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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

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

For the quarterly period ended March 31, 2020

OR

 

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

For the transition period from                      to                     

Commission file number: 001-37500

 

 

Chiasma, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   76-0722250

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

140 Kendrick Street, Building C East

Needham, Massachusetts 02494

(Address of principal executive office) (Zip Code)

(617) 928-5300

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock, $0.01 par value   CHMA   NASDAQ Global Select Market

 

 

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

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

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

 

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

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

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

As of May 4, 2020, there were 42,265,341 shares of the registrant’s Common Stock, $0.01 par value per share, outstanding.

 

 

 


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. These statements include all matters that are not related to present facts or current conditions or that are not historical facts, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth. The words “anticipate,” “believe,” “could,” “continue,” “should,” “predict,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “will,” “would,” or the negative of these terms or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, but are not limited to, statements about:

 

   

our efforts to potentially obtain regulatory approval of octreotide capsules, conditionally trade-named MYCAPSSA ®, in the United States;

 

   

the timing of the regulatory review process, including our expectation that the FDA will respond to our NDA resubmission by the June 26, 2020 Prescription Drug User Fee Act, or PDUFA date;

 

   

our expected commercial launch timing of MYCAPSSA in the United States, if FDA approval of our NDA and our first planned prior approval manufacturing supplement is obtained;

 

   

our ability to obtain supply of sufficient amounts of octreotide capsules to support our planned commercial launch in the United States, if FDA approval of our NDA and our planned prior approval manufacturing supplements is obtained, and clinical trials;

 

   

our development of octreotide capsules for the treatment of acromegaly;

 

   

our efforts to potentially obtain regulatory approval of octreotide capsules in the European Union by conducting the MPOWERED Phase 3 clinical trial;

 

   

the timing and receipt and announcement of top-line and other clinical data, including our ability to release top-line data from the MPOWERED trial during the fourth quarter of 2020;

 

   

the therapeutic benefits, effectiveness and safety of octreotide capsules;

 

   

our estimates of the size and characteristics of the markets that may be addressed by octreotide capsules;

 

   

the commercial success and market acceptance of octreotide capsules or any future product candidates that are approved for marketing in the United States or other countries;

 

   

our ability to generate future revenue;

 

   

the safety and efficacy of therapeutics marketed by our competitors that are targeted to indications which octreotide capsules have been developed to treat;

 

   

our ability to leverage our Transient Permeability Enhancer, or TPE, platform to develop and commercialize novel oral product candidates incorporating peptides that are currently only available in injectable or other non-absorbable forms;

 

   

the possibility that competing products or technologies may make octreotide capsules, other product candidates we may develop and successfully commercialize or our TPE technology obsolete;

 

   

our ability to secure collaborators to license, manufacture, market and sell octreotide capsules or any products for which we receive regulatory approval in the future;

 

   

our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

 

   

our product development and operational plans generally; and

 

   

our ability to continue as a going concern and estimates and expectations regarding our capital requirements, cash and expense levels and liquidity sources.

These forward-looking statements are not exhaustive. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and our prior filings with the U.S. Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk

 

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factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us”, “our” and “Chiasma” refer to Chiasma, Inc. and our subsidiaries. We own various U.S. federal trademark registrations and applications, and unregistered trademarks and service marks, including “Chiasma,” “TPE”, “MYCAPSSA” and our corporate logo. Other trademarks or service marks that may appear in this Quarterly Report on Form 10-Q are the property of their respective holders. For convenience, we do not use the ® and symbols in each instance in which one of our trademarks appears throughout this Quarterly Report on Form 10-Q, but this should not be construed as any indication that we will not assert, to the fullest extent under applicable law, our rights thereto. We do not intend to use or display other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

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Chiasma, Inc.

INDEX

 

         Page  
  PART I – FINANCIAL INFORMATION   

Item 1.

 

Financial Statements (Unaudited)

     4  
 

Condensed Consolidated Balance Sheets as of March  31, 2020 and December 31, 2019

     4  
 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019

     5  
 

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2020 and 2019

     6  
 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2019

     7  
 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

     8  
 

Notes to Condensed Consolidated Financial Statements

     9  

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     17  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     24  

Item 4.

 

Controls and Procedures

     24  
  PART II – OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     25  

Item 1A.

 

Risk Factors

     25  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     76  

Item 6.

 

Exhibits

     76  
 

Signatures

     77  

 

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PART I — FINANCIAL INFORMATION

 

Item 1.

Financial Statements

Chiasma, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

    March 31, 2020     December 31, 2019  
    (in thousands except share data)  

Assets

   

Current assets

   

Cash and cash equivalents

  $ 42,555     $ 27,855  

Marketable securities

    36,707       64,520  

Prepaid expenses and other current assets

    4,877       3,881  
 

 

 

   

 

 

 

Total current assets

    84,139       96,256  

Property and equipment, net

    590       334  

Other assets

    1,993       2,236  
 

 

 

   

 

 

 

Total assets

  $ 86,722     $ 98,826  
 

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

   

Current liabilities

   

Accounts payable

  $ 5,450     $ 3,253  

Accrued expenses

    7,238       7,576  

Other current liabilities

    716       546  
 

 

 

   

 

 

 

Total current liabilities

    13,404       11,375  

Long-term liabilities

    1,575       1,682  
 

 

 

   

 

 

 

Total liabilities

    14,979       13,057  
 

 

 

   

 

 

 

Commitments and contingencies (Note 9)

   

Stockholders’ equity:

   

Common stock, $0.01 par value; authorized 125,000,000 shares at March 31, 2020 and December 31, 2019; issued and outstanding 42,265,341 shares at March 31, 2020 and 42,078,416 shares at December 31, 2019

    423       421  

Preferred stock, $0.01 par value; authorized 5,000,000 shares; none outstanding

    —         —    

Additional paid-in capital

    359,637       358,245  

Accumulated other comprehensive income

    3       37  

Accumulated deficit

    (288,320     (272,934
 

 

 

   

 

 

 

Total stockholders’ equity

    71,743       85,769  
 

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 86,722     $ 98,826  
 

 

 

   

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

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Chiasma, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

    For the Three Months Ended March 31,  
    2020     2019  
    (in thousands except share and per share
data)
 

Operating expenses:

   

General and administrative

  $ 7,582     $ 2,450  

Research and development

    8,125       6,471  
 

 

 

   

 

 

 

Total operating expenses

    15,707       8,921  
 

 

 

   

 

 

 

Loss from operations

    (15,707     (8,921

Other income, net

    (398     (184
 

 

 

   

 

 

 

Loss before income taxes

    (15,309     (8,737

Provision for income taxes

    77       13  
 

 

 

   

 

 

 

Net loss

    (15,386     (8,750
 

 

 

   

 

 

 

Earnings per share

   

Basic

  $ (0.36   $ (0.36
 

 

 

   

 

 

 

Diluted

  $ (0.36   $ (0.36
 

 

 

   

 

 

 

Weighted-average shares outstanding:

   

Basic

    42,187,694       24,466,617  
 

 

 

   

 

 

 

Diluted

    42,187,694       24,466,617  
 

 

 

   

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

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Chiasma, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

 

    For the Three Months Ended March 31,  
    2020     2019  
    (in thousands)  

Net loss

  $ (15,386   $ (8,750

Other comprehensive income (loss):

   

Unrealized gain (loss) on available for sale securities, net

    (34     18  
 

 

 

   

 

 

 

Total other comprehensive income (loss):

    (34     18  
 

 

 

   

 

 

 

Comprehensive loss

  $ (15,420   $ (8,732
 

 

 

   

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

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Chiasma, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

                      Accumulated              
                Additional     Other           Total  
    Common Stock     Paid-in     Comprehensive     Accumulated     Stockholders’  
    Shares     Amount     Capital     Income (Loss)     Deficit     Equity  
    (in thousands except share data)  

Balance, December 31, 2019

    42,078,416     $ 421     $ 358,245     $ 37     $ (272,934   $ 85,769  

Stock-based compensation

    —         —         1,162       —         —         1,162  

Exercise of stock options

    186,925       2       230       —         —         232  

Other comprehensive loss

    —         —         —         (34     —         (34

Net loss

    —         —         —         —         (15,386     (15,386
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2020

    42,265,341     $ 423     $ 359,637     $ 3     $ (288,320   $ 71,743  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

                      Accumulated              
                Additional     Other           Total  
    Common Stock     Paid-in     Comprehensive     Accumulated     Stockholders’  
    Shares     Amount     Capital     Income (Loss)     Deficit     Equity  
    (in thousands except share data)  

Balance, December 31, 2018

    24,456,120     $ 245     $ 270,509     $ (16   $ (236,614   $ 34,124  

Stock-based compensation

    —         —         622       —         —         622  

Exercise of stock options

    33,839       —         3       —         —         3  

Additional paid in capital on account of vested portion of restricted stock

    —         —         16       —         —         16  

Other comprehensive income

    —         —         —         18       —         18  

Net loss

    —         —         —         —         (8,750     (8,750
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2019

    24,489,959     $ 245     $ 271,150     $ 2     $ (245,364   $ 26,033  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

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Chiasma, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Three Months Ended March 31,  
     2020     2019  
     (in thousands)  

Operating Activities:

    

Net loss

   $ (15,386   $ (8,750

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation

     26       16  

Stock-based compensation

     1,162       622  

Accretion on marketable securities, net

     (65     (131

Amortization of right-of-use asset

     121       39  

Benefit for deferred income taxes

     (24     (10

Changes in operating assets and liabilities:

    

Prepaid expenses and other current assets

     (1,298     1,015  

Accounts payable and accrued expenses

     2,924       (751

Other assets

     (19     9  

Other current and long-term liabilities

     (31     (9
  

 

 

   

 

 

 

Net cash used in operating activities

     (12,590     (7,950

Investing Activities:

    

Purchases of marketable securities

     (8,927     (12,282

Maturities of marketable securities

     36,771       17,250  

Purchases of property and equipment

     (282     (7
  

 

 

   

 

 

 

Net cash provided by investing activities

     27,562       4,961  

Financing Activities:

    

Exercise of stock options

     232       3  

Payments of short-term borrowing

     (504     —    
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (272     3  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     14,700       (2,986

Cash and cash equivalents, beginning of period

     27,855       13,060  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 42,555     $ 10,074  
  

 

 

   

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

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CHIASMA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

 

1.

Description of Business and Summary of Significant Accounting Policies

Chiasma, Inc. is a clinical, late stage biopharmaceutical company incorporated in 2001 under the laws of the State of Delaware. Chiasma, Inc. is headquartered in Massachusetts and has two wholly owned subsidiaries; Chiasma (Israel) Ltd., and Chiasma Securities Corp, collectively referred to as “the Company,” “we,” “us,” “our” or “Chiasma”. We are focused on improving the lives of patients who face challenges associated with their existing treatments for rare and serious chronic disease. Employing our proprietary Transient Permeability Enhancer (“TPE”) technology platform, we seek to develop oral medications that are currently available only as injections. We are currently developing oral octreotide capsules, conditionally trade-named “MYCAPSSA”, our TPE platform-based clinical product candidate, for the treatment of acromegaly. In July 2019, we reported positive top-line data from our second completed Phase 3 clinical trial of octreotide capsules in adult patients for the treatment of acromegaly. The trial, referred to as CHIASMA OPTIMAL, was a randomized, double-blind, placebo-controlled, nine-month trial that enrolled 56 adult acromegaly patients. We initiated this trial following our agreement with the United States Food and Drug Administration (“FDA”) on the design of the trial, reached through a Special Protocol Assessment in August 2017. In December 2019, we resubmitted our New Drug Application (“NDA”) and in early January 2020 the FDA accepted it for review and assigned a Prescription Drug User Fee Act, (“PDUFA”) target action date of June 26, 2020.

Acromegaly is a rare and debilitating condition that is caused by the body’s production of excess growth hormone. Octreotide is an analog of somatostatin, a natural inhibitor of growth hormone secretion. Octreotide capsules have been granted orphan designation in the United States and the European Union for the treatment of acromegaly. We retain worldwide rights to develop and commercialize octreotide capsules.

We are also currently conducting an international Phase 3 clinical trial, referred to as MPOWERED, of oral octreotide capsules for the maintenance treatment of adult patients with acromegaly to support regulatory approval in the European Union by the European Medicines Agency (“EMA”). The MPOWERED trial is a global, randomized, open-label and active-controlled 15-month trial initially designed to enroll up to 150 patients. The EMA requested that a minimum of 80 patients who are responders to octreotide capsules per the protocol following the six-month run-in phase be randomized to either remain on octreotide capsules or return to injectable somatostatin receptor ligands (octreotide or lanreotide), and then followed for an additional nine months. In June 2019, we completed the enrollment of 146 total patients in MPOWERED and in January 2020 completed the randomization in that trial.

In April 2019, we completed a follow-on public offering of common stock in which we sold 7,263,158 shares of common stock at $4.75 per share for aggregate net proceeds of approximately $32.2 million after underwriting fees and offering expenses.

In August 2019, we completed a follow-on public offering of common stock in which we sold 10,166,427 shares of common stock at $5.50 per share for aggregate net proceeds of approximately $52.3 million after underwriting fees and offering expenses.

In April 2020, we entered into an Open Market Sales Agreement (“ATM Agreement”) for “at the market offerings” with Jefferies LLC (“Jefferies”), which allows us to offer and sell up to $60.0 million in gross proceeds of common stock from time to time, through Jefferies, acting as our sales agent or principal. To date, we have not sold any common stock under the ATM Agreement.

In April 2020, we entered into a Revenue Interest Financing Agreement (the “Revenue Interest Financing Agreement”) with Healthcare Royalty Partners IV, L.P. (“HCR”) for up to $75.0 million. The initial funding of $25.0 million, less certain transaction expenses, was completed in April 2020 (see Note 6).

Consideration of Going Concern and Management’s Plans

Under the existing accounting guidance, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the condensed consolidated financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the condensed consolidated financial statements are issued. When substantial doubt is determined to exist, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans; however, is only

 

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considered if both (1) it is probable that the plans will be effectively implemented within one year after the date the condensed consolidated financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the condensed consolidated financial statements are issued.

We have incurred substantial operating losses since inception, and we expect our operating losses and negative operating cash flows to continue for the foreseeable future. For the three months ended March 31, 2020, we had a net loss of $15.4 million and used $12.6 million of cash in operations. For the year ended December 31, 2019, we had a net loss of $36.3 million and used $35.0 million of cash in operations. At March 31, 2020, we had cash, cash equivalents and marketable securities of $79.3 million and an accumulated deficit of $288.3 million. We expect to continue to incur significant costs in the upcoming year as we prepare for the potential approval and commercial launch of octreotide capsules in the United States. The FDA has assigned a PDUFA target action date of June 26, 2020 to our NDA resubmission. We also plan to continue to fund our international Phase 3 MPOWERED clinical trial of octreotide capsules in acromegaly to support potential regulatory approval in the European Union. Our current combined cash, cash equivalents and marketable securities are not sufficient to fund these activities, as currently planned, for one year after the date these condensed consolidated financial statements are issued. Accordingly, we believe these conditions, in the aggregate, raise substantial doubt regarding our ability to continue as a going concern for a period of one year from the date the condensed consolidated financial statements are issued.

In order to fund these efforts, in part, we entered into a $75.0 million Revenue Interest Financing Agreement with HCR, $50.0 million of which funding remains contingent upon the achievement of certain milestones. We expect to further finance our cash needs through equity financings, and we will also opportunistically consider license and collaboration agreements with potential partners or convertible debt financing to the extent such sources are identified and available. If FDA approval is obtained, we also plan to use revenues, if any, generated from the sale of octreotide capsules in the U.S. to fund our operations. While we believe our plans to achieve the Revenue Interest Financing Agreement funding milestones, to raise additional funds and generate product sales will alleviate the conditions that raise substantial doubt, these plans are not entirely within our control and cannot be assessed as being probable of occurring. Further, while we have received a PDUFA target action date from the FDA, there can be no assurances that FDA approval of octreotide capsules will be received.

Basis of Presentation

We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the SEC regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by accounting principles generally accepted in the United States (“U.S. GAAP”) for annual financial statements have been condensed or omitted. The information included in this quarterly report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019. The year-end condensed consolidated balance sheet data presented for comparative purposes was derived from our audited financial statements but does not include all disclosures required by U.S. GAAP. In the opinion of management, we have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as our audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. Interim results are not necessarily indicative of results for a full year or for any other subsequent interim period.

Cash Equivalents

Cash equivalents consist of highly liquid instruments that mature within three months or less from the date of purchase.

Marketable Securities

Our investments primarily consist of commercial paper and corporate and government debt securities. These marketable securities are classified as available-for-sale, and as such, are reported at fair value on our condensed consolidated balance sheets. Unrealized holding gains and losses are reported within accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, together with interest on securities, are included in other income, net, on our condensed consolidated statements of operations.

If a decline in the fair value of a marketable security below our cost basis is determined to be other than temporary, such marketable security is written down to its estimated fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. The cost of securities sold is based on the specific identification method.

