$	(42,696,454	)		$	(255,346,194	)
Net loss per common share—basic and diluted (1)		$	(3.45	)		$	(18.45	)
Weighted average common shares outstanding—basic and diluted (1)			12,386,662				13,838,371

 

 

(1)

See Note 2[L] to our audited consolidated financial statements for an explanation of the method used to compute basic and diluted net loss per common share.

 

 

 

		AS OF MARCH 31,
		2018				2019
Consolidated Balance Sheet Data:
Cash		$	17,325,690			$	8,714,663
Total assets			17,489,205				18,101,609
Total liabilities			8,553,426				124,533,772
Additional paid-in capital			79,397,126				219,017,433
Accumulated deficit			(70,020,751	)			(325,366,945	)
Total shareholder’s equity (deficit)			8,935,779				(106,432,163	)

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the section titled “Risk Factors” 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. Our fiscal year ends on March 31.

Overview

We are a clinical-stage biopharmaceutical company dedicated to developing and commercializing innovative therapeutics in medical dermatology. We have a robust medical dermatology pipeline with both late-stage and early-development product candidates. Our pipeline targets specific unmet needs in two of the largest growing immuno-dermatology markets, psoriasis and atopic dermatitis, as well as other large markets, including vitiligo, primary focal hyperhidrosis and acne.

We are developing our lead product candidate, tapinarof, as a differentiated therapeutic aryl hydrocarbon receptor modulating agent, or TAMA, topical cream for the treatment of psoriasis and atopic dermatitis. Psoriasis and atopic dermatitis affect approximately 7.5 million and 28 million people in the United States, respectively. We acquired the worldwide rights to tapinarof (other than with respect to certain rights in China) from GlaxoSmithKline, or GSK, in August 2018. Tapinarof and predecessor formulations have already been dosed in over 600 subjects across 10 different clinical trials conducted by GSK and Welichem Biotech Inc. In five Phase 2 clinical trials, tapinarof and predecessor formulations met all primary endpoints, with clinically meaningful and statistically significant responses coupled with a favorable tolerability profile observed in these trials. A clinically meaningful response refers to an actual health benefit to treated patients, including a clinical assessment of “clear” or “almost clear” skin at end of treatment and “moderately improved” to “very improved” itch as described by treated patients, and achievement of widely adopted primary and secondary endpoints for psoriasis and atopic dermatitis.

Topical corticosteroids, or TCS, are commonly used as the first-line therapy for the treatment of inflammatory skin conditions, such as psoriasis and atopic dermatitis. While convenient and relatively inexpensive, TCS are not as efficacious as systemically-administered biologics, which are more often prescribed for patients with moderate-to-severe cases of psoriasis. Continual TCS treatment also carries the risk of a variety of significant side effects. As a result, TCS are typically used only intermittently, leading to frequent disease flares. Biologic therapies are expensive and inconvenient and have long-term safety issues, and as a result remain limited for use in patients with significant disease burden. Oral therapies have not achieved the same level of efficacy as biologics and also have potential systemic side effects. Given the limitations associated with TCS and systemic therapies, patients with inflammatory skin conditions often report dissatisfaction with their current treatment options. We believe that an unmet need exists for a safe and conveniently administered topical therapy that can be applied without interruption or long-term safety concerns and with potential efficacy similar to systemically-administered biologics. We believe that such a treatment could serve as an alternative for those patients who do not receive adequate relief from current topical therapies or who have reservations about the safety, cost and inconvenience of biologics, or as an additional treatment option to those therapies.

Beyond tapinarof, our pipeline consists of four novel product candidates targeting an array of significant unmet medical needs:

 

∎

topical cerdulatinib, a dual inhibitor of the JAK and Syk pathways, which we are evaluating as a differentiated treatment option for vitiligo as well as other inflammatory skin conditions such as atopic dermatitis;

 

∎

DMVT-504, an investigational oral therapy being developed for the treatment of primary focal hyperhidrosis, or PFH, is a proprietary oral formulation that combines an immediate-release muscarinic antagonist,

 

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oxybutynin, with a delayed-release muscarinic agonist, pilocarpine. There are currently no U.S. Food and Drug Administration, or FDA, approved systemic therapies for the treatment of PFH, a disorder characterized by excessive sweating; and

 

∎

our earlier stage programs include DMVT-503, a topical DGAT1 inhibitor being developed for the treatment of acne vulgaris, and DMVT-501 (lotamilast), a topical phosphodiesterase type 4, or PDE4, inhibitor which we are evaluating as another potential treatment option for atopic dermatitis.

Our operations are supported in part by our affiliates, RSI and RSG, each a wholly owned subsidiary of our parent company, RSL. RSI and RSG provide us with services related to certain development, administrative and financial activities, in each case, pursuant to the Services Agreements. Under the terms of the Services Agreements, we are obligated to pay or reimburse RSI and RSG for the costs they, or third parties acting on their behalf, incur in providing services to us. In addition, we are obligated to pay to RSI and RSG a pre-determined markup on costs incurred by them in connection with any general and administrative and support services as well as research and development services. See “Certain Relationships and Related Party Transactions—Affiliate Services Agreements” for additional information.

We were incorporated in September 2015, and our operations to date have been limited to acquiring rights to our portfolio of product candidates as well as generating operating plans and organizational infrastructure for our day-to-day operations, preparing for and conducting clinical trials and preparing for commercialization of our product candidates, if approved. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of our lead product candidate tapinarof as well as our other product candidates. We recorded a net loss of $42.7 million and $255.3 million for the years ended March 31, 2018 and 2019, respectively. As of March 31, 2019, we had an accumulated deficit of $325.4 million. As a result, our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.

We acquired worldwide rights to tapinarof (other than with respect to certain rights in China) from GlaxoSmithKline, or GSK, pursuant to an asset purchase agreement. In addition, we entered into exclusive licenses to develop, manufacture and commercialize DMVT-504, DMVT-503, DMVT-502 (cerdulatinib) and DMVT-501 (lotamilast), excluding certain Asian territories, pursuant to our license agreements with TheraVida, Inc., AstraZeneca AB, Portola Pharmaceuticals, Inc., and Eisai Co. Ltd., respectively. See “—Contractual Obligations and Commitments” and “Business—Asset Acquisitions and License Arrangements” for additional information.

Financial Operations Overview

Revenue

We currently do not have any products approved for sale and have not generated any revenue since inception. If we are able to successfully develop, receive regulatory approval for and commercialize any of our current or future product candidates alone or in collaboration with third parties, we may generate revenue from the sales of these product candidates.

Research and Development Expenses

Since our inception, our operations have primarily been focused on organizing and staffing our company; raising capital; and acquiring, preparing for and advancing the preclinical and clinical development of our product candidates: tapinarof, cerdulatinib, DMVT-504, lotamilast and DMVT-503. Our research and development expenses include program-specific costs as well as unallocated internal costs.

Program-specific costs include:

 

∎

direct third-party costs as well as third-party pass through costs allocated to us under the Service Agreements, which include expenses incurred under agreements with CROs and contract manufacturing organizations, the cost of consultants who assist with the development of our product candidates on a program-specific basis, investigator grants, sponsored research, manufacturing costs in connection with producing materials for use in conducting nonclinical and clinical studies, and any other third-party expenses directly attributable to the development of our product candidates; and

 

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upfront and milestone payments for the purchase of in-process research and development.