 

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Concentrations of credit risk

Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash, cash equivalents and marketable securities. We routinely maintain deposits in financial institutions in excess of government insured limits. Management believes that we are not exposed to significant credit risk as our deposits are held at financial institutions that management believes to be of high credit quality and we have not experienced any significant losses in these deposits. We regularly invest excess operating cash in deposits with major financial institutions and money market funds and in notes issued by the U.S. government, as well as in fixed income investments and U.S. bond funds, both of which can be readily purchased and sold using established markets. We believe that the market risk arising from our holdings of these financial instruments is mitigated based on the fact that many of these securities are either government backed or of high credit rating.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes during the reporting period. We base these estimates and assumptions on historical experience when available, and on various factors that we believe to be reasonable under the specific circumstances. Significant estimates relied upon in preparing the accompanying condensed consolidated financial statements include, but are not limited to, accounting for stock-based compensation, income taxes, and accounting for certain accruals. We assess the above estimates on an ongoing basis; however, actual results could materially differ from those estimates.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued new guidance which will require more timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The new guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The new guidance also requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. On January 1, 2020, we adopted this standard. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

2. Investments

Our investments consisted of the following as of March 31, 2020 and December 31, 2019:

 

    As of March 31, 2020  
    Amortized Cost     Gross Unrealized
Gains
    Gross Unrealized
Losses
    Estimated Fair
Value
 
    ($ in thousands)  

Money market funds

  $ 41,312     $ —       $ —       $ 41,312  

Corporate notes

    21,527       1       (17     21,511  

Commercial paper

    15,177       19       —         15,196  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 78,016     $ 20     $ (17   $ 78,019  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

    As of December 31, 2019  
    Amortized Cost     Gross Unrealized
Gains
    Gross Unrealized
Losses
    Estimated Fair
Value
 
    ($ in thousands)  

Money market funds

  $ 23,012     $ —       $ —       $ 23,012  

Corporate notes

    45,584       20       —         45,604  

Commercial paper

    20,899       17       —         20,916  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 89,495     $ 37     $ —       $ 89,532  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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As of March 31, 2020, we consider those securities that are in an unrealized loss position are temporary and are not due to credit losses. We have the ability to hold such investments until recovery of the fair value. We utilize the specific identification method in computing realized gains and losses. We had no realized gains and losses on our available-for-sale securities for the three months ended March 31, 2020 or 2019.

The fair values of our investments by classification in our condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019 were as follows:

 

    March 31, 2020     December 31, 2019  
    ($ in thousands)  

Cash and cash equivalents

  $ 41,312     $ 25,012  

Marketable securities

    36,707       64,520  
 

 

 

   

 

 

 

Total

  $ 78,019     $ 89,532  
 

 

 

   

 

 

 

Cash and cash equivalents in the table above exclude cash of $1.2 million and $2.8 million as of March 31, 2020 and December 31, 2019, respectively. The contractual maturity dates of all of our investments are less than one year.

3. Fair Value Measurements of Financial Instruments

Certain assets and liabilities are reported at fair value on a recurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The fair value accounting guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

 

   

Level 1 — Quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

 

   

Level 2 — Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly.

 

   

Level 3 — Inputs that are unobservable for the asset or liability.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The fair value measurements of our financial instruments are summarized in the table below:

 

    Fair Value Measurements at March 31, 2020  
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs (Level 3)
    Total  
    ($ in thousands)  

Cash equivalents:

       

Money market funds

  $ 41,312     $ —       $ —       $ 41,312  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cash equivalents

  $ 41,312     $ —       $ —       $ 41,312  

Marketable securities:

       

Corporate notes

  $ —       $ 21,511     $ —       $ 21,511  

Commercial paper

    —         15,196       —         15,196  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total marketable securities

    —         36,707       —         36,707  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 41,312     $ 36,707     $ —       $ 78,019  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Fair Value Measurements at December 31, 2019  
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs (Level 3)
    Total  
    ($ in thousands)  

Cash equivalents:

       

Money market funds

  $ 23,012     $ —       $ —       $ 23,012  

Corporate notes

    —         2,000       —         2,000  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cash equivalents

  $ 23,012     $ 2,000     $ —       $ 25,012  

Marketable securities:

       

Corporate notes

  $ —       $ 43,604     $ —       $ 43,604  

Commercial paper

    —         20,916       —         20,916  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total marketable securities

    —         64,520       —         64,520  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 23,012     $ 66,520     $ —       $ 89,532  
 

 

 

   

 

 

   

 

 

   

 

 

 

Our cash equivalents are classified as Level 1 assets under the fair value hierarchy as these assets have been valued using quoted market prices in active markets and do not have any restrictions on redemption. Our marketable securities are classified as Level 2 assets under the fair value hierarchy as these assets were primarily determined from independent pricing services, which normally derive security prices from recently reported trades for identical or similar securities, making adjustments based upon other significant observable market transactions. At the end of each reporting period, we perform quantitative and qualitative analysis of prices received from third parties to determine whether prices are reasonable estimates of fair value. After completing our analysis, we did not adjust or override any fair value measurements provided by our pricing services as of March 31, 2020 or December 31, 2019. We did not have any Level 3 assets being measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.

4. Earnings per Share of Common Stock

All common stock warrants and stock options have been excluded from the computation of diluted weighted-average shares outstanding because such securities would have an anti-dilutive impact due to net losses reported during the three months ended March 31, 2020 and 2019.

5. Accrued Expenses

As of March 31, 2020 and December 31, 2019, accrued expenses consisted of the following:

 

    March 31, 2020     December 31, 2019  
    ($ in thousands)  

Accrued general and administrative expenses

  $ 1,488     $ 647  

Accrued research and development expenses

    3,964       4,219  

Accrued payroll and employee benefits

    1,451       1,872  

Short-term borrowing

    335       838  
 

 

 

   

 

 

 

Total accrued expenses

  $ 7,238     $ 7,576  
 

 

 

   

 

 

 

6. Deferred Royalty Obligation

In April 2020, we entered into the Revenue Interest Financing Agreement with HCR whereby HCR will receive payments from us at a tiered percentage (the “Applicable Tiered Percentage”) of future net revenues of MYCAPSSA and any of our other future products, including worldwide net product sales and upfront payments, and milestones (the “Revenue Interests”). Under the terms of the agreement, we received $25.0 million, less certain transaction expenses, from HCR in April 2020 and are entitled to receive an additional $25.0 million subject to the FDA approval of MYCAPSSA for the maintenance treatment of adults with acromegaly before the first anniversary of the initial closing (the “FDA Condition”) and customary closing conditions and an additional $15.0 million upon the certain conditions related to commercial drug supply availability and first commercial sale of MYCAPSSA subject to customary closing conditions. We are also entitled to receive an additional $10.0 million in early 2022 subject to the achievement of a commercial milestone and customary closing conditions. In exchange for the total investment amount (“Investment Amount”) received, HCR will receive a tiered royalty starting in the low double digits on worldwide annual net revenues of MYCAPSSA and any other future products, subject to step-downs upon the achievement of certain annual revenues.

 

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HCR’s rights to receive the Revenue Interests shall terminate on the date on which HCR has received payments equal to 195% of the funded portion of the Investment Amount including the aggregate of all payments made to HCR as of such date, unless the Revenue Interest Financing Agreement is terminated earlier. If the FDA Condition is not met (and is not waived by HCR), we shall pay HCR an amount equal to 113.5% of the funded portion of the Investment Amount and the Revenue Interest Financing Agreement will then terminate. If HCR has not received payments equal to the 195% of the funded portion of the Investment Amount by the ten-year anniversary of the initial closing date and no event of default has occurred or is ongoing, among other things, we shall pay HCR an amount equal to the funded portion of the Investment Amount plus a specific annual rate of return less payments previously received. If a change of control of the Company occurs, we must immediately repay HCR the total amount actually funded plus a change of control premium, the amount of which is variable up to 95% based on timing and circumstances of such change of control and the amount funded and conditionally eligible to be funded by HCR as of the date of the change of control.

If HCR has not received 60% of the Investment Amount by September 30, 2023 or 100% of the Investment Amount by September 30, 2024, we must make cash payments sufficient to gross HCR up to such minimum amounts. Further, the Revenue Interest Financing Agreement requires us to maintain a minimum of $20.0 million in securitized cash and investment accounts during any quarter that the trailing four quarters of net revenue of MYCAPSSA is below a certain threshold. Our obligations under the Royalty Interest Financing Agreement are secured by a first priority perfected security interest in all of our Chiasma, Inc. cash and cash equivalents (as defined in the Royalty Interest Financing Agreement), all present and future net revenues of MYCAPSSA and all MYCAPSSA-related assets.

7. Warrants

As of December 31, 2019, there were 3,567,015 common stock warrants outstanding with exercise prices ranging from $0.09 per share to $9.13 per share. Such warrants were issued between October 2012 and February 2015 with expiration dates ranging from March 2022 through December 2024. There were no warrants issued or exercised during the three months ended March 31, 2020. There were 3,567,015 outstanding warrants as of March 31, 2020.

8. Stock Incentive Plans

In 2008, our board of directors adopted the 2008 Stock Incentive Plan (the “2008 Plan”), which provided for the grant of incentive stock options, nonqualified stock options, and restricted stock to employees, directors, and nonemployees of the Company up to 3,547,741 shares of common stock. Option awards expire 10 years from the grant date and generally vest over four years but vesting conditions can vary at the discretion of our board of directors.

In July 2015, the Company approved the 2015 Stock Option and Incentive Plan (the “2015 Plan”), which became effective upon our initial public offering. The 2015 Plan allow the grant of incentive stock options, nonqualified stock options, and restricted stock to employees, directors, and nonemployees of the Company initially up to 3,566,296 shares of common stock. In connection with the adoption of the 2015 Plan, no further option grants were permitted under the 2008 Plan and any expirations, cancellations, or terminations under the 2008 Plan are available for issuance under the 2015 Plan. On January 1, 2020, the number of shares reserved and available for issuance under the 2015 Plan increased by 1,683,136 shares of common stock pursuant to a provision in the 2015 Plan that provides that the number of shares reserved and available for issuance will automatically increase each January 1, beginning on January 1, 2016, by 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or such lesser number as determined by the compensation committee of the board of directors. As of March 31, 2020, the total number of shares authorized for stock award plans is 9,775,418 of which 1,598,475 remain available for grant. There are 7,408,536 stock options outstanding as of March 31, 2020.

Stock-based compensation for the three months ended March 31, 2020 and 2019 consisted of the following:

 

    Three Months Ended March 31,  
    2020     2019  
    ($ in thousands)  

General and administrative

  $ 953     $ 311  

Research and development

    209       311  
 

 

 

   

 

 

 

Total

  $ 1,162     $ 622  
 

 

 

   

 

 

 

 

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The fair value of each stock option issued was estimated at the date of grant using the Black-Scholes option model with the following weighted-average assumptions:

 

    Three Months Ended March 31,  
    2020     2019  

Expected volatility

    85     101

Expected term (years)

    6.3       6.0  

Risk-free interest rate

    1.44     2.52

Expected dividend yield

    0     0

We granted approximately 1,158,900 stock options in the three months ended March 31, 2020. The weighted-average grant date fair value per share of stock options granted during the three months ended March 31, 2020 was $3.35. We granted approximately 492,000 stock options in the three months ended March 31, 2019. The weighted-average grant date fair value per share of options granted during the three months ended March 31, 2019 was $2.99.

9. Commitments and Contingencies

Manufacturing Commitments

As of March 31, 2020, we had outstanding purchase orders for the acquisition of API in the aggregate amount of $10.2 million. The payments on these orders will occur following the deliveries of the API which are anticipated during 2020.

10. Leases

We determine if an arrangement is a lease at inception. We have operating leases for our office spaces and certain automobiles. Right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The right-of-use asset also includes direct costs incurred and is reduced by lease incentives. Lease agreements with lease and non-lease components are accounted for separately. As our leases do not provide an implicit rate, we use an estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. We recognize operating lease expense on a straight-line basis over the lease term.

 

    Three Months Ended March 31,  
    2020     2019  
    ($ in thousands)  

The components of lease expense were as follows:

   

Operating lease expense

  $ 167     $ 47  
 

 

 

   

 

 

 

Supplemental cash flow information related to leases was as follows:

   

Cash paid for amounts included in the measurement of lease liabilities:

   

Operating cash flows from operating leases

  $ 72     $ 45  

Right-of-use assets obtained in exchange for lease obligations:

   

Operating leases

  $ 94     $ 27  

 

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Table of Contents
     March 31, 2020  
     ($ in thousands)  

Supplemental balance sheet information related to leases was as follows:

  

Right-of-use assets

   $ 1,346  
  

Other current liabilities

   $ 628  

Long-term liabilities

     938  
  

 

 

 

Total lease liabilities

   $ 1,566  
  

 

 

 

Weighted average remaining lease term - operating leases

     28 Months  

Weighted average discount rate - operating leases

     10.7

Our lease right-of-use assets are recorded within other assets on our condensed consolidated balance sheets.

Future lease payments under noncancelable leases as of March 31, 2020 are as follows:

 

     ($ in thousands)  

Remainder of 2020

   $ 587  

2021

     715  

2022

     487  
  

 

 

 

Total future minimum lease payments

     1,789  

Less: imputed interest

     (223
  

 

 

 

Total

   $ 1,566  
  

 

 

 

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q and our prior filings with the SEC, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical, late-stage biopharmaceutical company focused on improving the lives of patients who face challenges associated with their existing treatments for rare and serious chronic disease. Employing our proprietary Transient Permeability Enhancer, or TPE®, technology platform, we seek to develop oral medications that are currently available only as injections. In January 2020, the U.S. Food and Drug Administration, or the FDA, accepted for review our New Drug Application, or NDA, for our oral octreotide capsules product candidate, conditionally trade-named MYCAPSSA®, for the maintenance treatment of adults with acromegaly. We resubmitted our NDA following positive results from our CHIASMA OPTIMAL Phase 3 clinical trial, which was conducted under a Special Protocol Assessment, or SPA, agreement with the FDA and designed to support FDA approval. The FDA assigned a Prescription Drug User Fee Act, or PDUFA, target action date of June 26, 2020, which is a six-month review. Our primary focus is on developing and seeking the regulatory approval and subsequent commercialization of oral octreotide capsules, our sole TPE platform-based clinical product candidate, for the treatment of adult patients with acromegaly in the United States and European Union

Acromegaly is a rare and debilitating condition that results from the body’s production of excess growth hormone, which in turn elevates insulin-like growth factor 1, or IGF-1. These elevated hormone levels result in a number of painful and disfiguring symptoms, including some acute, such as headaches, joint pain and fatigue, and some long-term, such as enlarged hands, feet and internal organs, as well as altered facial features. If not treated promptly, acromegaly can lead to serious illness and is associated with premature death, primarily due to cardiovascular disease. Octreotide is an analog of somatostatin, a natural inhibitor of growth hormone secretion. The current standard of care for patients diagnosed with acromegaly and not otherwise cured by surgical removal of the pituitary tumor consists of lifelong, once-monthly injections of an extended release somatostatin analog. We believe that octreotide capsules, if approved by regulatory authorities, will be the first somatostatin analog available for oral administration. Octreotide capsules have been granted orphan designation in the United States and the European Union for the treatment of acromegaly. The worldwide market for injectable somatostatin analogs is approximately $2.8 billion annually, of which we estimate approximately $800 million represents annual sales for the treatment of acromegaly. We retain worldwide rights to develop and commercialize octreotide capsules.

We are also conducting an international Phase 3 clinical trial, referred to as MPOWERED, of oral octreotide capsules for the maintenance treatment of adult patients with acromegaly to support regulatory approval in the European Union. The MPOWERED trial is a randomized, open-label and active-controlled 15-month trial initially designed to enroll up to 150 patients. The European Medicines Agency, or EMA, requested that a minimum of at least 80 patients who are responders to octreotide capsules following the six-month run-in phase be randomized to either remain on octreotide capsules or return to injectable somatostatin receptor ligands (octreotide or lanreotide), and then followed for an additional nine months. In June 2019, we completed the enrollment of 146 total patients in MPOWERED. In January 2020, the randomization of patients was completed. Of the 146 patients that entered the six-month run-in phase of the trial, 92 of these patients (or 63%) completed the run-in phase and were deemed to be responders to octreotide capsules per protocol (IGF-1 <1.3 x ULN and GH<2.5 ng/mL). Of the 92 patients who completed the run-in phase, 83 patients have completed the trial and six remain in the nine-month, randomized, controlled phase of the trial. MPOWERED has met the EMA requirement of a minimum of 80 patients randomized into the controlled phase of the trial. The primary endpoint will be calculated with time weighted average analysis, therefore missing monthly IGF-1 values are not anticipated to affect the completion of the primary endpoint analysis. We expect to release top-line data from the MPOWERED trial in the fourth quarter of 2020.

We continue to believe that the data from the CHIASMA OPTIMAL trial alone is designed to address the clinical concerns raised by the FDA in its CRL to our original NDA submission and also that, with respect to our ongoing Phase 3

 

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MPOWERED clinical trial, the FDA only expects to review safety data from the MPOWERED trial as part of its review of our NDA resubmission. Any future requirement by the FDA to submit additional data, including the efficacy data from our MPOWERED clinical trial could delay or prevent the review or approval of our NDA.

In March 2020, we commenced enrolling patients in the first industry-sponsored disease state registry for acromegaly in the United States known as the Management of Acromegaly Registry, or MACRO Registry. The MACRO Registry is designed to enroll patients from over 40 planned clinical sites in the United States and collect real-world data on treatment burden and effectiveness of various acromegaly treatments.