 

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Unallocated internal costs include:

 

∎

share-based compensation expense for research and development personnel, including expenses related to RSL common share awards and RSL options issued by RSL to RSI and RSG employees;

 

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personnel-related expenses, which include employee-related expenses, such as salaries, benefits and travel expenses, for research and development personnel;

 

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costs allocated to us under our Services Agreements with RSI and RSG; and

 

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other expenses, which includes the cost of consultants who assist with our research and development, but are not allocated to a specific program.

Research and development activities will continue to be central to our business model. We expect to continue to incur research and development expense as we conduct preclinical and clinical studies across our portfolio. We expect our overall research and development expense to increase significantly for the foreseeable future as we progress our lead asset, tapinarof, into Phase 3 clinical trials and further develop our other product candidates. We also expect our share-based compensation and other employee-related expenses for our research and development personnel to increase as a result of the increasing development activities.

Product candidates in later stages of clinical development, such as tapinarof, generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.

The duration, costs and timing of preclinical studies and clinical trials of our product candidates will depend on a variety of factors that include, but are not limited to, the following:

 

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the number of trials required for approval;

 

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the per patient trial costs;

 

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the number of patients who participate in the trials;

 

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the number of sites included in the trials;

 

∎

the countries in which the trials are conducted;

 

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the length of time required to enroll eligible patients;

 

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the number of doses that patients receive;

 

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the drop-out or discontinuation rates of patients;

 

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the potential additional safety monitoring or other studies requested by regulatory agencies;

 

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the duration of patient follow-up;

 

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the timing and receipt of regulatory approvals; and

 

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the efficacy and safety profile of the product candidates.

In addition, the probability of success of our product candidates in development will depend on numerous factors, including competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval of our product candidates for any indication in any country. As a result of the uncertainties discussed above, we are unable to determine in advance the duration and completion costs of any clinical trial we conduct, or when and to what extent we will generate revenue from the commercialization and sale of our products in development or other product candidates, if at all.

General and Administrative Expense

General and administrative expenses consist primarily of legal and accounting fees relating to our formation and corporate matters, consulting services, services received under the Services Agreements, and employee-related expenses, such as salaries, share-based compensation, benefits and travel expenses for general and administrative personnel.

We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities, potential commercialization efforts and increased costs of operating as a public

 

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company. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses. Additionally, we anticipate increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with the requirements of Nasdaq and the SEC, insurance and investor relations costs. If any of our current or future product candidates receives U.S. regulatory approval, we expect that we would incur significantly increased expenses associated with building a sales and marketing team.

Results of Operations for the Years ended March 31, 2018 and 2019

The following table sets forth our results of operations for the years ended March 31, 2018 and 2019:

 

 

 

		YEARS ENDED MARCH 31,
		2018				2019
Operating expenses:
Research and development		$	37,402,954			$	252,279,316
General and administrative			4,693,617				20,952,528
Total operating expenses			42,096,571				273,231,844
Change in fair value of long-term debt			—				(18,500,000	)
Other expense			326,946				509,844
Loss before provision for income taxes			(42,423,517	)			(255,241,688	)
Income tax expense			272,937				104,506
Net loss		$	(42,696,454	)		$	(255,346,194	)

 

 

Research and Development Expenses

For the years ended March 31, 2018 and 2019, our research and development expenses consisted of the following:

 

 

 

		YEARS ENDED MARCH 31,
		2018				2019				CHANGE
Program-specific costs:
Tapinarof (DMVT-505)		$	—			$	212,537,360			$	212,537,360
Cerdulatinib (DMVT-502)			8,885,942				7,919,966				(965,976	)
Oxybutynin/Pilocarpine (DMVT-504)			2,000,310				4,976,465				2,976,155
Lotamilast (DMVT-501)			16,832,968				8,745,194				(8,087,774	)
DMVT-503			2,572,961				1,450,534				(1,122,427	)
DMVT-201			173,457				56,828				(116,629	)
Unallocated internal costs:
Share-based compensation			2,116,815				1,932,527				(184,288	)
Personnel-related expenses			1,679,005				7,247,902				5,568,897
Services Agreements			2,466,497				2,693,636				227,139
Other expenses			674,999				4,718,904				4,043,905
Total research and development expenses		$	37,402,954			$	252,279,316			$	214,876,362

 

 

Research and development expenses increased by $214.9 million, to $252.3 million, for the year ended March 31, 2019 compared to the year ended March 31, 2018, primarily due to a one-time upfront payment of $191.0 million relating to the asset purchase agreement for tapinarof and employee-related expenses due to increased headcount to support our clinical operations. Third-party direct costs billed under the Service Agreements have been allocated to the related programs.

 

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General and Administrative Expenses

General and administrative expenses increased by $16.3 million, to $21.0 million, for the year ended March 31, 2019 compared to the year ended March 31, 2018, primarily due to higher employee salaries and benefits of $7.0 million and higher share-based compensation expense of $0.9 million resulting from additional headcount, higher legal and professional fees of $3.8 million, higher pre-commercial market research and related expenses of $1.5 million, and higher general overhead expenses of $2.8 million to support the growth of our operations.

Change in Fair Value of Long-Term Debt

We recorded a gain of $18.5 million for the change in estimated fair value of long-term debt in our statements of operations for the year ended March 31, 2019 due primarily to changes in the estimated timing of the amounts payable to NovaQuest pursuant to the NovaQuest agreement and the related impact of the discount rate and other valuation assumptions.

Liquidity and Capital Resources

Overview

For the years ended March 31, 2018 and 2019, we recorded net losses of $42.7 million and $255.3 million, respectively. As of March 31, 2019, we had an accumulated deficit of $325.4 million and a cash balance of $8.7 million, as compared to $70.0 million and $17.3 million, respectively, as of March 31, 2018. We have never generated any revenue, and our operations to date have been financed through capital contributions or short-term advances from RSL or its affiliates, including pursuant to the RSL Commitment Letter, and the funding agreement entered into with NovaQuest in July 2018 and the loan and security agreement, the Loan Agreement, entered into with Hercules Capital, Inc., or Hercules, in May 2019. Pursuant to the RSL Commitment Letter, RSL funded the upfront £150.0 million (approximately $191 million) payment owed by us to GSK for our acquisition of tapinarof. See “Business—Asset Acquisitions and License Arrangements—Agreements Relating to Tapinarof—Roivant Commitment Letter” for additional information.

We expect to continue to incur significant and increasing operating losses at least for the next several years. We do not expect to generate product revenue until we successfully complete development and obtain regulatory approval for any of our current or future product candidates, which may never occur. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our planned clinical trials, our expenditures on other research and development activities and our pre-commercialization efforts. We anticipate that our expenses will increase substantially as we:

 

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initiate and advance our planned Phase 3 clinical trials for tapinarof;

 

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continue development of topical cerdulatinib for the treatment of vitiligo as well as evaluate topical cerdulatinib for the treatment of other inflammatory skin conditions such as atopic dermatitis;

 

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complete our Phase 1 trial and evaluate our planned Phase 2 clinical trial of DMVT-504 for the treatment of primary focal hyperhidrosis;

 

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evaluate our Phase 1 clinical trial for DMVT-503 for the treatment of acne vulgaris;

 

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evaluate the continued development of lotamilast;

 

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seek to identify, acquire, develop and commercialize additional product candidates;

 

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integrate acquired technologies into a comprehensive regulatory and product development strategy;

 

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maintain, expand and protect our intellectual property portfolio;

 

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hire scientific, clinical, quality control and administrative personnel;

 

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add operational, financial and management information systems and personnel, including personnel to support our drug development efforts;

 

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seek regulatory approvals for any product candidates that successfully complete clinical trials;

 

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ultimately establish a sales, marketing and distribution infrastructure and scale up external manufacturing capabilities to commercialize any drug candidates for which we may obtain regulatory approval; and

 

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begin to operate as a public company.

We intend to use the proceeds of this offering, together with our existing cash, for our pivotal Phase 3 clinical trials of tapinarof for the treatment of psoriasis as well as to advance the continued development of tapinarof for the

 

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treatment of atopic dermatitis and our other product candidates. We will need additional funding to complete the clinical development of, seek regulatory approval for and, if approved, commercially launch tapinarof and our other product candidates.

Until such time, if ever, as we can generate substantial product revenue from sales of any of our current or future product candidates, we expect to finance our cash needs through a combination of equity offerings, debt financings, royalty financings and potential collaboration, license or development agreements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common shareholder. Our agreement with NovaQuest involves, and any agreements for future debt or preferred equity financings, if available, may involve covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. Adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of our product candidates, grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves or potentially discontinue operations.

Loan and Security Agreement with Hercules Capital

In May 2019, we and our subsidiaries entered into a loan and security agreement, or the Loan Agreement, with Hercules Capital, Inc., or Hercules, as agent and lender, under which DSL, together with its non-U.S. subsidiaries, borrowed an aggregate of $20.0 million, or the Term Loan. Our obligations under the Loan Agreement are fully and unconditionally guaranteed by DSI and any of our future U.S. subsidiaries. The Term Loan was fully drawn in May 2019. The Term Loan bears interest at a variable interest rate equal to the greater of (i) 9.95% or (ii) 4.45% plus the prime rate as in effect from time to time. We are obligated to make monthly payments of accrued interest for the first 15 months after closing, or the Interest-only Period, followed by monthly installments of principal and interest through the maturity date. The Interest-only Period may be extended (i) up to 24 months after closing upon our receipt of net proceeds from equity or debt financings, capital contributions and proceeds from business development or similar transactions of at least $110.0 million on or prior to December 31, 2019, or (ii) up to 30 months after closing if, prior to the end of the Interest-only Period, our Phase 3 clinical trials of tapinarof for the treatment of psoriasis achieve primary efficacy and safety endpoints as specified in the Phase 3 protocol, or the Clinical Milestone. Our obligations under the Loan Agreement are secured by a first priority security interest on all of our assets, including intellectual property, and subject to certain customary exceptions, including non-exclusive licensing of intellectual property in connection with ordinary course business development transactions. In connection with the Loan Agreement, NovaQuest has entered into a subordination agreement to subordinate its security interest in all of the assets (including intellectual property) relating to tapinarof and related compounds to Hercules’ lien securing the Term Loan.

The Term Loan matures 36 months from closing, subject to extension of 12 additional months upon achievement of the Clinical Milestone. We have the option to prepay the Term Loan, subject to, in some circumstances, a prepayment charge equal to 2% in the first 12 months from closing, 1% in the second 12 months, and 0% thereafter. Upon repayment of the Term Loan, we will be obligated to pay an end of term charge in an amount equal to $1,390,000.

The Loan Agreement contains certain representations and warranties, affirmative covenants, negative covenants and conditions that are customarily required for similar financings, including a covenant against the occurrence of a “change in control”, financial reporting obligations, and certain limitations on indebtedness, liens (including on our intellectual property and other assets), investments, distributions (including dividends), collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes and deposit accounts. The Loan Agreement also contains a minimum cash covenant that requires us to maintain a minimum cash balance of up to $15.0 million in the event that certain financing or clinical milestones are not achieved by December 31, 2019. Such minimum cash covenant ceases to apply if the Company achieves the Clinical Milestone or certain financial

 

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$200.0 million of proceeds from RSL and $117.5 million of proceeds from the NovaQuest Agreement, partially offset by the repayment of $117.5 million to RSL.

For the year ended March 31, 2018, $47.5 million was provided by financing activities, all attributable to capital contributions from RSL.

Outlook

Based on the expected net proceeds from this offering, our research and development plans and our timing expectations related to the development of our clinical programs, we expect that the net proceeds from this offering, together with existing cash, including borrowings under the Loan Agreement, will enable us to fund our operating expenses and capital expenditure requirements into at least the fourth quarter of calendar year 2020. However, we have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect.

Contractual Obligations and Commitments

We enter into agreements in the normal course of business with CROs for clinical trials and with vendors for preclinical studies and other services and products for operating purposes, which are cancelable at any time by us, subject to payment of our remaining obligations under binding purchase orders and, in certain cases, nominal early termination fees, generally upon 30 days’ prior written notice. These payments are not included in the table of contractual obligations below.

As of March 31, 2019, we had contractual obligations for operating lease obligations, as summarized in the table that follows:

 

 

 

		PAYMENTS DUE BY PERIOD
CONTRACTUAL OBLIGATIONS		TOTAL				LESS THAN 1 YEAR				1-3 YEARS				3-5 YEARS				MORE THAN 5 YEARS
Operating lease obligations (1)		$	5,099,260			$	677,743			$	1,575,140			$	1,664,595			$	1,181,782

 

 

(1)

We lease 13,109 square feet of office space located in Phoenix, Arizona pursuant to an operating lease agreement that expires in January 2026 with an option to extend until January 2031 and 6,453 square feet of office space located in Long Beach, California pursuant to an operating lease agreement that expires in July 2024 with an option to extend until July 2027.

License and Collaboration Agreements

We have also entered into license agreements and asset purchase agreements with third parties in the normal course of business. We have not included these future payments in a table of contractual obligations because the payment obligations under these agreements are contingent upon future events such as achievement of specified regulatory and commercial milestones, or royalties on net product sales. As of March 31, 2019, the aggregate maximum amount of milestone payments we could be required to make under our agreement with Eisai was $35.5 million, under our license agreement with Portola was $132.5 million (plus up to $71.5 million that may be paid to Astellas, which payments may be credited against future payment obligations to Portola), under our license agreement with AstraZeneca was $83.5 million, under our license agreement with TheraVida was $158.0 million, and under our asset purchase agreement with GSK was £100.0 million (approximately $133 million) and CAD$180.0 million (approximately $137 million) to third parties as part of assumed liabilities under such agreement. See “Business—Asset Acquisitions and License Arrangements” for additional information.

NovaQuest Agreement

We are required to make significant milestone and other quarterly payments to NovaQuest upon the achievement of certain regulatory and commercial milestones for tapinarof in either psoriasis or atopic dermatitis in the United States, the European Union and Japan, which obligations terminate upon revocation or withdrawal by the FDA, us, our affiliates or any sublicensee for health or safety reasons. We are also required to make significant payments to NovaQuest if development of tapinarof is terminated or if we terminate development of tapinarof for one indication and receive approval for the other. NovaQuest is not obligated to refund to us any payments previously made under the NovaQuest Agreement. See “Business—Asset Acquisitions and License Arrangements—Agreements Relating to Tapinarof—NovaQuest Funding Agreement” for additional information.

 

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Commitment Letter

RSL has agreed to invest, or caused to be invested, in us up to £100.0 million (approximately $133 million) to ensure DSG’s ability to satisfy its contingent payment obligation under the GSK Agreement, in exchange for additional securities of DSL. See “Business—Asset Acquisitions and License Arrangements—Agreements Relating to Tapinarof—Roivant Commitment Letter” for additional information.