We were incorporated in 2001 and commenced active operations in the same year. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, developing our TPE technology, identifying potential drug candidates, undertaking nonclinical studies and, beginning in 2010, conducting clinical trials and preparing for regulatory submissions. In addition, we have initiated pre-commercial activities in anticipation of a potential mid-2020 FDA marketing approval of octreotide capsules. In July 2015, we completed our initial public offering, or IPO, in which we raised $106.5 million. In April 2019, we completed a follow-on public offering of common stock in which we raised an additional $32.2 million. In August 2019, we completed a follow-on public offering of common stock in which we raised an additional $52.3 million. In April 2020, we entered into a Revenue Interest Financing Agreement, or the Revenue Interest Financing Agreement, with Healthcare Royalty Partners IV, L.P., or HCR for up to $75.0 million. As of March 31, 2020, our consolidated cash, cash equivalents and marketable securities were $79.3 million, of which $0.4 million was held by Chiasma (Israel) Ltd., our wholly owned Israeli subsidiary. In April 2020, we entered into an Open Market Sales Agreement, or ATM Agreement, for “at the market offerings” with Jefferies LLC, or Jefferies, which allows us to offer and sell up to $60.0 million in gross proceeds of common stock from time to time, through Jefferies, acting as our sales agent or principal. To date, we have not sold any common stock under the ATM Agreement.

We have incurred significant operating losses since our inception. Our net loss was $15.4 million for the three months ended March 31, 2020 and $36.3 million for the year ended December 31, 2019. As of March 31, 2020, we had an accumulated deficit of $288.3 million. We expect to incur significant operating losses over the next several years. These losses, combined with prior losses will continue to have an adverse effect on our cash resources, stockholders’ equity and working capital. We plan to invest in our commercial launch, if approved, manufacture octreotide capsules for market consumption, if approved, as well as invest in manufacturing scale-up activities, and continue the open label extension portion of our international Phase 3 CHIASMA OPTIMAL clinical trial of octreotide capsules in acromegaly and to continue to conduct our international Phase 3 MPOWERED clinical trial of octreotide capsules in acromegaly to support potential regulatory approval in the European Union. Because of the numerous risks and uncertainties facing our company and associated with developing and commercializing pharmaceutical products generally, we are unable to predict the extent of any future losses or when we will become profitable, if at all.

As of March 31, 2020, we had cash, cash equivalents and marketable securities totaling approximately $79.3 million. Based on our current operating plans, we do not have sufficient cash, cash equivalents and marketable securities to fund our operating expenses, inventory purchases and capital expenditures for at least the next 12 months from the filing date of this Quarterly Report. We will require additional capital to sustain our operations, including our potential commercial launch. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through the Revenue Interest Financing Agreement and equity financings, and we will also opportunistically consider license and collaboration agreements with potential partners or convertible debt financing. However, we may be unable to raise capital when needed or on attractive terms, or to enter into collaboration agreements, which could force us to delay, limit, reduce or terminate our product development efforts or preparations for our anticipated commercial launch of oral octreotide capsules. These factors raise substantial doubt about our ability to continue as a going concern.

COVID-19 Update

In March 2020, the World Health Organization declared the novel strain of coronavirus, or COVID-19, a global pandemic and recommended containment and mitigation measures worldwide. We continue to closely monitor the impact of COVID-19 on our business and have implemented steps to ensure the well-being of our employees as well as the patients and health care professionals involved in the MPOWERED study and the MACRO Registry. At this time, we continue to plan for the June 26, 2020 PDUFA target action date for MYCAPSSA. In addition, we have not observed any significant disruptions to our manufacturing supply chain to date. We expect to release top-line data from the MPOWERED trial in the fourth quarter of 2020. We are unable to predict the impact that COVID-19 will have on our future plans, including timing of FDA approval, if any, for commercialization, and our future financial position and operating results due to numerous uncertainties. The duration and severity of the outbreak and its long-term impact on our business cannot be ascertained at this time.

 

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Commercial Manufacturing Supply

We began implementing commercial launch readiness plans in 2019 in preparation for a potential commercial launch of MYCAPSSA capsules in the United States in the fourth quarter of 2020, pending the FDA’s approval of the NDA. At this time, we expect to have sufficient commercial supply of MYCAPSSA to support our planned commercial launch in the fourth quarter of 2020, pending the FDA’s timely approval of the NDA and a planned prior approval manufacturing supplement to the NDA. To secure commercial supply for our planned launch, following FDA approval of our NDA, we expect to submit for FDA review two prior approval manufacturing supplements to our NDA for our commercial sources of generic active pharmaceutical ingredient, or API, octreotide acetate. We plan to submit the first prior approval manufacturing supplement to the NDA to provide for the approval of our primary API manufacturer and one of its large-scale manufacturing sites shortly following FDA approval. We must obtain the approval of this first planned prior approval manufacturing supplement in order to have commercial product available for commercial launch in the fourth quarter of 2020. We also plan to file a second prior approval manufacturing supplement to the NDA to provide for a large-scale manufacturing site affiliated with the small-scale manufacturing site currently referenced in the NDA resubmission. In April 2020, the FDA requested that we include certain stability data in this second planned prior approval manufacturing supplement, which we expect will delay our planned submission of this supplement until early 2021.

Financial Overview

Research and Development

Research and development expenses consist of expenses incurred in performing research and development activities, including compensation and benefits for full-time research and development employees, an allocation of facilities expenses, overhead expenses, nonclinical pharmacology studies, manufacturing process-development and scale-up activities, clinical trial and related clinical and pre-approval manufacturing expenses, fees paid to contract research organizations, or CROs, investigative sites, and other external expenses. In the early phases of development, our research and development costs included expanding our technology platform as well as early development of specific product candidates. The majority of our research and development expenses has been spent on the development of octreotide capsules, including the manufacturing of clinical trial material, manufacturing process development and validation, regulatory and clinical activities, and our TPE platform. We expense research and development costs as incurred.

We have limited research and discovery functions and are currently not materially investing in those areas. We have focused our resources on the clinical development of octreotide capsules, including our two international Phase 3 trials, CHIASMA OPTIMAL and MPOWERED. Product candidates in late stages of development generally have higher development costs than those in earlier stages of development, primarily due to the increased size and duration of late-stage clinical trials. We plan to continue the open label extension portion of our international Phase 3 CHIASMA OPTIMAL clinical trial of octreotide capsules in acromegaly. We also expect to continue to conduct our international Phase 3 MPOWERED clinical trial of octreotide capsules in acromegaly to support potential regulatory approval in the European Union. The successful development of octreotide capsules is highly uncertain.

General and Administrative

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, legal, marketing, patient services, information technology and support functions. Other general and administrative expenses include facility-related costs not otherwise allocated to research and development expenses, travel expenses for our general and administrative personnel and professional fees for auditing, tax, and corporate, litigation and intellectual property-related legal services.

Marketing expenses consist of professional fees related to preparation for the potential commercialization of octreotide capsules, if approved, as well as salaries and related benefits for commercial employees. Our marketing expenses for the six months ended June 30, 2019 and the year ended December 31, 2018 were immaterial. Following the positive top-line data from our CHIASMA OPTIMAL trial, which we released in July 2019, we have begun to incur additional pre-commercial marketing related expenses and we expect these expenses to substantially increase as we continue to prepare for the potential commercialization of octreotide capsules in the United States. In addition to anticipated future increases in marketing expenses, as we prepare for the potential commercialization of octreotide capsules and grow our operations, we have begun to incur additional other general and administrative expenses which we expect will continue to increase.

 

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Other Income, Net

Other income, net consists primarily of interest income earned on our investments.

Provision for Income Taxes

We are subject to federal and state income taxes for earnings generated in the United States, and foreign taxes on earnings of our wholly-owned Israeli subsidiary. Our consolidated tax expense is primarily affected by the mix of our foreign subsidiary permanent items, discrete items, and unrecognized tax benefits and to a lesser extent our taxable income (loss) in the United States.

Critical Accounting Policies and Use of Estimates

We have adopted various accounting policies to prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. Our most significant accounting policies are described in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. For information on new accounting pronouncements adopted in the current period and recently issued standards, see Note 1 to our condensed consolidated financial statements. The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Our estimates and assumptions include those related to the accounting for stock-based compensation, income taxes, and accounting for certain accruals. We assess the above estimates on an ongoing basis; however, actual results could materially differ from those estimates.

Results of Operations for the Three Months ended March 31, 2020 and 2019

Research and Development

The following is a comparison of research and development expenses for the three months ended March 31, 2020 and 2019:

 

     Three Months Ended March 31,  
     2020      2019      $ Change      % Change  
     ($ in thousands)  

Research and development

   $ 8,125      $ 6,471      $ 1,654        26
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended March 31, 2020, our total research and development expenses increased by $1.7 million to $8.1 million compared to the prior year period, primarily due to the manufacturing of octreotide capsules to support our planned commercial launch, if approved, costs associated with our disease state registry, scientific literature publications and increased regulatory costs which were offset by a decrease in clinical trial costs.

General and Administrative

The following is a comparison of general and administrative expenses for the three months ended March 31, 2020 and 2019:

 

     Three Months Ended March 31,  
     2020      2019      $ Change      % Change  
     ($ in thousands)  

General and administrative

   $ 7,582      $ 2,450      $ 5,132        209
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended March 31, 2020, our general and administrative expenses increased by $5.1 million compared to the prior year period, primarily due to our continuing pre-commercial activities, an increase in compensation-related expenses, and increased other administrative costs as we prepare for the potential commercialization of octreotide capsules.

Other Income, net

Other income totaled $0.4 million for the three months ended March 31, 2020 compared to other income of $0.2 million for the same period in 2019, an increase of approximately $0.2 million. This increase in our interest income was driven by the increase of our cash equivalents and marketable securities which was partially offset by a decrease in the interest rate yield on our cash equivalents and marketable securities.

 

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Provision for Income Taxes

Our total tax provision was approximately $0.1 million for the three months ended March 31, 2020, representing an effective tax rate of (0.5%), as compared to a tax provision of approximately $13,000 for the three months ended March 31, 2019, representing an effective tax rate of (0.1%).

Our effective tax rate differs from the statutory rate each year mainly due to a full valuation allowance maintained against U.S. deferred tax assets and due to lower tax rates applied to income of our Israeli subsidiary.

Liquidity and Capital Resources

In July 2015, we completed our IPO in which we raised $106.5 million by selling shares of common stock. In April 2019, we completed a follow-on public offering of common stock in which we raised an additional $32.2 million in net proceeds to finance our operations. In August 2019, we completed a follow-on public offering of common stock in which we raised an additional $52.3 million in net proceeds to finance our operations. As of March 31, 2020, our cash and cash equivalents were $42.6 million, of which $0.4 million was held by our Israeli subsidiary. In addition, as of March 31, 2020, we had $36.7 million invested in short-term marketable securities. In April 2020, we entered into the Revenue Interest Financing Agreement with HCR for up to $75.0 million and received the initial funding of $25.0 million, less certain transaction expenses. The remaining $50.0 million of funding is contingent upon the achievement of certain milestones. Further, the Revenue Interest Financing Agreement requires us to maintain a minimum of $20.0 million in securitized cash and investment accounts during any quarter that the trailing four quarters of net revenue of MYCAPSSA is below a certain threshold. In April 2020, we also entered into the ATM Agreement with Jefferies, which allows us to offer and sell up to $60.0 million in gross proceeds of common stock from time to time, through Jefferies, acting as our sales agent or principal. To date, we have not sold any common stock under the ATM Agreement.

Plan of Operations, Future Funding Requirements and Going Concern

We expect that our primary uses of capital will be associated with the planned commercialization of octreotide capsules in the United States, if approved, and the manufacturing of octreotide capsules for market consumption, if approved, seeking regulatory approval of octreotide capsules in the United States and European Union, including clinical trial costs (including our international Phase 3 MPOWERED clinical trial to support regulatory approval of octreotide capsules in the European Union and our international Phase 3 CHIASMA OPTIMAL clinical trial open label extension), medical affairs activities, legal and regulatory expenses related to seeking regulatory approval of octreotide capsules in the United States and European Union, compensation and related expenses, third-party clinical development services, and other general operating costs.

As of March 31, 2020, we had cash, cash equivalents and marketable securities totaling approximately $79.3 million. Based on our current operating plans, we do not have sufficient cash, cash equivalents and marketable securities to fund our operating expenses, inventory purchases and capital expenditures for at least the next 12 months from the filing date of this Quarterly Report. We will require additional capital to sustain our operations, including our potential commercial launch. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through the Revenue Interest Financing Agreement with HCR which we entered into in April 2020 and expect to further finance our cash needs through equity financings, and we will also opportunistically consider license and collaboration agreements with potential partners or convertible debt financing. We may be unable to raise capital when needed or on attractive terms, or to enter into collaboration agreements, which could force us to delay, limit, reduce or terminate our product development or future commercialization efforts. These factors raise substantial doubt about our ability to continue as a going concern. We cannot estimate the actual amounts necessary to successfully complete the development and commercialization of octreotide capsules, if at all, or whether, or when, we may achieve profitability. Our future capital requirements will depend on many factors, including, but not limited to:

 

   

the costs, timing and outcome of the development and regulatory review of octreotide capsules and our planned prior approval manufacturing supplements;

 

   

the progress and results of our ongoing clinical trials of octreotide capsules or any future clinical trials or studies we may conduct;

 

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the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for octreotide capsules and any other future product candidates for which we receive marketing approval;

 

   

proceeds, if any, received from commercial sales of octreotide capsules and any future product candidates for which we receive marketing approval;

 

   

the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; and

 

   

the extent to which we develop, acquire or in-license other product candidates and technologies or explore or consummate other strategic transactions.

We filed a $200.0 million shelf registration statement on Form S-3 with the SEC in September 2019, which the SEC declared effective in September 2019. In April 2020, we entered into the ATM Agreement with Jefferies LLC, or Jefferies, pursuant to which we may issue and sell shares of our common stock for which we included a prospectus to our shelf registration statement on Form S-3, having aggregate sales proceeds of up to $60.0 million, from time to time, through Jefferies, acting as our sales agent or principal. To date, we have not sold any common stock under the ATM Agreement.

To the extent that we raise additional capital through future issuance of equity or convertible debt, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through collaboration or other financing arrangements, we may have to relinquish valuable rights to our current or future product candidates, exploratory programs, technologies or future revenue streams on terms that may not be favorable to us. If we are unable to raise additional funds through equity or other financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts of octreotide capsules or grant rights to develop and market future potential product candidates that we would otherwise prefer to develop and market ourselves.

Revenue Financing Agreement

In April 2020, we entered into a Revenue Interest Financing Agreement with HCR whereby HCR will receive payments from us at a tiered percentage, or the Applicable Tiered Percentage, of future net revenues of MYCAPSSA and any of our other future products, including worldwide net product sales and upfront payments, and milestones, collectively, the Revenue Interests. Under the terms of the agreement, we received $25.0 million, less certain transaction expenses, from HCR in April 2020 and are entitled to receive an additional $25.0 million subject to FDA approval of MYCAPSSA for the maintenance treatment of adults with acromegaly before the first anniversary of the initial closing, or the FDA Condition, and customary closing conditions and an additional $15.0 million upon the certain conditions related to commercial drug supply availability and first commercial sale of MYCAPSSA subject to customary closing conditions. We are also entitled to receive an additional $10.0 million in early 2022 subject to the achievement of a commercial milestone and customary closing conditions. In exchange for the total investment amount, or Investment Amount, received, HCR will receive a tiered royalty in the low double digits on worldwide annual net revenues of MYCAPSSA and any other future products, subject to step-downs upon the achievement of certain annual revenues.

HCR’s rights to receive the Revenue Interests shall terminate on the date on which HCR has received payments equal to 195% of the funded portion of the Investment Amount including the aggregate of all payments made to HCR as of such date, unless the Revenue Interest Financing Agreement is earlier terminated. If the FDA Condition is not met (and is not waived by HCR), we shall pay HCR an amount equal to 113.5% of the funded portion of the Investment Amount and the Revenue Interest Financing Agreement will then terminate. If HCR has not received payments equal to the 195% of the funded portion of the Investment Amount by the ten-year anniversary of the initial closing date and no event of default has occurred or is ongoing, among other things, we shall pay HCR an amount equal to the funded portion of the Investment Amount plus a specific annual rate of return less payments previously received. If a change of control of the Company occurs, we must immediately repay HCR the total amount actually funded plus a change of control premium, the amount of which is variable up to 95% based on timing and circumstances of such change of control and the amount funded and conditionally eligible to be funded by HCR as of the date of the change of control.

If HCR has not received 60% of the Investment Amount by September 30, 2023 or 100% of the Investment Amount by September 30, 2024, we must make cash payments sufficient to gross HCR up to such minimum amounts. Further, the Revenue Interest Financing Agreement requires us to maintain a minimum of $20.0 million in securitized cash and

 

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investment accounts during any quarter that the trailing four quarters of net revenue of MYCAPSSA is below a certain threshold. Our obligations under the Royalty Interest Financing Agreement are secured by a first priority perfected security interest in all of our cash and cash equivalents (as defined in the Royalty Interest Financing Agreement), all present and future net revenues of MYCAPSSA and all MYCAPSSA-related assets.