Off-Balance Sheet Arrangements

During the years ended March 31, 2018 and 2019, we did not have any off-balance sheet arrangements, as defined under SEC rules.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of expenses during the reporting periods. In accordance with U.S. GAAP, we evaluate our estimates and judgments on an ongoing basis. Significant estimates include assumptions used in the determination of some of our costs incurred under our Services Agreements and which costs are charged to research and development and general and administrative expense. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We define our critical accounting policies as those under U.S. GAAP that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. While our accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this prospectus, we believe the following are the critical accounting policies used in the preparation of our consolidated financial statements that require significant estimates and judgments.

Research and Development Expense

Research and development costs with no alternative future use are expensed as incurred. Clinical trial costs are accrued over the service periods specified in the contracts and adjusted as necessary based upon an ongoing review of the level of effort and costs actually incurred. Payments for a product license prior to regulatory approval of the product and payments for milestones achieved prior to regulatory approval of the product are expensed in the period incurred as research and development. Milestone payments made in connection with regulatory approvals are capitalized and amortized to cost of product sales over the remaining useful life of the asset. Research and development costs are charged to expense when incurred and primarily consist of the intellectual property and research and development materials acquired and expenses from third parties who conduct research and development activities on our behalf.

We have evaluated our in-license and asset purchase agreements based on the applicable guidance in ASC No. 805, Business Combinations, and have determined that the in-process research and development assets, or IPR&D, licensed and acquired do not meet the definition of a business and thus these transactions were not considered business combinations. We then evaluated, pursuant to ASC 730, Research and Development, whether the IPR&D assets had an alternative future use and concluded they did not. As a result, we recorded the upfront license payments as research and development expense in the periods acquired along with any subsequent milestone payments in the periods incurred.

Share-Based Compensation

We recognize share-based compensation expense related to stock options granted to employees based on the estimated fair value of the awards on the date of grant. We estimate the grant date fair value, and the resulting share-based compensation expense, for stock options that only have service vesting requirements or performance-

 

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based vesting requirements without market conditions using the Black-Scholes option-pricing model. The grant date fair value of the share-based awards with service vesting requirements is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. Determining the appropriate amount to expense for performance-based awards based on the achievement of stated goals requires judgment. The estimate of expense is revised periodically based on the probability of achieving the required performance targets and adjustments are made as appropriate. The cumulative impact of any revisions is reflected in the period of change. If any applicable financial performance goals are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. For performance-based awards with market conditions, we determine the fair value of awards as of the grant date using a Monte Carlo simulation model.

We recognize share-based compensation expense related to stock options granted to non-employees issued in exchange for services based on the estimated fair value of the awards on the date of grant. We estimate the grant date fair value, and the resulting share-based compensation expense, using the Black-Scholes option-pricing model; however, the fair value of the stock options granted to non-employees is remeasured each reporting period until the service is complete, and the resulting increase or decrease in value, if any, is recognized as expense or a reduction in previously recognized expense, respectively, during the period the related services are rendered.

The Black-Scholes option-pricing model requires the use of highly subjective assumptions, which determine the fair value of share-based awards. These assumptions include:

Expected Term. Our expected term represents the period that our share-based awards are expected to be outstanding and is determined using the “simplified method” (based on the mid-point between the vesting date and the end of the contractual term). For share-based awards granted to non-employees, the expected term represents the contractual term of the award.

Common Share Price. Our board of directors estimates the fair value of our common shares. Given the absence of a public trading market for our common shares, and in accordance with the American Institute of Certified Public Accountants’ Practice Guide, Valuation of Privately Held-Company Equity Securities Issued as Compensation, our board of directors exercises reasonable judgment and considers a number of objective and subjective factors to determine its best estimate of the fair value of our common shares, as further described below under “ —Common Share Valuations.”

Expected Volatility. Prior to this offering we were a privately held company and did not have any trading history for our common shares and the expected volatility was estimated using weighted-average measures of implied volatility and the historical volatility of our peer group of companies for a period equal to the expected life of the stock options. Our peer group of publicly traded biopharmaceutical companies was chosen based on their similar size, stage in the life cycle or area of specialty.

Risk-Free Interest Rate. The risk-free interest rate is based on the rates paid on securities issued by the U.S. Treasury with a term approximating the expected life of the stock options.

Expected Dividend. We have never paid, and do not anticipate paying, cash dividends on our common shares. Therefore, the expected dividend yield was assumed to be zero.

In addition to the Black-Scholes assumptions, we adopted ASU 2016-09 on April 1, 2017 and as a result, we have made an entity-wide accounting policy election to account for pre-vesting award forfeitures when they occur.

A component of total share-based compensation expense relates to the RSL common share awards and RSL options issued by RSL to RSL, RSG and RSI employees. Share-based compensation expense is allocated to us by RSL based upon the relative percentage of time utilized by employees of RSL, RSG and RSI on our matters. The RSL common share awards and RSL options are fair valued on the date of grant and that fair value is recognized over the requisite service period. As RSL is a non-public entity, the RSL common share awards and RSL options are classified as Level 3 due to their unobservable nature. Significant judgment and estimates were used to estimate the fair value of these awards and options, as they are not publicly traded. RSL common share awards and RSL options are subject to specified vesting schedules and requirements (a mix of time-based and performance-based events). The fair value of each RSL common share award is based on various corporate event-based considerations, including targets for RSL’s

 

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post-IPO market capitalization and future financing events. The fair value of each RSL option on the date of grant is estimated using the Black-Scholes closed-form option-pricing model.

In June 2019, our board of directors approved the repricing of stock options previously granted to current employees and directors with exercise prices above the initial public offering price per share to the public in this offering, or the Option Repricing. Assuming an initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, (i) upon the execution of the underwriting agreement related to this offering, stock options to purchase 1.4 million common shares will be automatically repriced to an exercise price per share equal to the initial price per share to the public in this offering and (ii) we would incur additional compensation expense of approximately $1.5 million in the aggregate, recognized over the remaining service period of the affected options, or through April 2023.

The actual amount of total additional compensation expense resulting from the Option Repricing will be determined at the pricing of this offering by comparing the estimated fair market value of the stock options, using the Black-Scholes option-pricing model, immediately before and immediately after the Option Repricing. The estimate of total additional compensation expense set forth above is subject to the actual initial price per share to the public in this offering as well as other assumptions used by the Black-Scholes option-pricing model, including expected volatility and the risk-free interest rate.

Common Share Valuations

Prior to this offering, the fair value of our common shares was estimated on each grant date by our board of directors. In order to determine the fair value of our common shares, our board of directors considered, among other things, timely valuations of our common shares prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately Held-Company Equity Securities Issued as Compensation. Given the absence of a public trading market for our common shares, our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common shares, including (1) our business, financial condition and results of operations, including related industry trends affecting our operations; (2) our forecasted operating performance and projected future cash flows; (3) the illiquid nature of our common shares; (4) the rights and privileges of our common shares; (5) market multiples of our most comparable public peers and (6) market conditions affecting our industry.

After the closing of this offering, our board of directors will determine the fair value of each common share underlying share-based awards based on the closing price of our common shares as reported by Nasdaq on the date of grant.

Based upon the assumed initial public offering price of $13.00 per common share, the midpoint of the price range set forth on the cover page of this prospectus, the aggregate intrinsic value of outstanding options to purchase our common shares as of March 31, 2019 was zero (not taking into account the Option Repricing).

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

When uncertain tax positions exist, we recognize the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of March 31, 2019, we did not have any significant uncertain tax positions.

Recently Issued Accounting Pronouncements:

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU No. 2016-01, which requires entities with financial liabilities measured using the fair value option in ASC 825 to recognize the changes in fair value of

 

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liabilities caused by a change in instrument-specific credit risk (own credit risk) in other comprehensive income. The ASU is effective for public business entities in fiscal years beginning after December 15, 2017. Entities can early adopt certain provisions of the new standard, including the provision related to financial liabilities measured under the fair value option. We adopted ASU 2016-01 as of April 1, 2018. For any financial liabilities measured using the fair value option, the change in fair value caused by a change in our own credit risk (e.g. change in the discount rate related to our credit rating) is recorded in other comprehensive income (loss) on the consolidated statements of comprehensive loss. Other changes in fair value (e.g. change in the forecasted milestone payments due to probability and/or timing or market-based changes in the discount rate) are recorded in current net income (loss) within change in fair value of long-term debt on the consolidated statements of operations.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU No. 2016-02, a comprehensive new lease standard that amends various aspects of existing accounting guidance for leases. The core principle of ASU No. 2016-02 requires lessees to present the assets and liabilities that arise from leases on their consolidated balance sheets. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted.

We plan to adopt the requirements of the new lease standard effective April 1, 2019. We will elect the optional transition method to apply the standard as of the effective date and therefore will not apply the standard to the comparative periods presented in the financial statements. We will elect the transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs. We will not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of right-of-use assets. Further, we will elect a short-term lease exception policy to not apply the recognition requirements of this standard to short-term leases with terms of 12 months or less and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. As of April 1, 2019, we expect to recognize lease liabilities for operating leases of between approximately $3.6 million and $3.9 million and corresponding right-of-use assets of between approximately $2.6 million and $2.9 million in the consolidated balance sheet. We do not expect to recognize a material cumulative effect adjustment to retained earnings as of April 1, 2019 and do not expect the adoption of the standard to have a material impact on the consolidated statement of operations or consolidated statement of cash flows.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows—Restricted Cash (Topic 230), or ASU No. 2016-18, which requires that restricted cash be added to cash and cash equivalents when reconciling the beginning and ending amounts on the consolidated statements of cash flows. The guidance also requires entities that report cash and cash equivalents and restricted cash separately on the consolidated balance sheets to reconcile those amounts to the consolidated statements of cash flows. ASU No. 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017 and early adoption is permitted. Entities must apply the guidance retrospectively to each period presented. As a result, we added restricted cash to the ending amounts on the consolidated statement of cash flows for the year ended March 31, 2019.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, or ASU No. 2017-01, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU No. 2017-01 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The guidance prescribed by ASU 2017-01 will be applied prospectively to relevant transactions on or after the adoption date of April 1, 2018 and did not have a material impact on the acquisitions accounted for as asset purchases during the year ended March 31, 2019.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, or ASU No. 2018-02. ASU No. 2018-02 allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act, from accumulated other comprehensive (loss) income to retained earnings. ASU No. 2018-02 is effective for interim and annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The adoption of ASU 2018-02 on April 1, 2018 did not have a material impact on our consolidated financial statements.

 

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In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, or ASU No. 2018-05. ASU No. 2018-05 amends certain SEC material in ASC Topic 740 for the income tax accounting implications of the recently issued Tax Cuts and Jobs Act. ASU No. 2018-05 is effective immediately. We evaluated the impact of the Tax Cuts and Jobs Act as well as the guidance of SAB No. 118 and incorporated the changes into the determination of a reasonable estimate of deferred taxes and related disclosures in the notes to our consolidated financial statements (see Note 8). We finalized our accounting related to the impacts of the Tax Cuts and Jobs Act and recorded immaterial measurement period adjustments in the year ended March 31, 2019.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” or ASU No. 2018-07. ASU No. 2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. ASU No. 2018-07 is effective for interim and annual reporting periods beginning after December 15, 2018 and early adoption is permitted. We are currently evaluating the new standard and its impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,” or ASU No. 2018-13. ASU No. 2018-13 removes, modifies, and adds certain recurring and nonrecurring fair value measurement disclosures, including removing disclosures around the amount(s) of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation process for Level 3 fair value measurements, among other things. ASU No. 2018-13 adds disclosure requirements around changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and a narrative description of measurement uncertainty. The amendments in ASU No. 2018-13 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption, with all other amendments applied retrospectively to all periods presented. Early adoption is permitted. We are currently evaluating the new standard and its impact on our consolidated financial statements.

JOBS Act

The JOBS Act was enacted in April 2017. Section 107(b) of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period, and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential loss arising from adverse changes in market rates and market prices such as interest rates, foreign currency rates and changes in the market value of equity instruments. As of March 31, 2019, we had cash of $8.7 million, consisting of non-interest-bearing deposits denominated in the U.S. dollar and Swiss franc. We do not believe we are currently exposed to any material market risk.

 

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BUSINESS

Overview

We are a clinical-stage biopharmaceutical company dedicated to developing and commercializing innovative therapeutics in medical dermatology. We have a robust medical dermatology pipeline with both late-stage and early-development product candidates. Our pipeline targets specific unmet needs in two of the largest growing immuno-dermatology markets, psoriasis and atopic dermatitis, as well as other large markets, including vitiligo, primary focal hyperhidrosis and acne.

We are developing our lead product candidate tapinarof as a differentiated therapeutic aryl hydrocarbon receptor modulating agent, or TAMA, topical cream for the treatment of psoriasis and atopic dermatitis. Psoriasis and atopic dermatitis affect approximately 7.5 million and 28 million people in the United States, respectively. We acquired the worldwide rights to tapinarof (other than with respect to certain rights in China) from GSK in August 2018. Tapinarof and predecessor formulations of tapinarof cream have already been dosed in over 600 subjects across 10 different clinical trials conducted by GSK and Welichem. In five Phase 2 clinical trials, tapinarof and predecessor formulations met all primary endpoints, with clinically meaningful and statistically significant responses coupled with a favorable tolerability profile observed in these trials. A clinically meaningful response refers to an actual health benefit to treated patients, including a clinical assessment of “clear” or “almost clear” skin at end of treatment and “moderately improved” to “very improved” itch as described by treated patients, and achievement of widely adopted primary and secondary endpoints for psoriasis and atopic dermatitis. We commenced two pivotal Phase 3 clinical trials of tapinarof for the treatment of psoriasis in May 2019.

Topical corticosteroids, or TCS, are commonly used as the first-line therapy for the treatment of inflammatory skin conditions, such as psoriasis and atopic dermatitis. While convenient and relatively inexpensive, TCS are not as efficacious as systemically-administered biologics, which are more often prescribed for patients with moderate-to-severe cases of psoriasis. Continual TCS treatment also carries the risk of a variety of significant side effects. As a result, TCS are typically used only intermittently, leading to frequent disease flares. Biologic therapies are expensive and inconvenient and have long-term safety issues, and as a result remain limited for use in patients with significant disease burden. Oral therapies have not achieved the same level of efficacy as biologics and also have potential systemic side effects. Given the limitations associated with TCS and systemic therapies, patients with inflammatory skin conditions often report dissatisfaction with their current treatment options. We believe that an unmet need exists for a safe and conveniently administered topical therapy that can be applied without interruption or long-term safety concerns and with potential efficacy similar to systemically-administered biologics. We believe that such a treatment could serve as an alternative for those patients who do not receive adequate relief from current topical therapies or who have reservations about the safety, cost and inconvenience of biologics, or as an additional treatment option to those therapies.