Cash Flows

The following is a summary of cash flows for the three months ended March 31, 2020 and 2019:

 

     Three Months Ended March 31,  
     2020      2019  
     ($ in thousands)  

Cash flows provided by (used in):

     

Operating activities

   $ (12,590    $ (7,950

Investing activities

     27,562        4,961  

Financing activities

     (272      3  

Operating Activities

Net cash used in operating activities was $12.6 million for the three months ended March 31, 2020, and primarily consisted of $15.4 million in net loss, adjusted for non-cash items of $1.2 million (primarily stock-based compensation) and working capital increase of $1.6 million (primarily due to the increase in accounts payable and accrued expenses offset by decreases in prepaid expenses and other assets). Net cash used in operating activities was $8.0 million for the three months ended March 31, 2019, and primarily consisted of $8.8 million in net loss, adjusted for non-cash items of $0.5 million (primarily stock-based compensation) and working capital increases of $0.3 million (primarily due to the decrease in prepaid expenses and other current assets partially offset by the decrease in accounts payable and accrued expenses). The primary driver for the increase in our cash used in our operating activities during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was the costs incurred as we prepared for the potential commercialization of octreotide capsules, if approved.

Investing Activities

Net cash provided by investing activities was $27.6 million for the three months ended March 31, 2020, primarily related to the net maturities of marketable securities, compared to $5.0 million in cash provided by investing activities for the three months ended March 31, 2019, primarily related to the net maturities of marketable securities.

Financing Activities

Net cash used in financing activities was $0.3 million during the three months ended March 31, 2020, primarily related to payments of a short-term borrowing which was partially offset by proceeds from the exercise of stock options. For the three months ended March 31, 2019, net cash provided by financing activities was $3,000, primarily related to the exercise of stock options.

Contractual Obligations

As of March 31, 2020, we had outstanding purchase commitments under non-cancelable agreements in the aggregate amount of $10.2 million. The payments on these orders will occur following the deliveries of the API which are anticipated during 2020. As of March 31, 2020, we had future minimum lease payments under non-cancelable operating leases in the aggregate amount of $1.8 million.

As of April 7, 2020, we have contractual obligations under the Revenue Interest Financing Agreement with HCR, as noted above and disclosed in Note 6 to the condensed consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

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

 

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JOBS Act

In April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 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 public companies.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. As of March 31, 2020, we had $42.6 million in cash and cash equivalents, consisting of cash in checking accounts at U.S. and Israeli banking institutions as well as money market funds. In addition, as of March 31, 2020, we had $36.7 million of marketable securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. An immediate 100 basis point increase in interest rates would cause a decrease in the value of our short-term investments of $0.1 million. As of March 31, 2020, we did not have any outstanding variable interest rate nor long-term borrowings, and as a result we are not exposed to interest rate risk associated with credit facilities.

In addition, we are subject to currency risk for balances held, or denominated, in currencies other than U.S. dollars. We work to maintain all balances in U.S. dollars until payment in other currencies is required to minimize this currency risk. Fluctuations in the exchange rate between the U.S. dollar and each of the Euro, GBP and NIS over the past 24 months have been approximately (12%), (13%), and (2%), respectively. As of March 31, 2020, we held $0.4 million in Israeli banks and petty cash funds to support our Israeli operations, the majority of which is denominated in U.S. dollars. We contract with CROs internationally, primarily for the execution of clinical trials and manufacturing activities. Transactions with these providers are settled in U.S. dollars, Euros or GBP and, therefore, we believe that we have only minimal exposure to foreign currency exchange risks. We do not currently hedge against foreign currency exchange rate risks.

We do not believe that inflation and changing prices had a significant impact on our results of operations for any periods presented herein.

 

Item 4.

Controls and Procedures

Management’s Evaluation of our Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive officer and principal financial officer have concluded based upon the evaluation described above that, as of March 31, 2020, our disclosure controls and procedures were effective at the reasonable assurance level.

We continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

Changes in Internal Control Over Financial Reporting

During the three months ended March 31, 2020, there have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1.

Legal Proceedings

As of the date of this filing, we were not party to any legal matters or claims. In the future, we may become party to legal matters and claims arising in the ordinary course of business, the resolution of which we do not anticipate would have a material adverse impact on our financial position, results of operations or cash flows.

 

Item 1A.

Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this Quarterly Report on Form 10-Q and in our other public filings before making an investment decision. Our business, prospects, financial condition, or operating results could be harmed by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. If any such risks or uncertainties actually occur, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings. The trading price of our common stock could decline due to any of these risks, and as a result, you may lose all or part of your investment.

Those risk factors below denoted with a “*” are newly added or have been materially updated from our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on March 16, 2020.

Risks Related to the Development and Potential Regulatory Approval and Commercialization of Octreotide Capsules and any Future Product Candidates

In light of our receipt of a Complete Response Letter, or CRL, from the United States Food and Drug Administration, or the FDA, in April 2016 regarding our original New Drug Application, or NDA, for octreotide capsules for the maintenance treatment of U.S. adult patients with acromegaly, despite our receipt of a Special Protocol Assessment, or SPA, for our CHIASMA OPTIMAL Phase 3 clinical trial, positive results from the CHIASMA OPTIMAL trial and acceptance by the FDA of the resubmission of our NDA for review, the approvability of octreotide capsules is uncertain and we may never obtain regulatory approval in the United States, which would jeopardize our viability as a business.

In June 2015, we submitted an NDA to the FDA for the marketing and sale of octreotide capsules for the maintenance therapy of adult patients with acromegaly. On the Prescription Drug User Fee Act, or PDUFA, date of April 15, 2016, the FDA issued a CRL regarding the NDA, indicating that their review was complete and the NDA was not ready for approval in its present form. In its CRL, the FDA advised us that it did not believe our application provided substantial evidence of efficacy to warrant approval and advised us that we would need to conduct another clinical trial in order to overcome this deficiency. The FDA expressed concerns regarding certain aspects of our single-arm, open-label Phase 3 clinical trial and strongly recommended that we conduct a randomized, double-blind and controlled trial that enrolls patients from the United States and is of sufficiently long duration to ensure that control of disease activity is stable at the time point selected for the primary efficacy assessment. In addition, the FDA advised that, during a site inspection, certain deficiencies were conveyed to the representative of one of our suppliers that would need to be resolved before approval. In addition, while the FDA did not note any safety concerns related to octreotide capsules in the CRL, it subsequently indicated in the minutes from our June 2016 End of Review meeting that the size, duration, dropout rate and absence of a control group in our Phase 3 clinical trial were factors limiting an overall safety assessment.

In the End of Review meeting, we discussed the concerns raised by the FDA in the CRL, and in the meeting minutes, the FDA reiterated its strong recommendation for a randomized, double-blind and controlled trial, and introduced the concept of a placebo control as a design element that could address some of the FDA’s concerns. In August 2017, we reached agreement with the FDA under its SPA procedures of a new Phase 3 clinical trial of octreotide capsules in adult acromegaly patients, which includes a placebo control. This clinical trial was designed to address the concerns previously raised in the CRL and support a potential resubmission of our NDA for octreotide capsules as a treatment for acromegaly. In May 2018, we received a SPA Agreement Modification Letter from the FDA agreeing to our proposed modification to the hierarchical set of secondary endpoints. We refer to this Phase 3 trial, which we initiated in September 2017, using the acronym CHIASMA OPTIMAL.

 

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In July 2019, we reported statistically significant top-line data from the CHIASMA OPTIMAL trial. Based on the positive results from the CHIASMA OPTIMAL trial, we resubmitted our NDA seeking approval of octreotide capsules as a maintenance therapy for adult patients with acromegaly to the FDA. In January 2020, the FDA accepted for review the resubmission of the NDA as a complete response to deficiencies identified in the CRL and assigned a target action date of June 26, 2020 under the PDUFA. The time provided for the NDA review could take longer than we expect, including if the FDA requires us to submit additional data, such as efficacy data from our MPOWERED clinical trial. Although we currently estimate that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations through the target PDUFA date, regulatory outcomes are inherently uncertain and, in the event of a delay, we may not have the sufficient capital resources necessary to fund our operations. Further, we may not have sufficient capital resources to fund any additional trials that the FDA may require as a condition to approval.

We also cannot provide any assurance that the data from the CHIASMA OPTIMAL trial are sufficiently positive to support U.S. regulatory approval of octreotide capsules for the maintenance therapy of adult patients with acromegaly. Varying interpretations of the data obtained from nonclinical and clinical testing or manufacturing of our product candidates could delay, limit or prevent regulatory approval of octreotide capsules. Of note, in July 2014, F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc., collectively Roche, elected to terminate our license agreement for octreotide capsules after reviewing the data from the seven-month core treatment period of our first Phase 3 clinical trial of octreotide capsules and after a May 2014 pre-NDA meeting with the FDA. Roche cited no reason for its decision in its formal notice of termination but stated publicly at the time that it had elected to make this decision after receiving additional information about our first Phase 3 clinical trial and after further consultation with regulatory authorities. Subsequent to this decision, we independently met with the FDA to discuss the clinical development of octreotide capsules, including the first Phase 3 clinical results from the six-month extension phase of the clinical trial (in addition to the seven-month core data provided by Roche in May 2014). At this meeting, the FDA advised us that it had not identified an issue that would preclude us from submitting an NDA for review. However, the FDA also advised us that interpreting efficacy from a voluntary long-term extension study is subject to limitations and therefore the data at the seven-month time point in our first Phase 3 clinical trial would carry more weight in the efficacy evaluation than the extension data. The FDA also informed us that, in its view, a single-arm study was not as informative as a controlled study such as an active control trial using a non-inferiority design, and that the interpretability of the efficacy findings we submitted in our NDA from our single-arm study, and whether these findings would be robust enough to warrant approval, would be review issues as the FDA evaluated our NDA. In April 2016, the FDA issued a CRL.

If CHIASMA OPTIMAL fails to address the concerns raised by the FDA in the CRL or if the FDA determines that the data from the trial are insufficient to support marketing approval, we may be unable to obtain U.S. regulatory approval for the marketing and sale of octreotide capsules at all or without submitting new or additional clinical data to the FDA, which may require that we conduct one or more additional clinical trials, which we are highly unlikely to pursue. Furthermore, if the CHIASMA OPTIMAL trial data is not sufficient to support U.S. regulatory approval, our ability to pursue regulatory approval in the European Union, if the MPOWERED Phase 3 clinical trial is positive, will require significant additional time and capital, which we may not be able to secure on favorable terms, if at all. The prospects for our business under these circumstances will be significantly diminished, our ability to continue as a standalone business could be materially impaired and we may need to cease operations.

Even though our Phase 3 CHIASMA OPTIMAL trial was conducted under a SPA agreed to with the FDA, we cannot guarantee that the design of, or data collected from, this trial or any of our clinical trials will be sufficient to support approval of an NDA.

In the context of a Phase 3 clinical trial, the purpose of a SPA is to reach agreement with the FDA on the protocol design and size of the trial that may form the primary basis of an efficacy claim in support of an NDA. In requesting a SPA agreement, a sponsor asks focused questions on specific issues relating to the protocol, protocol design, study conduct, study goals and data analysis. However, according to regulatory guidance, a SPA agreement does not indicate FDA concurrence on every protocol detail. Absence of an FDA comment on a particular aspect of a trial does not necessarily indicate agreement if the sponsor did not specifically ask about that aspect. Moreover, a SPA is not a guarantee of approval, even if the trial is successful. A SPA is not binding on the FDA and may be rescinded if, for example, the FDA identifies a safety concern related to the product or its pharmacological class, if the FDA and the scientific community recognize a paradigm shift in disease diagnosis or management, if the relevant data, assumptions or information provided by the sponsor in the SPA submission are found to be false or misstated or omit relevant facts, or if the sponsor fails to follow the protocol that was agreed upon with the FDA. A SPA may be modified, as our SPA was in May 2018, with the written agreement of the FDA and the trial sponsor and, according to regulatory guidance, minor issues can be resolved

 

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through additional correspondence and protocol amendments after the trial begins. However, the FDA retains significant latitude and discretion in interpreting the terms of a SPA agreement, the significance of protocol amendments, and the data and results from the applicable clinical trial.

Further, the results from the CHIASMA OPTIMAL trial, a double-blind, placebo controlled clinical trial, may not be sufficiently robust to support the approval of our NDA resubmission. In particular, the CHIASMA OPTIMAL trial had a relatively small sample size, 56 patients enrolled, and therefore the FDA has indicated that missing data, which might be only a few measurements, may raise questions about data quality and may, ultimately, invalidate the trial results.

We anticipate that the FDA will review the totality of the data collected from the CHIASMA OPTIMAL trial, including both primary and secondary endpoints, including but not limited to data related to the loss of biochemical response when switching from injectable somatostatin analogs to octreotide capsules, together with certain data from our other clinical trials of octreotide capsules, in evaluating octreotide capsules treatment effect in our NDA resubmission and determining whether to grant approval. Therefore, our achievement of the primary endpoint and all secondary endpoints in the CHIASMA OPTIMAL trial alone may not be sufficient to support approval. Not all endpoints measured in our clinical trials may be supportive of octreotide capsules’ efficacy or safety.

We also anticipate that the FDA will review whether the data collected from CHIASMA OPTIMAL and our other clinical trials are sufficiently robust to support the interpretability of these analyses, in determining whether to approve our NDA resubmission. Consequently, there can be no assurance that the data collected from the CHIASMA OPTIMAL trial will be sufficient to support approval of our NDA for the marketing and sale of octreotide capsules. If the data from CHIASMA OPTIMAL are insufficient to support approval of our NDA, our ability to continue as a standalone business could be materially impaired and we may need to cease operations.

* We are substantially dependent on the regulatory approvals and subsequent commercial success of octreotide capsules for the treatment of acromegaly in the United States and European Union, both of which may never occur or may be substantially delayed.

We are a clinical, late-stage biopharmaceutical company with no products approved by regulatory authorities or available for commercial sale. As a result, our potential to generate future revenues is currently dependent upon our ability to obtain regulatory approval and achieve commercial success of octreotide capsules for the treatment of acromegaly in the United States and European Union. Our receipt of a CRL from the FDA to our NDA for octreotide capsules and the requirement to conduct an additional Phase 3 clinical trial to address the concerns raised in the CRL has resulted in a significant delay in our ability to commercialize octreotide capsules in the United States, if we are ever able to obtain U.S. regulatory approval at all.

Our NDA resubmission that was accepted by the FDA for review in January 2020 references one small-scale manufacturing site for the active pharmaceutical ingredient, or API, in octreotide owned by our planned secondary commercial API manufacturer. This site was also included in our original NDA. However, we do not expect to procure commercial API from this manufacturing site for our planned commercial launch. Accordingly, even if we obtain FDA approval of our NDA, in order to commercially launch octreotide capsules, following the June 26, 2020 PDUFA date, we plan to submit to the FDA a prior approval manufacturing supplement to the NDA to provide for the approval of our primary API manufacturer and one of its large-scale manufacturing sites that was included in our original NDA. We must obtain the approval of this planned prior approval manufacturing supplement in 2020 in order to have commercial product available for commercial launch in the fourth quarter of 2020. We also plan to file a second prior approval manufacturing supplement to the NDA to provide for a large-scale manufacturing site affiliated with the small-scale manufacturing site currently referenced in the NDA resubmission. In April 2020, the FDA requested that we include certain stability data in this second planned prior approval manufacturing supplement, which we expect will delay our planned submission of this supplement until early 2021. These two manufacturing sources were not referenced in our December 2019 NDA resubmission in order to allow for further time for the additional API manufacturer not referenced in the NDA resubmission to resolve observations from a recent regulatory inspection and to allow us to seek the FDA’s designation of the resubmission of the NDA as a Class 2 resubmission entailing a six-month review period, which designation we obtained from the FDA in January 2020. Assuming we obtain the FDA’s approval of our NDA, in order to have oral octreotide capsules available for our planned commercial launch in the fourth quarter of 2020, we must also obtain the FDA’s approval of the first of our two planned prior approval manufacturing supplements in a timely manner. If we are unable to obtain the FDA’s approval of one of our two planned prior approval manufacturing supplements in a timely manner, our planned commercial launch could be prevented or substantially delayed. The review of any prior approval manufacturing supplement to the NDA will require FDA review and approval of the manufacturing process, facility, equipment and procedures in place at each manufacturing site, including batch-to-batch comparability and API and drug product stability data, in accordance with the FDA’s cGMP requirements and may require regulatory

 

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inspections of each manufacturing site, which could prevent or delay approval of any such prior approval manufacturing supplement and prevent or delay our planned commercial launch. The timing of the FDA’s review process related to our planned prior approval manufacturing supplements and the outcome of such reviews are inherently uncertain, and we can provide no assurances that either planned prior approval manufacturing supplement will be approved in a timely manner or at all.