Tapinarof has met its primary endpoint in several clinical trials for the treatment of both psoriasis and atopic dermatitis and has been observed to be well-tolerated. In a Phase 2b clinical trial conducted by GSK, 56% of psoriasis patients treated with tapinarof cream 1% QD achieved treatment success—defined as those patients who experienced a minimum two-point improvement on the PGA resulting in an assessment of “clear” or “almost clear” skin. This compared favorably with the 5% of patients who achieved the same result when treated with vehicle. In a Phase 2b clinical trial in atopic dermatitis also conducted by GSK, 46% of patients treated with tapinarof cream 1% QD achieved a minimum two-point improvement on the IGA resulting in an assessment of “clear” or “almost clear” skin, while only 28% of patients treated with vehicle achieved the same result. Given these results, we commenced two Phase 3 pivotal trials of tapinarof for the treatment of psoriasis in May 2019 and anticipate receiving top-line results from these trials in the first half of 2020. If these pivotal Phase 3 clinical trials are successful, we anticipate submitting an NDA for tapinarof for the treatment of psoriasis to the FDA in 2021.

Beyond tapinarof, our pipeline consists of four novel product candidates targeting an array of significant unmet medical needs. We are evaluating topical cerdulatinib as another potentially differentiated treatment for vitiligo, an inflammatory skin condition that results in skin depigmentation and for which there are no approved therapies, as well as other inflammatory skin conditions such as atopic dermatitis. Topical cerdulatinib is a dual inhibitor of the JAK and Syk pathways. We believe this dual mechanism of action may offer advantages over inhibition of JAK alone

 

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by blocking antigen-presenting cell activation properties of Syk in concert with blocking inflammatory cell activation via the JAK pathway. The results of a preclinical mouse model of atopic dermatitis suggest that, by blocking Syk activity, topical cerdulatinib may suppress the role that exogenous contact antigens play in the activity and flares associated with atopic dermatitis. This approach has the potential to both control disease activity and reduce frequency of disease flares.

DMVT-504 is an investigational oral therapy that we are developing for the treatment of primary focal hyperhidrosis, or PFH, a disorder characterized by excessive sweating. There are currently no FDA-approved systemic therapies for the treatment of PFH, a disease which affects approximately 15 million people in the United States. DMVT-504 is a proprietary oral formulation that combines an immediate-release muscarinic antagonist, oxybutynin, with a delayed-release muscarinic agonist, pilocarpine. The use of oral oxybutynin for the treatment of PFH, while not FDA-approved, has demonstrated clinical utility; however, approximately 51% of patients discontinue treatment due to side effects, with 36% of patients discontinuing specifically due to extreme dry mouth. We believe that our proprietary formulation of oxybutynin, with the addition of delayed-release pilocarpine, provides a unique pharmacokinetic profile to address this limitation of oxybutynin monotherapy.

Finally, our earlier stage programs include DMVT-503, a topical DGAT1 inhibitor being developed for the treatment of acne vulgaris, and DMVT-501 (lotamilast), a topical PDE4 inhibitor being evaluated as another treatment option for atopic dermatitis.

We have assembled a team with a history of leadership and innovation in the field of medical dermatology. Our leadership team has a track record of successful new product commercialization including the development, approval and commercial launch of over 30 dermatology products. We are led by our Principal Executive Officer, Todd Zavodnick, who previously served as Chief Commercial Officer of Revance Therapeutics, Inc. and President of International of ZELTIQ Aesthetics, Inc., which was acquired by Allergan plc for $2.47 billion in April 2017, our Principal Financial and Accounting Officer, Cyril Allouche, who previously served as principal financial and accounting officer of Revance Therapeutics, Inc., and our Chief Medical Officer, Philip Brown, M.D., who previously served as head of global pharmaceutical drug development of Galderma S.A.

Our Strategy

Our goal is to develop and commercialize innovative therapies for a variety of medical dermatologic indications. We intend to focus exclusively on addressing significant unmet medical needs with the goal of improving patients’ lives. To execute our strategy, we plan to:

 

∎

Complete development and obtain FDA approval of our lead product candidate tapinarof for the treatment of psoriasis and atopic dermatitis. We initiated two pivotal Phase 3 clinical trials to evaluate tapinarof for the treatment of psoriasis in May 2019 and expect to report top-line results from these trials in the first half of 2020. If these pivotal Phase 3 clinical trials are successful, we anticipate submitting an NDA for tapinarof for the treatment of psoriasis to the FDA in 2021. In addition, we are currently evaluating our development plans for tapinarof for the treatment of atopic dermatitis, and anticipate potentially initiating Phase 3 clinical trials of tapinarof for the treatment of atopic dermatitis as early as 2020, subject to receipt of sufficient additional capital.

 

∎

Advance development of our innovative product pipeline. We plan to initiate a Phase 2a clinical trial of topical cerdulatinib for the treatment of vitiligo in 2019, with top-line results expected in the second half of 2020, and evaluate a Phase 2 clinical trial of DMVT-504 for the treatment of PFH. We are also advancing preclinical development of DMVT-503 for the treatment of acne vulgaris.

 

∎

Establish a specialized team to commercialize our product candidates, if approved. We intend to commercialize tapinarof or any other product candidates that we may successfully develop in North America by building a highly specialized sales force and managed care and access organization. We plan to primarily focus on prescribing dermatologists. Our management team has extensive experience with the commercial launch of dermatology products and will lead our commercialization strategy.

 

∎

Pursue collaboration opportunities to further maximize the value of our portfolio. We intend to pursue collaboration opportunities with third parties in select sales channels and geographies, including Europe and Japan, to maximize the global potential of our portfolio.

 

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Our Development Programs

We are currently developing five product candidates across five different indications. Our development pipeline is summarized in the figure below:

 

 

In connection with our acquisition of tapinarof from GSK, we received worldwide rights to tapinarof except certain intellectual property rights in China. For each of our other product candidates, we did not retain intellectual property rights with respect to China and South Korea. See “—Asset Acquisitions and License Arrangements” for more information.

Unmet Need and Market Opportunities in Psoriasis and Atopic Dermatitis

Medical dermatology is a large and growing market that encompasses inflammatory skin diseases and immuno-dermatology indications. The global market value was estimated at approximately $22 billion in 2017 and is expected to grow at a compound annual growth rate, or CAGR, of approximately 10% through 2024 to over $43 billion, according to EvaluatePharma.

 

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Global Medical Dermatology Market Value and Forecast 2017 – 2024 ($ in billions)

 

Source: EvaluatePharma

The market’s size and growth potential has been driven by large-sized pharmaceutical companies, such as Johnson & Johnson, AbbVie, Pfizer, Novartis and Amgen. We believe there is an opportunity to broaden the market with innovative products for improved, safer and cost-effective treatments and that dissatisfaction remains with current treatment options. We believe that a tremendous market opportunity awaits innovative therapeutics that are able to fill the significant unmet needs of patients with inflammatory skin conditions, such as psoriasis and atopic dermatitis.

Psoriasis

Psoriasis is a chronic, inflammatory disease with skin lesions characterized by red patches and plaques with silvery scale that affects an estimated 7.5 million people in the United States. Its most common form, psoriasis vulgaris or plaque psoriasis, constitutes approximately 90% of all cases of psoriasis. Psoriasis severity is typically classified by BSA involvement: mild (less than 3% BSA), moderate (3% to 10% BSA) and severe (greater than 10% BSA). Based on this guideline, approximately 85% of patients with psoriasis in the United States have mild to moderate disease and 15% have severe disease. Common signs and symptoms of psoriasis include itching and burning, which can be very intense and frequent. Other symptoms can include cracking and bleeding of the skin. Psoriasis can cause significant social and emotional distress.