Even if we receive regulatory approval of our NDA resubmission and one or both of our planned prior approval manufacturing supplements, the timing and success of the commercial launch of octreotide capsules in the United States is dependent upon a number of factors, including, but not limited to, hiring and retaining sales, marketing and other commercial personnel, implementing internal systems and infrastructure in order to support a commercial sales organization and establish patient-focused programs, obtain pricing and reimbursement, the timely production and delivery of sufficient quantities of commercial drug product (especially since we have only recently provided our commercial suppliers with purchase orders and initial forecasts regarding anticipated commercial supply requirements) implementation of a distribution infrastructure, the efficacy and safety data from our clinical trials, particularly our MPOWERED Phase 3 clinical trial from which we expect to report topline data in the fourth quarter of 2020 comparing the safety and efficacy of octreotide capsules to the current standard of care somatostatin analog injections, and the competitive landscape. In addition, the FDA may introduce significant restrictions to the label for octreotide capsules, if approved, in an effort to address the concerns it raised in the CRL and the End of Review meeting or to address findings in the CHIASMA OPTIMAL trial or the MPOWERED clinical trial. Any such restrictions or concerns about efficacy within the medical community could significantly impact market adoption and commercial performance of octreotide capsules, even if we are able obtain regulatory approval to commercialize in the United States in the future.

In the event that the CHIASMA OPTIMAL trial is not interpreted to be successful by the FDA, or we are otherwise unable to obtain U.S. regulatory approval for the marketing and sale of octreotide capsules, we may not be able to ever reach or achieve profitability, or even commercial viability, based solely on the prospects of marketing authorization approval of octreotide capsules in the European Union. Further, the MPOWERED trial, even if successful, may no longer be sufficient evidence to warrant EMA approval of octreotide capsules as we expect that any failure to achieve U.S. regulatory approval to commercialize octreotide capsules may reduce the likelihood of approval of octreotide capsules by the EMA. Our potential for financial success in the European Union as a standalone market will largely be dependent upon our ability to raise significant additional capital at least through the MAA approval date, which is uncertain, to obtain timely and adequate pricing and reimbursement approval for octreotide capsules from countries comprising the European Union, if approved, to achieve market acceptance of octreotide capsules in the European Union, to build our commercial infrastructure and distribution capabilities in the European Union, and to grow the octreotide capsules business in the European Union and other ex-U.S. markets to a certain scale. As such, there can be no assurance that the commercialization of octreotide capsules or our business plans are at all viable in the absence of FDA approval of octreotide capsules.

In addition, we have incurred and expect to continue to incur significant expenses and to utilize virtually all of our efforts and financial resources as we continue to pursue the approval of octreotide capsules in the United States and European Union, and subsequent commercialization of octreotide capsules, if approvals are obtained. The success of octreotide capsules, if our NDA and one or both of our planned prior approval manufacturing supplements are approved, will depend on several factors, including:

 

   

the efficacy and safety data from our clinical trials;

 

   

execution of an effective sales and marketing strategy for the commercialization of octreotide capsules, including engaging healthcare providers through virtual sales interactions;

 

   

acceptance by patients, the medical community and third-party and government payors;

 

   

the incidence and prevalence of acromegaly in those markets in which octreotide capsules are approved;

 

   

the prevalence and severity of side effects, if any, experienced with octreotide capsules;

 

   

the availability, perceived advantages, cost, safety and efficacy of alternative treatments;

 

   

our success in educating physicians and patients about the benefits, administration and use of octreotide capsules;

 

   

the willingness of healthcare providers and patients to utilize telemedicine to switch patients from their existing acromegaly therapy to octreotide capsules if in-person office visits are restricted or prohibited;

 

   

successful implementation of our manufacturing processes and production of quantities of commercial drug product;

 

   

our ability, and the ability of our third-party manufacturers and other vendors, to maintain compliance with regulatory requirements, including cGMPs, and taking other measures satisfactory to the FDA; and

 

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obtaining and maintaining patent, trademark and trade secret protection and regulatory exclusivity and otherwise protecting our rights in our intellectual property portfolio.

Other than octreotide capsules, we have no other product candidates in clinical development. As a result, we continue to be highly dependent on the regulatory approval and successful commercialization of octreotide capsules, the failure or delay of which could raise substantial doubt of our ability to continue as a viable business.

* If we are not able to obtain required regulatory approvals for octreotide capsules, particularly in the U.S., including our planned prior approval manufacturing supplements to our NDA, we will not be able to commercialize this product candidate and our ability to generate revenue or profits, raise future capital, or continue as a standalone business could be materially impaired.

In April 2016, the FDA issued a CRL regarding our NDA for octreotide capsules for the maintenance therapy of acromegaly, indicating that the NDA was not able to be approved during this review cycle and strongly recommending that we conduct a randomized, double-blinded, controlled trial. In the End of Review meeting, the FDA reiterated its strong recommendation for a randomized, double-blind and controlled trial.

In October 2015, the European Medicines Agency, or EMA, accepted the design, enrollment criteria and required duration of our second Phase 3 trial to evaluate the non-inferiority of octreotide capsules to injectable somatostatin analogs in adult patients with acromegaly. This clinical trial, which is referred to as MPOWERED and was initiated in March 2016, is a global, randomized, open-label and active-controlled 15-month trial initially designed to enroll up to 150 patients in Europe, Russia, the United States and certain other countries. This clinical trial is currently designed to show comparative effectiveness as required by the EMA, to support submission of an MAA and potential approval. The FDA advised us that positive data from the ongoing MPOWERED clinical trial, if obtained, would not be sufficient to address the concerns identified by the FDA in the CRL. Shortly following the receipt of this information, we commenced the SPA process with FDA for the Phase 3 CHIASMA OPTIMAL clinical trial. Even though we believe the CHIASMA OPTIMAL trial was successful and the FDA accepted the resubmission of our NDA for octreotide capsule for review, the FDA may never approve our NDA. Our ongoing MPOWERED Phase 3 clinical trial may not be successful, or acceptable to the EMA to support regulatory approval in the European Union. The CRL, a decision by FDA not to approve our resubmitted NDA or data produced from the CHIASMA OPTIMAL trial could adversely impact the EMA’s review of our regulatory submission, if submitted, and therefore we may never receive approval to market octreotide capsules in the United States, European Union or elsewhere.

Importantly, the safety data generated in our completed clinical trials of octreotide capsules, including our first Phase 3 clinical trial and the CHIASMA OPTIMAL clinical trial as well as certain safety data from the MPOWERED clinical trial, as well as the efficacy data from our completed first Phase 3 clinical trial and the CHIASMA OPTIMAL trial, are integrated into the NDA resubmission. We further expect the safety and efficacy data from all three of our Phase 3 clinical trials to be submitted in our planned MAA filing. While CHIASMA OPTIMAL was designed to address the FDA’s concerns in the CRL and the MPOWERED trial design has been accepted by the EMA, our ultimate success in the regulatory review process of the NDA we resubmitted to the FDA or planned application for marketing approval in the European Union could be negatively impacted by the results from any of our clinical trials.

The research, testing, manufacturing, labeling, packaging, storage, approval, sale, marketing, advertising and promotion, export, import and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, and these regulations differ from country to country and change over time. We are not permitted to market octreotide capsules in the United States until we receive approval of an NDA from the FDA, or in any foreign countries until we receive the requisite approvals in such countries. In the United States, the FDA generally requires the completion of nonclinical testing and clinical trials of each drug to establish its safety and efficacy and extensive pharmaceutical development to ensure its quality and other factors before an NDA is approved. Regulatory authorities in other jurisdictions impose similar requirements and may impose pricing restrictions. Of the large number of drugs in development, only a small percentage result in the submission of an NDA to the FDA and even fewer are approved for commercialization.

Our NDA resubmission that was accepted by the FDA in January 2020 for review references one small-scale API manufacturer that was included in our original NDA and is owned by our planned secondary commercial API manufacturer. However, we do not expect to procure commercial API from this small-scale manufacturing site. Accordingly, even if we obtain FDA approval of our NDA, in order to commercially launch octreotide capsules, following the June 26, 2020 PDUFA date, we plan to submit to the FDA a prior approval manufacturing supplement to the NDA seeking approval of our primary API manufacturer and one of its large-scale manufacturing sites that was included in our original NDA. We must obtain the approval of this planned prior approval manufacturing supplement in

 

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2020 in order to have commercial product available for commercial launch in the fourth quarter of 2020. We also plan to file a second prior approval manufacturing supplement to the NDA to provide for a large-scale manufacturing site affiliated with the small-scale manufacturing site currently referenced in the NDA resubmission. In April 2020, the FDA requested that we include certain stability data in this second planned prior approval manufacturing supplement, which we expect will delay our planned submission of this supplement until early 2021. If we are unable to obtain or are delayed in obtaining regulatory approval of our NDA or both of our two planned prior approval manufacturing supplements, we could be prevented from commercializing the product candidate in a timely manner or at all.

Other than the June 2015 submission of our NDA for octreotide capsules as a treatment for acromegaly to the FDA and the recent resubmission of our NDA, we have not yet submitted comparable applications to other regulatory authorities, nor have we submitted prior approval manufacturing supplements to any regulatory authority. If our development efforts for octreotide capsules, including our ability to obtain regulatory approval, are not successful for the acromegaly indication or are delayed, if we are unsuccessful or delayed in obtaining regulatory approval of the planned prior approval manufacturing supplements to our NDA or if adequate demand for octreotide capsules are not generated, our business and ability to generate revenues will be materially harmed. Failure to obtain regulatory approval for marketing octreotide capsules as a treatment for acromegaly or for our planned prior approval manufacturing supplements will prevent us from commercializing the product candidate in a timely manner or at all, which could raise significant concerns about our continued viability as a business.

The success of octreotide capsules will depend on the receipt of regulatory approvals, including the planned prior approval manufacturing supplements, and the issuance of such approvals is uncertain and subject to a number of risks, including the following:

 

   

the FDA or comparable foreign regulatory authorities, institutional review boards, or IRBs, or ethics committees may disagree with the design or conduct of our clinical trials;

 

   

the results of our clinical trials may not provide acceptable evidence of octreotide capsules’ safety and efficacy;

 

   

the results of our clinical trials may not be sufficiently robust or meet the level of statistical or clinical significance required by the FDA, the EMA or other regulatory agencies for marketing approval;

 

   

the dosing of octreotide capsules in a particular clinical trial may not be at an optimal level;

 

   

patients in our clinical trials may suffer adverse effects for reasons that may or may not be related to octreotide capsules;

 

   

the data collected from our clinical trials may not be sufficient to obtain regulatory approval in the United States or elsewhere;

 

   

the FDA or comparable foreign regulatory authorities may identify deficiencies with the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical and commercial supplies, one of which was identified by the FDA in its CRL and a second of which had unresolved observations from a recent regulatory inspection at the time of our NDA resubmission, or may later suspend or withdraw approval of our products;

 

   

the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval; and

 

   

even if we obtain marketing approval in one or more countries, future safety or other issues could result in the suspension or withdrawal of regulatory approval in such countries.

In particular, we cannot guarantee that regulators will agree with our assessment of the results of the clinical trials we have conducted to date, as was the case with the FDA’s review of our completed first Phase 3 clinical trial contained in the original NDA, or that any current or future trials will be successful. The FDA, EMA and other regulators have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional clinical trials, or nonclinical or other studies, as the FDA strongly recommended in the CRL.

We have only limited experience in filing the applications necessary to gain regulatory approvals and have relied before, and expect to continue to rely, on consultants and third-party contract research organizations, or CROs, with expertise in this area to assist us in this process. Securing FDA approval requires the submission of extensive nonclinical and clinical data, information about product manufacturing processes and inspection of facilities and supporting information to the FDA for each therapeutic indication to establish a product candidate’s safety and efficacy for each indication and

 

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manufacturing quality. Octreotide capsules may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use with respect to one or all intended indications.

The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon, among other things, the type, complexity and novelty of the product candidates involved, the jurisdiction in which regulatory approval is sought and the substantial discretion of the regulatory authorities. Changes in the regulatory approval policy during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for a submitted product application may cause delays in the approval or rejection of an application or may result in future withdrawal of approval. Regulatory approval obtained in one jurisdiction does not necessarily mean that a product candidate will receive regulatory approval in all jurisdictions in which we may seek approval, but the failure to obtain approval in one jurisdiction may negatively impact our ability to seek approval in a different jurisdiction.

Our development, regulatory and commercialization strategy for octreotide capsules depends, in part, on published scientific literature and the FDA’s prior findings regarding the safety and efficacy of approved products containing octreotide.

The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, added Section 505(b)(2) to the Federal Food, Drug, and Cosmetic Act, or Section 505(b)(2). Section 505(b)(2) permits the submission of an NDA where at least some of the information required for approval comes from investigations that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person or entity by or for whom the investigations were conducted. The FDA interprets Section 505(b)(2) to permit the applicant to rely, in part, upon published literature or the FDA’s previous findings of safety and efficacy for an approved product. The FDA also requires companies to perform additional clinical trials or measurements to support any difference from the previously approved product. The FDA may then approve the new product candidate for all or some of the label indications for which the listed drug has been approved, as well as for any new indication(s) sought by the Section 505(b)(2) applicant as supported by additional data. The label, however, may require all or some of the limitations, contraindications, warnings or precautions included in the listed drug’s label, including a black box warning, or may require additional limitations, contraindications, warnings or precautions.

We have designed our nonclinical and clinical programs to seek regulatory approval for octreotide capsules for registration filing in the United States using the FDA’s 505(b)(2) regulatory pathway and using the hybrid application pathway in the European Union. As such, our original NDA relied, and the NDA we resubmitted that was accepted for review by the FDA in January 2020 continues to rely, and we intend that our MAA will rely, in part, on previous findings of safety and efficacy for an approved immediate-release injectable octreotide product and published scientific literature for which we have not received a right of reference. Even though we designed our development programs to take advantage of Section 505(b)(2) and the hybrid application pathway to support potential regulatory approval of octreotide capsules in the United States and the European Union, the relevant regulatory authorities may require us to perform additional clinical trials or measurements to support approval over and above the clinical trials that we have already completed or initiated. The relevant regulatory authorities also may determine that we have not provided sufficient data to justify reliance on prior investigations involving the approved immediate-release injectable octreotide product.

In addition, notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), in the past some pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). For example, parties have filed citizen petitions objecting to the FDA approving a Section 505(b)(2) NDA on scientific, legal and regulatory grounds. Scientific arguments have included the assertions that for the FDA to determine the similarity of the drug in the 505(b)(2) NDA to the listed drug, the FDA would need to reference proprietary manufacturing information or trade secrets in the listed drug’s NDA; that it would be scientifically inappropriate for the FDA to rely on public or nonpublic information about the listed drug because it differs in various ways from the drug in the 505(b)(2) NDA; or that differences between the listed drug and the drug in the 505(b)(2) NDA may impair the latter’s safety and effectiveness. Legal and regulatory arguments have included the assertion that Section 505(b)(2) NDAs must contain a full report of investigations conducted on the drug proposed for approval, and that approving a drug through the 505(b)(2) regulatory pathway would lower the approval standards. In addition, citizen petitions have made patent-based challenges against 505(b)(2) NDAs. For example, petitioners have asserted that the FDA should refuse to file a 505(b)(2) NDA unless it references a specific NDA as the listed drug, because it is “most similar” to the proposed drug, and provides appropriate patent certification to all patents listed for that NDA; or that when a 505(b)(2) NDA is pending before the FDA, but before it is approved, where the FDA approves an NDA for a drug that is pharmaceutically equivalent to the drug that is the subject of the 505(b)(2) NDA, then the FDA should require that the 505(b)(2) NDA be resubmitted referencing the approved NDA as the listed drug and certifying to the listed patents for that approved drug.

 

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However, if the FDA or EMA changes its interpretation of Section 505(b)(2) or the hybrid application pathway, or if the FDA’s or EMA’s interpretation is successfully challenged in court, this could delay or even prevent the FDA or EMA, as applicable, from approving any Section 505(b)(2) NDAs or hybrid application pathway MAAs that we submit. Such a result could require us to conduct additional testing and costly clinical trials, which could substantially delay or prevent the approval and launch of octreotide capsules for the treatment of acromegaly or any future product candidates we may develop.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and our current and future clinical trials may not be successful. Results of earlier studies and trials may not be predictive of future trial results, and approval in one jurisdiction may not be predictive of approval in other jurisdictions.

We initiated a second Phase 3 clinical trial of octreotide capsules in acromegaly called MPOWERED to support potential regulatory approval in the European Union. In the CRL and subsequent End of Review meeting minutes, the FDA strongly recommended that we conduct a randomized, double-blind and controlled trial, and introduced the concept of a placebo control as a design element that could potentially address some of the FDA’s concerns. We acknowledged FDA’s feedback contained in the CRL and in the End of Review meeting minutes and conducted a third Phase 3 clinical trial, called the CHIASMA OPTIMAL trial under the FDA’s SPA procedures. This trial was initiated in September 2017, and we announced positive top-line data in July 2019. Based on the positive results from the CHIASMA OPTIMAL trial, we resubmitted our NDA seeking approval of octreotide capsules as a maintenance therapy for adult patients with acromegaly to the FDA. In January 2020, the FDA accepted for review the resubmission of the NDA as a complete response to deficiencies identified in the CRL to our original NDA and assigned a target action date of June 26, 2020 under the PDUFA. However, there can be no assurance that the FDA will approve our NDA in a timely manner or at all. If we successfully secure regulatory approval in acromegaly, we may also consider clinical trials of octreotide capsules in indications other than acromegaly, assuming financing is available to us. Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain, and we will continue to be subject to these risks. Failure can occur at any time during the clinical trial process and results of past, current or future trials, such as the MPOWERED trial, can adversely affect prospects of securing regulatory approval or regulatory approvals previously received.

The results of nonclinical studies and prior clinical trials may not be predictive of the results of future clinical trials. The results of our completed clinical trials for octreotide capsules in acromegaly, including the CHIASMA OPTIMAL Phase 3 trial, do not ensure that future clinical trials, including the MPOWERED Phase 3 trial designed to support EMA approval, will also generate comparable results. Among other considerations, these trials may be designed in a way that is different from our completed clinical trials. For example, the EMA required that we use multiple time points in the Phase 3 clinical trial that we initiated in March 2016 rather than a single time point for the primary endpoint determination used for our initial Phase 3 clinical trial. While the EMA agreed that we use the same cut off as used in our first Phase 3 clinical trial of IGF-1 < 1.3 times the upper limit of normal as the threshold for response, the FDA agreed that we use IGF-1 £ 1.0 times the upper limit of normal in the CHIASMA OPTIMAL trial. The fact that we have not used such endpoints previously for regulatory submissions introduces an additional level of uncertainty in the outcome of the MPOWERED and CHIASMA OPTIMAL Phase 3 clinical trials, and the ability for the data from each trial to support regulatory approval. We cannot provide assurance that the FDA or EMA will view the results as we do or that any of our ongoing or future trials of octreotide capsules, including our MPOWERED Phase 3 clinical trial in acromegaly, or any clinical trials we may conduct for other indications, if any, will achieve positive results. 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 prior clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in prior trials.

Despite the results reported in earlier nonclinical studies and clinical trials for octreotide capsules for the treatment of acromegaly, any current or future clinical trial results of octreotide capsules may not be successful in acromegaly, or any other indication, if studied. A number of factors could contribute to a lack of favorable safety and efficacy results for octreotide capsules for acromegaly or other indications. For example, such trials could result in increased variability due to varying site characteristics, such as local standards of care, differences in evaluation period, and varying patient characteristics, including demographic factors and health status. If later-stage clinical trials, such as MPOWERED, do not produce favorable results, it will raise substantial doubt about our ability to achieve regulatory approval of octreotide capsules for the treatment of acromegaly or other indications.

Further, our resubmitted NDA relies upon the FDA’s 505(b)(2) regulatory pathway for octreotide capsules in acromegaly in the United States and we expect to rely on a similar hybrid application pathway for the MAA that we plan to submit in the European Union. There can be no assurance that our clinical trials, or the clinical trials conducted by third parties, will demonstrate sufficient safety and efficacy for the FDA or EMA to approve octreotide capsules for the treatment of

 

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acromegaly or any other indication that may be specified in future NDA or MAA submissions. Even if we do obtain approval from the FDA for octreotide capsules for the treatment of acromegaly in the United States, we may not be successful in obtaining approval from the EMA or other regulatory authorities, or vice versa.

Any negative clinical results from, termination or suspension of, or delays in the commencement or completion of any ongoing or future trials of octreotide capsules for the treatment of acromegaly or for any additional indications, in the United States or other countries, or future clinical trials of product candidates we may develop could result in increased costs to us, delay or limit our ability to generate revenue, negatively impact our commercial prospects, cause our market value and stock price to fall and jeopardize our viability as a business.

Delays in the completion of the Phase 3 MPOWERED clinical trial we initiated in March 2016 to support marketing approval of octreotide capsules as a treatment for acromegaly in the European Union, the clinical trials of octreotide capsules for other indications we may pursue, if conducted, or any future clinical trials we may conduct for other product candidates we may develop, or negative findings in those trials, could significantly increase our product development costs and jeopardize our ability to commercialize octreotide capsules. For example, if the topline data from the Phase 3 MPOWERED clinical trial, which we expect to report in the fourth quarter of 2020, are negative, those data could negatively impact the commercial prospects for octreotide capsules in the U.S., if FDA approval is obtained.

Furthermore, in October 2015, the EMA required us to revise our protocol for our MPOWERED Phase 3 clinical trial to extend the control period from six months to nine months. The final protocol accepted by EMA therefore dictated that additional time will be needed to complete our second Phase 3 clinical trial of octreotide capsules. While enrollment and randomization are complete, we do not know whether the MPOWERED Phase 3 trial will be completed on schedule or will be successful. In light of the FDA’s position that the MPOWERED clinical trial would not be sufficient to address the concerns in the CRL, in late 2016 we modified certain elements of the MPOWERED trial in an effort to preserve patients, sites and other resources that were necessary to conduct the CHIASMA OPTIMAL Phase 3 trial. The modifications to the MPOWERED trial, together with our decision in October 2018 to enroll 15 additional patients, delayed the expected timing of an MAA submission with the EMA. We now expect top-line data from the MPOWERED study in the fourth quarter of 2020. The completion of the MPOWERED Phase 3 trial or other clinical trials we may conduct could be delayed for a number of other reasons, including delays related to:

 

   

the FDA, the EMA or any other relevant regulatory authority failing to grant permission to proceed and placing the clinical trial on hold;

 

   

patient enrollment and variability in the number and types of patients available for clinical trials, which is particularly challenging for orphan indications, as well as other ongoing clinical trials in adult acromegaly patients;

 

   

a facility manufacturing octreotide acetate, octreotide capsules, placebo capsules or any other product candidate we may develop being found deficient in its processes, as the FDA noted in its CRL to our NDA and as was observed in a recent regulatory inspection at the time of our NDA resubmission, or ordered by the FDA, EMA or other government or regulatory authorities to temporarily or permanently shut down due to violations of cGMP requirements or other applicable requirements, or cross-contaminations of product candidates in the manufacturing process;

 

   

any changes to our manufacturing process that may be necessary or desired or a failure to successfully manufacture qualifying clinical trial supplies of oral octreotide capsules or placebo;

 

   

patients choosing an alternative treatment for acromegaly or any of the indications for which we may develop octreotide capsules or potential product candidates, or participating in competing clinical trials;

 

   

difficulty in maintaining contact with patients after treatment, resulting in incomplete or missing data;

 

   

patients experiencing drug-related adverse effects;

 

   

reports from clinical testing on similar technologies and products raising safety and/or efficacy concerns;

 

   

third-party clinical investigators losing their licenses or permits necessary to perform our clinical trials, not performing our clinical trials on our anticipated schedule or employing methods that are inconsistent with the clinical trial protocol, good clinical practice, or GCP, requirements, or other third parties not performing data collection and analysis in a timely or accurate manner;

 

   

inspections of clinical trial sites by the FDA, EMA or other regulatory authorities finding regulatory violations that require us to undertake corrective action, result in suspension or termination of one or more sites or the imposition of a clinical hold on the entire trial, or that prohibit us from using some or all of the data in support of our marketing applications;

 

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third-party contractors becoming debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities for violations of regulatory requirements, in which case we may need to find a substitute contractor, and we may not be able to use some or any of the data produced by such contractors in support of our marketing applications;

 

   

one or more IRBs or ethics committees refusing to approve, suspending or terminating the study at an investigational site, precluding enrollment of additional patients, or withdrawing its approval of the trial;

 

   

reaching 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;

 

   

deviations of the clinical sites from trial protocols or dropping out of a trial;

 

   

delays in adding new clinical trial sites;

 

   

the inability of the CRO to execute any clinical trials for any reason;

 

   

the inability to enroll patients who participated in prior clinical trials in our current or planned clinical trials; or

 

   

government or regulatory delays or “clinical holds” requiring suspension or termination of a trial.

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

Changes in regulatory requirements and guidance may also occur, and we may need to amend clinical trial protocols submitted to applicable regulatory authorities to reflect these changes. Amendments may require us to resubmit clinical trial protocols to IRBs or ethics committees for re-examination, which may impact the costs, timing or successful completion of a clinical trial.

The FDA’s and other regulatory authorities’ policies may change, and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of octreotide capsules and any future product candidates we may develop. 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 the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, and we may not achieve or sustain profitability, which would harm our business, prospects, financial condition and results of operations.

If we are required to conduct additional clinical trials or other studies with respect to octreotide capsules or any future product candidates we may develop beyond those that we may propose to conduct, or if we are unable to successfully complete our clinical trials or other studies, we may be delayed in obtaining regulatory approval of octreotide capsules and any future product candidates we may develop, we may not be able to obtain regulatory approval at all or we may obtain approval of indications that are not as broad as intended. Our product development costs will also increase if we experience delays in testing or approvals, and we may not have sufficient funding to complete the testing and approval process for octreotide capsules or any future product candidates we may develop. Significant clinical trial delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our products if and when approved. If any of this occurs, our business would be harmed.

* Changes in funding for, or leadership at, or disruptions at the FDA, the SEC and other government agencies, including due to the novel coronavirus COVID-19 pandemic, could hinder their ability to hire and retain key personnel, prevent new products and services from being developed, approved or commercialized in a timely manner or otherwise prevent those agencies from performing normal functions on which the operation of our business may rely, which could negatively impact our business.

 

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The ability of the FDA to review and approve new products or take action with respect to other regulatory matters can be affected by a variety of factors, including prioritization of activities related to managing the novel coronavirus COVID-19 pandemic, government budget and funding levels, ability to hire and retain key personnel and accept 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 the SEC, the FDA and other government agencies on which our business relies 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, or for other actions to be taken, by relevant government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA and the SEC, have had to furlough critical FDA, SEC and other government employees and stop critical activities. In addition, the FDA is experiencing disruptions related to the novel coronavirus COVID-19 pandemic, including postponing most foreign inspections and scaling back domestic inspections, and has also warned that it may be unable to sustain its current level of performance for its new drug program and other programs. If a prolonged government shutdown or other disruption occurs or if disruptions related to the outbreak of novel coronavirus COVID-19 pandemic continue or worsen, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, including our NDA resubmission for octreotide capsules as a treatment for acromegaly currently under review by the FDA, which could have a material adverse effect on our business. Moreover, changes in leadership at the FDA could have an adverse impact on our ability to receive regulatory approval for octreotide capsules in the United States. Similarly, a prolonged government shutdown or other disruption could prevent the timely review of patent applications by the United States Patent and Trademark Office, or USPTO, which could delay the issuance of any U.S. patents to which we might otherwise be entitled. Further, in our operations as a public company, future government shutdowns could impact our ability to access the public markets and obtain necessary capital in order to properly capitalize and continue our operations.

We may find it difficult to enroll patients in our clinical trials, in particular with respect to octreotide capsules and any other product candidates that we may pursue, which could delay or prevent clinical trials of octreotide capsules and any future product candidates we may develop and potentially harm our business.

Identifying and qualifying patients to participate in clinical trials of octreotide capsules and any future product candidates we may develop is critical to our success. The timing of our clinical trials depends on the speed at which we can recruit patients to participate in testing octreotide capsules and any future product candidates we may develop as well as completion of required follow-up periods. If patients are unable or unwilling to participate in our clinical trials for any reason, including if patients choose to enroll in competitive clinical trials for similar patient populations or they are unwilling to enroll and stay in a clinical trial with a placebo-controlled design, the timeline for recruiting patients, conducting studies and obtaining regulatory approval of octreotide capsules and any future product candidates we may develop may be delayed. These delays could result in increased costs, and we may not have sufficient capital on hand or the ability to raise additional capital to cover such costs, delays in advancing octreotide capsules or any future product candidates we may develop, delays in testing the effectiveness of future product candidates, if any, or termination of the clinical trials altogether.

We may not be able to identify, recruit and enroll a sufficient number of patients, or those with required or desired characteristics to achieve diversity in a trial, to complete our clinical trials in a timely manner. In particular, the conditions for which we may evaluate octreotide capsules are orphan diseases with limited patient pools from which to draw for clinical trials. The eligibility criteria of our clinical trials will further limit the pool of available trial participants. For example, while we are enrolling patients in the United States, Russia, Europe and other countries, we are not permitted to enroll patients from our prior clinical trials in our ongoing Phase 3 clinical trial to support MAA submission and approval in the European Union. The same limitation was true for our CHIASMA OPTIMAL trial. Further, in light of the FDA’s position that the MPOWERED clinical trial would not be sufficient to address the concerns in the CRL, we modified certain elements of the MPOWERED trial in an effort to preserve patients, sites and other resources necessary to conduct the CHIASMA OPTIMAL Phase 3 trial.

Patient enrollment is affected by factors including the:

 

   

severity of the disease under investigation;

 

   

design of the clinical trial protocol;

 

   

size and nature of the patient population;

 

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perceived risks and benefits of the product candidate under trial;

 

   

possibility of receiving placebo rather than active drug in certain controlled trials, such as was the case in the CHIASMA OPTIMAL trial;

 

   

eligibility criteria for the trial in question;

 

   

possibility of being randomized back to current injectable therapies, such as in the MPOWERED trial, or rescued back to current injectable therapies following a loss of biochemical and symptom control, such as was the case in the CHIASMA OPTIMAL trial;

 

   

proximity and availability of clinical trial sites for prospective patients;

 

   

availability of competing therapies and clinical trials;

 

   

perceptions of patients and healthcare providers as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating;

 

   

efforts to facilitate timely enrollment of patients in clinical trials;

 

   

patient referral practices of physicians; and

 

   

ability to monitor patients adequately during and after treatment.

If we have difficulty enrolling a sufficient number of patients to conduct our clinical trials or our clinical trials produce incomplete data, we may be forced to delay, limit or terminate ongoing or planned clinical trials, any of which would have an adverse effect on our business. We could encounter delays if physicians encounter unresolved ethical issues associated with enrolling patients in clinical trials of octreotide capsules and any future product candidates that we may develop in lieu of prescribing existing treatments that have established safety and efficacy profiles. We may not be able to initiate or continue clinical trials if we cannot enroll a sufficient number of eligible patients to participate in the clinical trials required by the FDA, the EMA or other regulatory authorities. Our ability to successfully initiate, enroll and complete a clinical trial in any foreign country is subject to numerous risks unique to conducting business in foreign countries, including the:

 

   

difficulty in establishing or managing relationships with CROs and physicians;

 

   

different requirements and standards for conducting clinical trials;

 

   

inability to locate qualified local consultants, physicians and partners; and

 

   

potential burden of complying with a variety of foreign laws, medical standards and regulatory requirements, including the regulation of pharmaceutical and biotechnology products and treatments.

* Even if we receive regulatory approval of our NDA resubmission for octreotide capsules as a treatment for acromegaly, we must also obtain regulatory approval of at least one of our two planned prior approval manufacturing supplements and may still face additional future development and regulatory challenges, each of which could inhibit or preclude our ability to commercialize octreotide capsules for any indication.

Assuming we obtain the FDA’s approval of our NDA, in order to have octreotide capsules available for our planned commercial launch in the fourth quarter of 2020, we must also obtain the FDA’s approval of the first of our two planned prior approval manufacturing supplements for our sources of commercial API. If we are unable to obtain or are delayed in obtaining regulatory approval of our NDA and one of our two planned prior approval manufacturing supplements, we could be prevented from commercializing the product candidate in a timely manner or at all. Further, even if we obtain regulatory approval of our NDA resubmission for octreotide capsules as a treatment of acromegaly, and other indications we may pursue, or any other product candidates we may develop, they will be subject to ongoing requirements by the FDA and comparable foreign regulatory authorities governing manufacturing, quality control, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of safety and other post-market information. If approved, the safety profile of octreotide capsules and any future product candidates we may develop will continue to be closely monitored by the FDA and comparable foreign regulatory authorities after approval. If new safety information becomes available after approval of octreotide capsules and any future product candidates we may develop, the FDA or comparable foreign regulatory authorities may require labeling changes or establishment of a Risk Evaluation and Mitigation Strategy, or REMS, or similar strategy, impose significant restrictions on our product candidates, indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance. For example, the label ultimately approved for

 

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octreotide capsules, if it achieves marketing approval, may include restrictions on use or exclude the symptom improvement data observed in our first completed Phase 3 clinical trial, which could limit the marketability of octreotide capsules and impair our ability to have octreotide capsules gain market acceptance. If we do not receive approval of octreotide capsules for the treatment of acromegaly, there would be significant doubts about our viability as a standalone business.

In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP and other regulations. The third-party contract manufacturers that we utilize or plan to utilize for commercial supply have been subject to ongoing regulatory inspections from time to time that resulted in inspectional observations. For example, in the CRL, the FDA advised that, during a site inspection, certain deficiencies were conveyed to the representative of one of our suppliers. In addition, in connection with the resubmission of our NDA, we did not reference in the NDA resubmission our planned primary commercial API manufacturer due to unresolved observations from a recent regulatory inspection. If we or a regulatory authority discover any new or previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or with any facility where the product is manufactured, we may recall or withdraw the product from the market or a regulatory authority may impose restrictions on that product, the manufacturing facility or us, including requiring suspension of manufacturing. If we, our potential products or the manufacturing facilities for our potential products fail to comply with applicable regulatory requirements, a regulatory authority may, among other things:

 

   

issue warning letters or untitled letters;

 

   

mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;

 

   

require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;

 

   

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

 

   

suspend or withdraw regulatory approval;

 

   

suspend any ongoing clinical trials;

 

   

refuse to approve pending applications or supplements to applications filed by us;

 

   

suspend or impose restrictions on operations, including costly new manufacturing requirements; or

 

   

seize or detain products, refuse to permit the import or export of products, or request that we initiate a product recall.