Psoriasis has the largest global market among inflammatory skin diseases and medical dermatologic conditions, with approximately $13.2 billion in sales in 2017, approximately $9 billion of which was in the United States, according to EvaluatePharma. This global market is projected to grow to nearly $22 billion, by 2024, including approximately $15 billion in the United States, according to EvaluatePharma. The U.S. market represents more than half of the global market for psoriasis prescriptions, and topical treatments account for approximately 73% of prescriptions in the United States.

 

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Psoriasis U.S. Prescription Market

 

Source: IQVIA

Figures presented in millions of prescriptions in MAT July 2018.

TCS are the most commonly prescribed first-line therapy across all severities of psoriasis, comprising approximately 66% of total psoriasis prescriptions in the United States in 2018. However, long-term and continual TCS use carries the risk of a variety of significant and potentially irreversible side effects including skin atrophy, telangiectasias (spider veins), hypopigmentation (loss of skin pigment), adrenal gland suppression, contact allergy or infection and steroid-induced acne. These side effects often lead to cycles of intermittent use of TCS, resulting in episodic disease control and flares. As a result, psoriasis patients frequently report dissatisfaction with TCS for long-term disease control and are less likely to adhere to treatment regimens.

In moderate-to-severe cases, patients with psoriasis may be prescribed systemic oral or biologic therapies, including TNF-a and interleukin inhibitors. While highly efficacious, biologic therapies necessitate frequent injections, entail regular physician appointments, have potential systemic toxicities and often require laboratory monitoring. As a result, use of biologics remains limited to patients with significant disease burden. Patients on biologics often continue to use TCS on resistant patches and plaques. Oral therapies have not achieved the same level of efficacy as biologics, yet also have potential systemic side-effects. Despite inferior efficacy compared to biologics, oral therapies comprise significant market share, indicating a need for more convenient treatment options with efficacy in the moderate-to-severe symptom setting. As with biologics, patients on oral therapies often require topical supplementation. Thus, topical therapies are an important part of clinical practice and the treatment regimen across the disease spectrum.

Atopic Dermatitis

Atopic dermatitis is a chronic, itchy inflammatory skin disease that affects an estimated 28 million people in the United States. Atopic dermatitis has a complex pathophysiology involving genetic, immunologic and environmental factors, culminating in skin barrier dysfunction and immune system dysregulation. The condition occurs most frequently in children (up to 30% worldwide). Approximately 60% of those who develop atopic dermatitis show symptoms in the first year of life and up to 85% show symptoms by five years of age. While more prevalent in infancy and adolescence, up to 10% of adults worldwide suffer from atopic dermatitis. Approximately 90% of these patients have mild to moderate disease, while 10% have severe disease. Atopic dermatitis is associated with several comorbidities, including asthma, allergies and depression.

The global market for atopic dermatitis treatment reached approximately $1.2 billion in sales in 2017, including approximately $0.5 billion in the United States, and is projected to grow to approximately $7.0 billion by 2024, including approximately $3.6 billion in the United States, according to EvaluatePharma. The U.S. market represents more than half of the global market for atopic dermatitis prescriptions, with topical treatments accounting for approximately 99% of atopic dermatitis prescriptions in the United States. For 2019, sales of EUCRISA, an approval topical PDE4 inhibitor for the treatment of atopic dermatitis, are expected to reach approximately $286 million, according to EvaluatePharma.

 

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Atopic Dermatitis U.S. Market

 

Source: IQVIA

Figures presented in millions of prescriptions in MAT July 2018.

Safety concerns limit the long-term use of TCS, particularly for children. The increased body surface area to mass ratio in children results in increased absorption and systemic exposure. The American Academy of Dermatology guidelines suggest limiting long-term use of TCS in children to avoid the risk of systemic side effects. As such, 86% of U.S. patients report dissatisfaction with current treatment options for atopic dermatitis according to the National Eczema Association. Biologic therapies are more efficacious. However, as in psoriasis, use of biologic therapy such as the recently approved DUPIXENT is limited to patients with significant disease burden and has been associated with significant long-term safety risks. In addition, PDE4 inhibitors developed to treat atopic dermatitis have been associated with side effects including application site burning and stinging.

Addressing the Unmet Need: Tapinarof

We believe tapinarof has the potential to fill the need for a long-term treatment option for psoriasis and atopic dermatitis. Tapinarof is designed to be a single or complementary therapy in the form of a steroid-free, once-daily, cosmetically elegant topical cream without the limitations associated with biologics and long-term continual use of TCS. In multiple clinical trials for the treatment of psoriasis and atopic dermatitis, tapinarof showed clinically meaningful and statistically significant responses in psoriasis and atopic dermatitis disease scores, with a favorable tolerability profile observed in these trials. We believe tapinarof will appeal to physicians and payors who wish to minimize or delay the use of costly systemic therapies in patients with more disease severity and for whom TCS prove inadequately effective.

Tapinarof reduces proinflammatory cytokines, upregulates skin barrier components, and boosts anti-oxidant pathways to suppress oxidative damage that contributes to inflammatory skin conditions. Tapinarof modulates the aryl hydrocarbon receptor, or AhR, in a novel way through transient binding as opposed to persistent activation. This produces several desirable biological effects in patients with inflammatory skin disease. AhR reduces Th17 and Th2 pro-inflammatory cytokines, which are understood to play a central role in psoriasis and atopic dermatitis, respectively. AhR regulates several immune responses by controlling the differentiation of specific T cell subpopulations, including Th17, Th2 and T-regulatory subtypes. AhR also plays an important role in the development and maintenance of the skin barrier and its response to external environmental signals. An impairment of skin barrier function has been well described in specific inflammatory skin diseases. Through AhR modulation and signaling, tapinarof promotes epidermal barrier restoration. Finally, AhR modulation facilitates the body’s reaction to oxidative stress by increasing the production of Nrf-2. Nrf-2 is transcription factor that regulates the expression of antioxidant proteins in response to the oxidative damage that is triggered by injury or inflammation. Reduced Nrf-2 levels have been observed in psoriatic skin. Thus, boosting Nrf-2 levels via the AhR pathway may contribute to tapinarof’s therapeutic effect.

 

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Tapinarof’s Mechanism of Action

 

Prior Clinical Development for Tapinarof

Tapinarof and predecessor formulations of tapinarof cream have been dosed in over 600 subjects across 10 clinical trials conducted to date by GSK and Welichem, including approximately 300 subjects dosed in Phase 2b clinical trials conducted by GSK. Tapinarof was observed to be well-tolerated in each trial. A summary of the studies and trials is set forth in the table below. The trials conducted by Welichem as well as two Phase 1 trials conducted by GSK (IPS117191 and 201661) involved predecessor formulations of tapinarof cream with different component excipients. The Phase 2b clinical trials conducted by GSK were conducted using the current formulation of tapinarof, which we intend to use in future clinical trials, including our planned Phase 3 clinical trials. We intend to use the results of the prior studies and trials that used predecessor formulations in support of our NDA for tapinarof submitted to the FDA. The current formulation of tapinarof was designed to provide further physical and chemical stability and improve uniformity of distribution of the active pharmaceutical ingredient in tapinarof cream. However, given that the efficacy and tolerability results across the different tapinarof formulations have been similar so far over 12-week treatment periods, we do not expect that the differences in component excipients for predecessor formulations will impact our ability to rely on the results of those prior studies and trials in support of our NDA for tapinarof.