The occurrence of any event or penalty described above may inhibit or preclude our ability to commercialize octreotide capsules, if approved, and any future product candidates we may develop and generate revenue.

We face substantial competition from larger companies with considerable resources that already have somatostatin analogs available in the market, and they or others may also discover, develop or commercialize additional products before or more successfully than we do.

Our industry is highly competitive and subject to rapid and significant technological change as researchers learn more about diseases and develop new technologies and treatments. Our potential competitors include primarily large pharmaceutical, biotechnology and specialty pharmaceutical companies. If approved, we expect octreotide capsules will face competition from established drugs and major brand names and also generic versions of these products. Key competitive factors affecting the commercial success of octreotide capsules and any other product candidates we may develop are likely to be efficacy, safety and tolerability profile, reliability, convenience of administration, price and reimbursement and effectiveness of our promotional activities. For example, physicians may choose not to prescribe octreotide capsules, if approved, because a lower percentage of patients met the criteria for response in our first Phase 3 clinical trial after treatment with octreotide capsules compared to their baseline response rates on injectable therapy, similar data was produced in the CHIASMA OPTIMAL trial, or may also occur in the MPOWERED clinical trial. Competition could also force us to lower prices or could result in reduced sales.

The standards of care for patients suffering from acromegaly all involve injectable therapies, other than cabergoline, an oral agent used for the treatment of mild acromegaly. Novartis markets octreotide LAR, which is administered monthly and intramuscularly using a large gauge needle. Ipsen markets lanreotide, another long-acting analog of somatostatin, like octreotide, which is administered monthly using a deep subcutaneous injection. Pfizer markets pegvisomant daily

 

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injections and Recordati also markets pasireotide LAR, which is another somatostatin analog administered via intramuscular injection. Generic versions of these drugs may also bring additional competition to the treatment landscape. For example, while octreotide LAR and lanreotide currently have no generic competitors in the United States, generic versions are available in some markets in the European Union. In addition, we are aware of other companies involved in early-stage nonclinical and clinical studies of similar somatostatin analogs. Most notably, Camurus AB is developing CAM2029, a subcutaneous octreotide depot for the potential treatment of neuroendocrine tumors and acromegaly. Camurus AB received FDA approval of its IND in June 2019 to initiate a Phase 3 acromegaly trial. MidaTech Pharma PLC also conducted its first in human study and also recently initiated a Phase 1 study of Q-Octreotide (MTD201), Midatech’s injectable treatment for acromegaly built on its Q-Sphera sustained release platform technology. In 2019, Crinetics Pharmaceuticals, Inc. announced the initiation of two Phase 2 clinical trials to evaluate the safety and efficacy of CRN00808 in acromegaly patients. CRN00808 is a nonpeptide somatostatin agonist designed to be taken orally once per day. In May 2017, Dauntless Pharmaceuticals, Inc., a privately held biopharmaceutical company, announced positive results from its two-part, Phase 1 pharmacokinetic/pharmacodynamic study evaluating DP1038, a novel formulation of octreotide acetate for intranasal administration. In 2018, Ionis Pharmaceuticals initiated a Phase 2 trial of IONIS-GHR-RX, its growth hormone receptor antagonist to control growth hormone production in acromegaly patients. In January 2020, Rani Therapeutics (RaniPill capsule containing octreotide) announced the completion of a Phase 1 study in 58 healthy volunteers, indicating that the RaniPill performed as designed. Per published reports, Rani Therapeutics plans to conduct a head-to-head study in acromegaly patients and demonstrate equivalence or non-inferiority to the injectable version of octreotide sc. We are also aware that Strongbridge Biopharm (valdoreotide or COR-005) may also be actively developing products for the maintenance treatment of acromegaly. If any or a combination of CAM2029, MTD201, CRN00808, DP1038, IONIS-GHR-RX, RaniPill or the other products in development for acromegaly receive regulatory approval before, or in a similar timeframe as, our octreotide capsules, or demonstrate superior clinical results to octreotide capsules, we may encounter significant difficulties with our commercial launch of octreotide capsules.

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, obtaining FDA and other regulatory approvals of products and the commercialization of those products. These companies also have long-established relationships within the medical and patient community, including patients, physicians, nurses and commercial third-party payors and government payors. Our ability to compete successfully will depend largely on our ability to:

 

   

develop our product candidate and demonstrate that it is competitive with or superior to other products on the market;

 

   

obtain required regulatory approvals;

 

   

adequately communicate the benefits of octreotide capsules, if approved;

 

   

attract and retain qualified personnel;

 

   

obtain and maintain patent and/or other proprietary protection for octreotide capsules and any future product candidates we may develop; and

 

   

in certain geographies, obtain collaboration arrangements to develop and commercialize octreotide capsules and any future product candidates we may develop.

Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a small number of our competitors. Accordingly, our competitors may be more successful than we may be in obtaining FDA approval of drugs and achieving widespread market acceptance. Our competitors’ drugs may be more effective, or more effectively marketed and sold, than any drug we may commercialize and may render octreotide capsules or any future product candidates we may develop obsolete or non-competitive before we can recover the expenses of developing and commercializing octreotide capsules or any future product candidates we may develop. Our competitors may also obtain FDA or other regulatory approval of their products more rapidly than we may obtain approval of ours. We anticipate that we will face intense and increasing competition as new drugs enter the market and more advanced technologies become available. For example, a competitor could develop another oral formulation of either a somatostatin analog or non-somatostatin analog or other technology that could make administration of peptide-based therapies more convenient. If we are unable to compete effectively, our opportunity to generate revenue from the sale of octreotide capsules or any future product candidates we may develop, if approved, could be impaired.

 

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The number of patients suffering from acromegaly is small and has not been established with precision. Our assumptions and estimates regarding prevalence may be wrong. If our octreotide capsules product candidate is approved for sale, and the actual number of patients in the applicable market is smaller than we estimate, our revenue could be adversely affected, possibly materially.

We estimate that there are an estimated 69,000 individuals with acromegaly in the developed world. The U.S. National Institutes of Health, or NIH, estimates that there are roughly 20,000 individuals with acromegaly in the United States, based on its published prevalence of an estimated 60 cases per million. In thirteen studies of acromegaly prevalence since 1980, an average of approximately 75 cases per million was determined, suggesting roughly 24,000 individuals with acromegaly in the United States. However, data presented at the Endocrine Society’s Annual Meeting in 2015 suggest that pituitary tumors may be more prevalent than previously thought, and that the global prevalence of acromegaly may be higher, between 85 and 118 cases per million people. NIH also cites an annual incidence of three to four new cases per million each year. Data from a 2017 study by Lavrentaki et. al. suggest that the global prevalence of acromegaly may be between 28 and 137 cases per million people. Based upon our own market research, we believe that approximately 8,000 adult acromegaly patients are chronically treated with somatostatin analogs in the United States. However, there is no guarantee that these estimates are correct. The number of patients with acromegaly, in particular the number of patients for whom our octreotide capsules product, if approved, is approved for use, could actually be significantly lower than these estimates.

We believe that the actual size of the total addressable acromegaly market in those markets in which our octreotide capsules product is approved, if at all, will be determined only after we have substantial history as a commercial company. If the total addressable market for our products is smaller than we expect, our revenue could be adversely affected, possibly materially.

Even if we receive the regulatory approvals necessary to commercialize octreotide capsules, it may not achieve or maintain an adequate level of acceptance by physicians, patients and third-party payors and government payors, and we may not generate sufficient revenue or be able to achieve or sustain profitability.

The commercial success of octreotide capsules, if we obtain the necessary regulatory approvals, will depend in large part on the willingness of physicians to prescribe them to their patients. If we obtain the necessary regulatory approvals to commercialize octreotide capsules, the product will compete against products that have achieved broad recognition and acceptance among medical professionals. In order to achieve and maintain an acceptable level of prescriptions for octreotide capsules, if we obtain the necessary regulatory approvals, we must be able to meet the needs of both the medical community and patients with respect to cost, efficacy and other factors.

The degree of market acceptance of octreotide capsules, if we obtain the necessary regulatory approvals, will depend on a number of factors, including:

 

   

the clinical safety, efficacy, tolerability and other factors regarding octreotide capsules observed in our completed ongoing and potential future clinical trials, including relative to injectable somatostatin analogs such as the relative topline data from our MPOWERED trial expected in the fourth quarter of 2020, and any other treatments available at the time;

 

   

the relative convenience, number of capsules that need to be taken, requirement to fast before and after each dose of octreotide capsules, and other factors affecting the ease of administration;

 

   

the prevalence and severity of any adverse effects;

 

   

the willingness of physicians to prescribe octreotide capsules and of the target patient population to try new therapies and adhere to them;

 

   

the introduction of any new products that may in the future become available to treat indications for which octreotide capsules may be approved;

 

   

changes in the clinical or economic profiles of alternative treatments;

 

   

new procedures or methods of treatment that may reduce the incidences of any of the indications in which octreotide capsules may show utility;

 

   

pricing and cost-effectiveness, particularly compared to alternative treatments;

 

   

the effectiveness of our or any future collaborators’ sales and marketing, as well as disease education and awareness programs;

 

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limitations or warnings contained in labeling approved by the FDA or comparable foreign regulatory authorities;

 

   

our ability to obtain and maintain sufficient third-party coverage and adequate reimbursement from government health care programs, including Medicare and Medicaid, private health insurers and other third-party payors;

 

   

the willingness of patients to pay out-of-pocket in the absence of third-party coverage or reimbursement;

 

   

competitor activities; and

 

   

our ability to reliably manufacture and supply octreotide capsules.

In addition, even if we obtain the necessary regulatory approvals, the timing or scope of any approvals may prohibit or reduce our ability to commercialize octreotide capsules successfully. For example, if the approval process takes too long, which is a greater likelihood as a result of our plan to submit two prior approval manufacturing supplements for the approval of the sources of commercial API required in order to have octreotide capsules available for our planned commercial launch, we may miss market opportunities and give other companies the ability to develop competing products or establish market dominance. Any regulatory approval we ultimately obtain may be limited or be subject to restrictions or post-approval commitments that render octreotide capsules not commercially viable. For example, regulatory authorities may approve octreotide capsules for more limited indications than we request, may limit approved usage to narrower patient populations, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve octreotide capsules with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that indication. While we believe that our completed first Phase 3 clinical trial demonstrated acromegaly symptom improvements in patients who completed the trial, we believe there is a substantial likelihood that the FDA may not include this data in an approved label, if any, for oral octreotide due to the CRL, and the CHIASMA OPTIMAL trial was not designed to, and did not, demonstrate validated symptom improvement data. While the MPOWERED trial employs a validated treatment satisfaction questionnaire for patient completion, the final symptom and treatment satisfaction data may be negative when comparing oral octreotide capsules to standard of care somatostatin analog injectables. The symptom data from our Phase 3 trials, even if deemed positive, may not be contained in our octreotide capsules product label, if approved. Any of the foregoing scenarios could harm the commercial prospects for octreotide capsules.

Even if octreotide capsules are approved and commercialized in one or more geographies, they may not achieve and maintain an adequate level of acceptance by physicians, healthcare payors and patients, and we may not generate sufficient revenue or be able to achieve or sustain profitability. Any concerns about or negative perception of octreotide capsules or the clinical data of octreotide capsules within the patient or medical communities could significantly impact market adoption and commercial performance of octreotide capsules, even if we are able obtain regulatory approval to commercialize in the United States or European Union in the future. The perception of octreotide capsules within the patient and medical communities could be negatively impacted by clinical data from ongoing or future clinical studies, including comparative safety and efficacy data from the MPOWERED trial from which topline data is expected in the fourth quarter of 2020, as well as by real-world data on acromegaly treatments that we expect will be generated from our disease state registry for acromegaly. Our revenue and profitability may also be delayed during the potential period of time when commercial third-party payors and government payors are becoming familiar with octreotide capsules and patients are transitioning from injected alternatives to octreotide capsules. Our efforts to educate the medical community, patients and third-party payors on the benefits of octreotide capsules may require significant resources and may never be successful. Even if we are able to demonstrate and maintain a competitive advantage over our competitors, if the market for octreotide capsules decreases, we may not generate sufficient revenue.

* We do not have a sales organization and only recently established marketing and market access organizations and, as a company, have not commercialized any products. If we are able to secure regulatory approvals for commercializing octreotide capsules as a treatment for acromegaly but are unable to establish effective sales and marketing capabilities in the United States and access them in the European Union and other international markets, we may not succeed in commercializing octreotide capsules.

We essentially do not have sales personnel and have only recently hired marketing and market access personnel. We have not engaged a partner to commercialize octreotide capsules in the United States, if we obtain the necessary regulatory approvals and, therefore, we currently intend to build our sales and marketing infrastructure to support commercial launch in the United States, assuming our NDA is approved. If we obtain the necessary regulatory approvals to commercialize octreotide capsules when we expect, our sales, market access and marketing teams will have worked together for only a limited period prior to our anticipated commercial launch of octreotide capsules. We cannot guarantee that we will be successful in gaining coverage and or reimbursement with payers for MYCAPSSA or in driving

 

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utilization of octreotide capsules in the United States. We may not be able to establish a direct sales force in a cost-effective manner or realize a positive return on this investment. In addition, we will have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain sales, market access and marketing personnel. Factors that may inhibit our efforts to successfully commercialize octreotide capsules in the United States ourselves include:

 

   

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

 

   

the inability of our relatively small planned sales force to obtain access to or inform adequate numbers of physicians, particularly the pituitary centers and the significantly larger number of community endocrinologists, about the potential benefits of octreotide capsules;

 

   

the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines;

 

   

the inability to compete with larger, more established pharmaceutical sales and marketing organizations;

 

   

the inability of market access personnel to obtain sufficient levels of pricing and reimbursement in each jurisdiction; and

 

   

unforeseen costs, expenses and delays associated with creating a commercial organization.

Even if we are able to obtain the regulatory approvals for commercializing octreotide capsules, we cannot guarantee when that will occur or whether we will be successful in marketing octreotide capsules in the United States or any other jurisdiction. If we are not successful in recruiting of sales and other commercial personnel on a timely basis or rebuilding a sales, market access and marketing infrastructure, or if we do not successfully enter into appropriate collaboration arrangements, we will have difficulty commercializing octreotide capsules, if we obtain the necessary regulatory approvals, which could harm our business, operating results and financial condition.

If pursued by us, expansion of our business into the European Union and other international markets will require significant management attention and additional financial resources. We may explore commercializing octreotide capsules in the European Union and other international markets by entering into collaboration agreements with other biopharmaceutical companies, and we may not be successful in entering into these collaboration agreements. In the event that we do enter into such agreements, we may have limited or no control over the sales, marketing and distribution activities of these third parties. Additional factors and risks that may inhibit our efforts to commercialize octreotide capsules in foreign markets include:

 

   

our inability to commercialize octreotide capsules in the United States;

 

   

our inability to directly control commercial activities because we are relying on third parties, should we enter into third-party collaborations;

 

   

varying pricing in different foreign markets, including significantly lower prices for existing somatostatin analog injectables in European and other markets as well as the recent entry of generic somatostatin analog injectables into European markets, which could adversely affect our pricing in the European Union and other countries;

 

   

the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements;

 

   

different medical practices and customs in foreign countries affecting acceptance in the marketplace;

 

   

import or export licensing requirements;

 

   

longer collection times for accounts receivable;

 

   

longer lead times for shipping;

 

   

language barriers for technical training;

 

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reduced protection of intellectual property rights in some foreign countries, and related prevalence of generic alternatives;

 

   

foreign currency exchange rate fluctuations;

 

   

our ability to obtain adequate reimbursement for octreotide capsules in foreign markets, either at all or at prices that exceed our costs; and

 

   

the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.

Foreign sales of octreotide capsules could also be adversely affected by the imposition of governmental price controls, political and economic instability, trade restrictions and changes in tariffs.

We may not be able to establish a commercial operation in a cost-effective manner or realize a positive return on this investment, even with the assistance of one or more third-party collaborators, should we choose to enter into such an arrangement. In addition, we will have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain sales and marketing personnel.

If we or third-party collaborators are not successful in recruiting sales and marketing personnel or in building a sales and marketing infrastructure, or if we do not successfully enter into additional collaboration arrangements with third parties, we may not be able to successfully commercialize octreotide capsules or any future product candidates we may develop in foreign markets, which could impair our business, operating results and financial condition.

Even with the potential assistance of third-party collaborators, we may not be successful in establishing a commercial operation in foreign markets for numerous reasons, including, but not limited to, failing to attract, retain and motivate the necessary skilled personnel and failing to develop a successful marketing strategy. Failure to establish a commercial operation in foreign markets will have a negative outcome on our ability to commercialize octreotide capsules and generate revenue.

Additionally, if approved for marketing in one or more countries, we and/or our potential third-party collaborators may encounter unexpected or unforeseen delays in establishing our commercial operations that delay the commercial launch in these countries. These delays may increase the cost of and the resources required for successful commercialization of octreotide capsules both in the United States and internationally. We do not have any experience in a commercial launch in the United States, European Union or elsewhere.

We have only recently established a medical affairs organization and, as a company, have limited experience in operating a medical affairs organization. If we are unable to establish effective medical affairs capabilities in the United States and build or access them in the European Union and other international markets, our business may suffer.