In addition, tapinarof and predecessor formulations of tapinarof cream have been evaluated in a variety of preclinical and clinical studies. In each, tapinarof and predecessor formulations of tapinarof cream showed immunological effects consistent with its mechanism of action and with the data that has been gathered in the clinical setting.

 

STUDY		TRIAL SPONSOR		TREATMENT REGIMEN (TOPICAL APPLICATION)		KEY STUDY FINDINGS
Phase I randomized, double-blind, vehicle-controlled proof-of-concept trial WBI-1001-101 for the treatment of psoriasis   Predecessor formulation		Welichem		Study cream on one side (0.5% QD, 0.5% BID, 1% QD, 1% BID, 2% QD, or 2% BID)   Vehicle on the other side   28-day trial period   36 total subjects		∎   Primary objective – safety and tolerability.   ∎   Secondary objective – efficacy based on mean improvements in PGA score, and BSA, induration, erythema and scaling of target lesion compared with vehicle (not powered to show statistical significance).   ∎   Generally well-tolerated at 0.5% and 1% concentrations, with higher incidence of mild application site reactions at 2% QD and BID. 26 subjects experienced at least one AE, which were all mild except for one event of moderate bronchospasm. Eight subjects experienced mild skin AEs that were considered related to treatment. The most common AEs were nasopharyngitis

 

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STUDY		TRIAL SPONSOR		TREATMENT REGIMEN (TOPICAL APPLICATION)		KEY STUDY FINDINGS
						(unrelated to treatment), headache (unrelated to treatment), pustular rash and folliculitis. No subjects experienced any serious adverse events, or SAEs, and there were no discontinuations.       ∎   Subjects treated with study cream at both concentrations QD and BID showed greater improvement in PGA scores relative to vehicle at both day 14 and day 28 except day 28 for the 1% QD group. Mean improvement in PGA score from baseline for study treatment ranged from 0.8 to 1.5 at day 14 and 0.8 to 1.5 at day 28, compared to 0.2 to 0.8 at day 14 and 0.5 to 1.0 at day 28 for vehicle.   ∎   Study cream also showed greater improvement in induration, erythema and scaling for all groups at both day 14 and day 28 except (i) day 14 for erythema for the 1% BID group and (ii) day 28 for scaling for the 1% QD group.
Phase 2a randomized, double-blind, vehicle- controlled trial WBI-1001-102 for the treatment of psoriasis   Predecessor formulation		Welichem		Study cream at 1% BID   Vehicle cream BID   12-week trial period   61 total subjects		∎   Primary endpoint – efficacy based on mean improvements in PGA score   ∎   Secondary endpoint – efficacy based on PGA score, PASI score, BSA score and target lesion assessments   ∎   At week 12, patients in the study cream 1% BID group showed statistically significant (p<0.0001) improvement in mean percentage change in PGA score from baseline (62.5%) versus placebo (14.2%).   ∎   The proportion of patients who achieved a PGA score of “clear” (o) or “almost clear” (1) at day 84 for the ITT population was 67.5% for the treatment group as compared to 4.8% for the vehicle group (p<0.0001).   ∎   At week 12, patients treated with study cream 1% BID showed statistically significant improvements in mean percentage changes from baseline in PASI score (71%, p<0.0001), BSA score (79%, p<0.0001) and target lesion

 

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STUDY		TRIAL SPONSOR		TREATMENT REGIMEN (TOPICAL APPLICATION)		KEY STUDY FINDINGS
						assessments of induration, scaling and erythema (mean of 76%, p<0.0001).   ∎   Generally well-tolerated, with mild to moderate application site reactions. 43 subjects experienced at least one AE (32 in the treatment group). 25 AEs were considered related to treatment. The most common AEs were nasopharyngitis, application site discoloration and application site dermatitis. One subject in the vehicle group experienced a SAE (a severe cerebrovascular event) resulting in discontinuation prior to end of trial period.
Phase 2a randomized, double-blind, vehicle-controlled trial WBI-1001-201 for the treatment of atopic dermatitis   Predecessor formulation		Welichem		Study cream at 0.5% BID and 1% BID   Vehicle cream BID   28-day trial period   37 total subjects		∎   Primary endpoint – safety and tolerability.   ∎   Secondary endpoint – efficacy based on mean percentage change from baseline for scores for Eczema Area and Severity Index, or EASI, IGA, itch reduction and BSA as well as the index for scoring atopic dermatitis, or SCORAD.     ∎   Generally well-tolerated at 0.5% and 1% concentrations, with mild to moderate application site reactions. 31 subjects experienced at least one AE (19 in the treatment group). No AEs were considered related to treatment. The most common AEs were viral respiratory tract infection, headache, vomiting, nausea, dermatosis, back pain and itch. No subjects experienced any SAEs, and there were no discontinuations.   ∎   Efficacy data from post-hoc statistical analyses showed that at day 28, patients treated with both 0.5% and 1% study cream showed statistically significant improvements in mean percentage changes from baseline in EASI score (59.3% and 54.9%, respectively, compared with 7.1% for vehicle) (p = 0.03), SCORAD (56.4% and 50.1%, respectively, compared with 18.4% for vehicle) (p = 0.04), IGA (38.9% and 45.8%, respectively, compared with 5.6% for vehicle) (p = 0.003) and itch reduction (74.0% and 56.0%, respectively, compared with 10.8% for vehicle) (p = 0.04), as well as affected BSA reduction (64.4% and 57.7%,

 

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STUDY		TRIAL SPONSOR		TREATMENT REGIMEN (TOPICAL APPLICATION)		KEY STUDY FINDINGS
						respectively, compared with 10.8% for vehicle) (p = 0.03).
Phase 2b randomized, double-blind, vehicle- controlled dose-ranging trial WBI-1001-202 for the treatment of atopic dermatitis   Predecessor formulation		Welichem		Study cream at 0.5% and 1% BID   Vehicle cream BID   12-week trial period; at week 6,   subjects in vehicle group re-randomized to receive study cream for remaining six weeks.   148 total subjects		∎   Primary endpoint – efficacy based on mean percentage change from baseline in IGA scores.   ∎   Secondary endpoint – efficacy based on mean percentage change from baseline in EASI, BSA and itch scores and SCORAD.   ∎   At day 42 (vehicle-controlled six-week portion), patients treated with both 0.5% and 1% study cream showed statistically significant improvements in mean percentage changes from baseline in IGA score: 43% (p < 0.001) and 56.3% (p < 0.001), respectively, compared to 14.7% for vehicle. At day 84 (non-vehicle-controlled six-week portion), patients treated with 0.5% and 1% cream showed mean percentage changes from baseline in IGA score of 48.9% and 73.3%, respectively.     ∎   At day 42, patients treated with both 0.5% and 1% study cream also showed significant improvements in mean percentage changes from baseline in EASI score (68.9% and 76.3%, respectively, compared with 23.3% for vehicle) (p < 0.001), BSA (65.5% and 71.5%, respectively, compared with 12.1% for vehicle) (p < 0.05), itch (29.8% and 66.9%, respectively, compared with 9.5% for vehicle) (p = 0.002 for 1% study cream) and SCORAD (57.5% and 63.4%, respectively, compared with 13.9% for vehicle) (p < 0.05). There was no significant difference in mean percentage change from baseline at day 84 except for itch (0.5% study cream) and BSA score (both 0.5% and 1% study cream).   ∎   Generally well-tolerated at 0.5% and 1% concentrations, with mild to moderate application site reactions. 104 subjects experienced at least one AE (82 subjects in treatment groups). 17 AEs were considered related to

 

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