We have only recently established our medical affairs organization. Medical affairs personnel are responsible for a number of key activities within biopharmaceutical companies, which include, but are not limited to, providing expert advice to other functions within the organization, advising on medical education activities, reviewing promotional and non-promotional communications, supporting medical and scientific publications, reviewing grants for third-party continuing medical education events, and providing an important scientific point of contact for physicians and scientists who seek to partner with us or better understand our science.

Failure to successfully execute these activities could harm our business in the following ways:

 

   

our reputation among key physicians and scientists in acromegaly and other disease areas of interest to us may suffer;

 

   

we may not be able to secure the advice and feedback of outside experts to help advance our knowledge and understanding of complex scientific and medical issues;

 

   

our commercial and corporate functions may not receive adequate medical and scientific information in the creation of their external communications, which could lead to inaccurate information being disseminated about us, our product candidates, our disease areas of interest, or our other scientific endeavors;

 

   

our promotional, non-promotional, grants, and medical events review processes may not provide an effective control to ensure compliance with applicable laws, regulations and standards; and

 

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we may not successfully interact with European or other ex-U.S. healthcare professionals and scientists who could help us execute plans for expansion into Europe or other international markets.

We will need to grow the size of our organization in order to establish our sales and marketing infrastructure, which is vital to our ability to successfully commercialize octreotide capsules, and we may experience difficulties in achieving and managing this growth.

We anticipate that in the near term our ability to generate revenues will depend solely on our ability to successfully commercialize octreotide capsules, if approved, in the United States. A commercial launch is a significant undertaking that requires substantial financial and managerial resources. As of March 31, 2020, we had 49 full-time employees. As our development and commercialization plans and strategies evolve, we will need to expand the size of our employee base for managerial, operational, sales, marketing, financial and other resources. The recruitment and hiring of these personnel will take time and could delay the commercialization of octreotide capsules. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. Also, our management may have to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. Our future financial performance and our ability to commercialize octreotide capsules and other product candidates we may develop and to compete effectively will depend, in part, on our ability to effectively manage any future growth and related costs. We may not be able to effectively manage a rapid pace of growth and timely implement improvements to our management infrastructure and control systems.

We will need to build an effective healthcare compliance program to support the sales and marketing of an approved drug in a manner that is compliant with applicable laws and regulations.

Our marketing of pharmaceutical products is subject to extensive and complex laws and regulations. We are building a corporate compliance program designed to actively identify, prevent and mitigate risk through the implementation of compliance policies and systems, and through the establishment and communication of a culture of compliance. Among other laws, regulations and standards, we are subject to various U.S. federal and state laws, and comparable foreign laws pertaining to health care fraud and abuse, including anti-kickback and false claims statutes, laws prohibiting the promotion of drugs for unapproved or off-label uses, and laws requiring transparency regarding transfers of value to health care professionals and entities. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive or pay any remuneration to induce the referral of business, including the purchase or prescription of a particular drug; false claims laws prohibit anyone from presenting for payment to third-party payors, including Medicare and Medicaid, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services; and the Sunshine Act and other state and federal transparency laws require certain pharmaceutical manufacturers to track and report certain financial arrangements with physicians and teaching hospitals, including certain “transfers of value” provided to them, as well as certain ownership or investment interests held by physicians and their immediate family members. Although effective compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, these risks cannot be entirely eliminated. We expect to devote substantial resources to develop, administer and grow this compliance program, but we may not be able to develop and implement it rapidly enough to keep pace with the rapid growth and activity of the commercial organization.

Even if we obtain marketing approval of octreotide capsules or any future product candidates we may develop, we will be subject to ongoing obligations and continued regulatory review, including with respect to the advertising and promotion of any product candidate that obtains approval.

Advertising and promotion of any product candidate that obtains approval in the United States will be heavily scrutinized by, among others, the FDA, the Department of Justice, or DOJ, the Office of Inspector General of the Department of Health and Human Services, or HHS, state attorneys general, members of Congress and the public, as well as by foreign regulatory authorities in the countries in which we commercialize octreotide capsules. Even if octreotide capsules are being marketed, the manufacture and marketing of octreotide capsules will be subject to ongoing regulation, including compliance with cGMPs, adverse event reporting requirements, guidance regarding the provision of reimbursement support and patient services, and general prohibitions against promoting products for unapproved or “off-label” uses. Violations of these ongoing regulations are subject to enforcement letters, inquiries and investigations, and civil and criminal sanctions by the FDA or other government agencies. Government investigation of these issues itself typically requires the expenditure of significant resources and can generate negative publicity, which could harm our business. Additionally, advertising and promotion of any product candidate that obtains approval outside of the United States will be heavily scrutinized by comparable foreign regulatory authorities.

 

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In the United States, engaging in impermissible promotion of our drug products for “off-label” uses can also subject us to false claims litigation under federal and state statutes, and other litigation and/or investigation, which can lead to significant administrative civil and criminal penalties and fines and agreements that materially restrict the manner in which we promote or distribute our drug products. These false claims statutes include the federal False Claims Act, which allows any individual to bring a lawsuit against a pharmaceutical company on behalf of the federal government alleging submission of false or fraudulent claims, or causing to present such false or fraudulent claims, for payment by a federal program such as Medicare or Medicaid. If the government decides to intervene and prevails in the lawsuit, the individual will share in any fines or settlement funds. In recent years, these False Claims Act lawsuits against pharmaceutical companies have increased significantly in volume and breadth, leading to substantial civil and criminal settlements based on certain sales practices promoting “off-label” drug uses. This increasing focus and scrutiny has increased the risk that a pharmaceutical company will have to defend a false claim action, pay settlement fines or restitution, agree to comply with burdensome reporting and compliance obligations, and be excluded from the Medicare, Medicaid and other federal and state healthcare programs, among other penalties. If we do not lawfully promote our approved products, we may become subject to such litigation and/or investigation and, if we are not successful in defending against such actions, those actions could compromise our ability to become profitable. In addition, any action against us for an alleged or suspected violation could cause us to incur significant legal expenses and could divert our management’s attention from the operation of our business, even if our defense is successful. For example, the marketing and promotion of authorized products, including industry-sponsored continuing medical education and advertising directed toward the prescribers of drugs, are strictly regulated in the European Union under Directive 2001/83EC, as amended. The advertising of prescription-only medicines to the general public is not permitted in the European Union.

* The manufacture and packaging of pharmaceutical products such as octreotide capsules are subject to FDA requirements and those of similar foreign regulatory bodies. If we or our third-party manufacturers fail to satisfy these requirements, our product development and commercialization efforts may be harmed.

The manufacture and packaging of pharmaceutical products, such as octreotide capsules, if approved, are regulated by the FDA and similar foreign regulatory bodies and must be conducted in accordance with the FDA’s cGMP and comparable requirements of foreign regulatory bodies. There are a limited number of manufacturers that operate under these cGMP regulations who are both capable of manufacturing octreotide capsules and willing to do so. Failure by us or our third-party manufacturers to comply with applicable regulations or requirements could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals, seizures or voluntary recalls of product, operating restrictions and criminal prosecutions, any of which could harm our business. The same requirements and risks are applicable to the suppliers of the key raw material used to manufacture the API, for octreotide capsules. The third-party contract manufacturers that we utilize or plan to utilize for commercial supply have been subject to regulatory inspections from time to time that resulted in inspectional observations. For example, in the CRL, the FDA advised that, during a site inspection, certain deficiencies were conveyed to the representative of one of our suppliers. In addition, we did not reference in the NDA resubmission our planned primary commercial API manufacturer due to unresolved observations from a recent regulatory inspection. We expect that our suppliers will be subject to additional regulatory inspections in the future, including in connection with the FDA’s review of the NDA we resubmitted seeking approval of octreotide capsules as a treatment for acromegaly and in connection with its review of our planned prior approval manufacturing supplements. Changes in the manufacturing process or procedure, including a change in the location where the product is manufactured or a change of a third-party manufacturer such as those we expect to propose by submitting our planned prior approval manufacturing supplements to the FDA, may require prior FDA review and approval of the manufacturing process and procedures in accordance with the FDA’s cGMP requirements. Any new facility is subject to a pre-approval inspection by the FDA and would again require us to demonstrate product comparability to the FDA. There are comparable foreign requirements. This review may be costly and time consuming and could delay or prevent the planned commercial launch of our product.

Furthermore, in order to obtain approval of our current or future product candidates, including octreotide capsules, by the FDA and foreign regulatory agencies, we will be required to consistently produce the API and the finished product in commercial quantities and of specified quality on a repeated basis and document our ability to do so. Even if we obtain approval of our NDA from the FDA, in order to secure sources of commercial quantities of API to support our planned commercial launch of octreotide capsules, following the June 26, 2020 PDUFA date, we plan to submit to the FDA two prior approval manufacturing supplements for sources of commercial API. In April 2020, the FDA requested that we include certain stability data in one of the planned prior approval manufacturing supplements, which we expect will delay our planned submission of this supplement until early 2021. The review of any prior approval manufacturing supplement

 

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to the NDA will require FDA review and approval of the manufacturing process, facility, equipment and procedures in place at each manufacturing site, including batch-to-batch comparability and API and drug product stability data, in accordance with the FDA’s cGMP requirements and may require regulatory inspections of each manufacturing site, which could prevent or delay approval of any such prior approval manufacturing supplement. If we are unable to obtain approval of our NDA and one of the two prior approval manufacturing supplements, we may be unable to secure API and the finished oral octreotide product in commercial quantities and our commercialization efforts may be harmed. The timing of the FDA’s review process related to our planned prior approval manufacturing supplements and the outcome of such review are inherently uncertain, and we can provide no assurances that either planned prior approval manufacturing supplement will be approved in a timely manner or at all.

In addition, we expect our primary supplier for commercial API will require additional qualified capacity to meet future demand and each of our planned API suppliers may use a different method to manufacture API, which has the potential to increase the risk to us that our manufacturers will fail to meet our commercial demand for API or applicable regulatory requirements. If we obtain the necessary regulatory approvals to commercialize octreotide capsules, we will also need to complete required testing on the finished product in the packaging we propose for commercial sales. This includes testing of stability, measurement of impurities and testing of other product specifications by validated test methods. If the FDA does not consider the result of the process validation or required testing to be satisfactory, commercial supply after NDA approval, if obtained, and launch may be delayed.

The FDA and similar foreign regulatory bodies may also implement new requirements, or change their interpretation and enforcement of existing requirements, for manufacturing, packaging or testing of products at any time. If we are unable to comply, we may be subject to regulatory, civil actions or penalties which could harm our business.

If we do not achieve our projected development and commercialization goals in the timeframes we announce and expect, the commercialization of octreotide capsules and any future product candidates we may develop may be delayed, our business will be harmed and we may not have sufficient resources to continue as a standalone company.

We estimate for planning purposes the timing of the accomplishment of various scientific, clinical, regulatory, product development and commercialization objectives. These milestones may include our expectations regarding the commencement or completion of clinical trials, the submission of regulatory filings, or initiation of commercialization. From time to time, we may publicly announce the expected timing of some of these milestones, such as the initiation or completion of an ongoing clinical trial, submission of a marketing application for approval, receipt of marketing approval, or a commercial launch of a product. The achievement of these milestones may be outside of our control. All of these milestones are based on a variety of assumptions which may cause the timing of achievement of the milestones to vary considerably from our estimates, including:

 

   

our available capital resources or capital constraints we experience;

 

   

the rate of progress, costs and results of our clinical trials and research and development activities, including the extent of scheduling conflicts with participating clinicians and collaborators, and our ability to identify and enroll patients who meet clinical trial eligibility criteria;

 

   

our strategic decisions on the design and conduct of our clinical trials;

 

   

our receipt of approvals by the FDA and other regulatory agencies and the timing thereof;

 

   

other actions, decisions or rules issued by regulators;

 

   

our ability to access sufficient, reliable and affordable supplies of compounds used in the manufacture of octreotide capsules and any future product candidates we may develop;

 

   

the efforts of our collaborators and the success of our own efforts with respect to the commercialization of our products; and

 

   

the securing of, costs related to, and timing issues associated with product manufacturing as well as sales and marketing activities.

If we fail to achieve announced milestones, including regulatory approvals, in the timeframes we announce and expect, the commercialization of octreotide capsules and any future product candidates we may develop may be prevented or delayed and our business and results of operations may be harmed.

 

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Octreotide capsules and other products we may develop, if approved, may not be commercially viable if we fail to obtain coverage and an adequate level of reimbursement for these products from governmental payors, including Medicare and Medicaid programs, private insurers, and other third-party payors. The market for octreotide capsules and other products we may develop may also be limited by the indications for which their use may be reimbursed.

The availability of coverage and adequate levels of reimbursement by governmental and other third-party payors will affect the market for octreotide capsules, if approved, and subsequent products that we may develop, if any. These third-party payors continually attempt to contain or reduce the costs of health care, such as by challenging the prices charged for medical products and services and by applying value assessments to clinical outcomes using different safety and efficacy standards than used for marketing approval by the FDA and the EMA.

In the United States, in the event that octreotide capsules are approved, we will seek to obtain reimbursement for octreotide capsules from third-party payors. In recent years, through legislative and regulatory actions, the federal government has made substantial changes to various payment systems under the Medicare program. Comprehensive reforms to the U.S. healthcare system were enacted in 2010 with the passage of the Affordable Care Act, or the ACA. These reforms could significantly reduce payments from Medicare and Medicaid in the future. Reforms or other changes to these payment systems, including modifications to the conditions on qualification for payment, bundling of payments or the imposition of enrollment limitations on new providers, may change the availability, methods and rates of reimbursements from governmental payors, private insurers and other third-party payors for octreotide capsules and any other potential products we may pursue. Some of these changes and proposed changes could result in reduced reimbursement rates for octreotide capsules and any other potential products we may pursue, which would adversely affect our business strategy, operations and financial results.

In the United States, no uniform policy of coverage and reimbursement for products exists among third-party payors. As a result, obtaining coverage and reimbursement approval of a product from a governmental or other third-party payor is a time-consuming and costly process that could require us to provide to each payor supporting scientific, clinical and cost-effectiveness data for the use of our products on a payor-by-payor basis, with no assurance that coverage and adequate reimbursement will be obtained. Even if we obtain coverage for a given product, the resulting reimbursement payment rates might not be adequate for us to achieve or sustain profitability or may require co-payments that patients find unacceptably high.

We expect that private insurers will consider the efficacy, cost effectiveness and safety of octreotide capsules, if approved, as well as the relative pricing of competing injectable somatostatin analogs in determining whether to provide reimbursement for octreotide capsules and at what level. Obtaining these additional approvals for reimbursement can be a time-consuming and expensive process. Even if we receive regulatory approval to market octreotide capsules, our business would be harmed if we do not receive approval of reimbursement of octreotide capsules from third-party payors on a timely or satisfactory basis. Medicare does not cover particular drugs if it determines that they are not “reasonable and necessary” for its beneficiaries. Limitations on coverage could also be imposed at the local Medicare carrier level or by fiscal intermediaries. Our business could be harmed if Medicare, local Medicare carriers or fiscal intermediaries were to make such a determination and deny or limit the reimbursement of octreotide capsules.

Our business could also be harmed if governments, private insurers, Medicare, Medicaid or other reimbursing bodies or payors limit the indications for which octreotide capsules will be reimbursed to a smaller set than we believe it is safe and effective in treating, or establish a limitation on the frequency with which octreotide capsules may be administered that is less often than we believe would be safe and effective, or establish a limitation on dose that is lower than we believe would be safe and effective. In addition, even if we receive regulatory approval, the FDA may introduce significant restrictions to the label for octreotide capsules in an effort to address certain concerns about the product candidate, including those raised in the CRL, End of Review meeting or by the FDA’s review of data from the CHIASMA OPTIMAL trial or the MPOWERED trial. For example, we expect to report top-line data from the MPOWERED clinical trial in the fourth quarter of 2020, which will provide biochemical control data (GH and IGF-1) of octreotide capsules as compared to the standard of care injectable somatostatin analogs, octreotide LAR and lanreotide depot, as well as patient treatment satisfaction and symptom control data. If octreotide capsules are approved in the United States, and reported MPOWERED data is unfavorable, the reimbursement rates and market potential for octreotide capsules could be severely limited. Conversely, if octreotide capsules are not approved in the United States because, among other things, the FDA determines that the CHIASMA OPTIMAL trial results do not support approval, but we nevertheless receive regulatory approval in the European Union based upon data from the MPOWERED trial, the failure to obtain regulatory approval in the Unites States could impact reimbursement rates or reduce the willingness of physicians to prescribe octreotide capsules. Any such restrictions or potential reservations about efficacy expressed by the FDA, the EMA, or within the medical community could significantly impact reimbursement, market adoption and commercial performance of octreotide capsules.

 

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We expect to experience pricing pressures in connection with the sale of octreotide capsules and any future product candidates we may develop, if required regulatory approvals are obtained, due to healthcare reforms, as well as the trend toward programs aimed at reducing health care costs, the increasing influence of health maintenance organizations, additional legislative proposals, competitive pricing pressures, including potential generic entrants, and the economic health of companies. If coverage and reimbursement for our products are unavailable, or are limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed.

In Europe and many other foreign countries, the pricing of prescription pharmaceuticals is subject to governmental control, and each country has a different reviewing body that evaluates reimbursement dossiers submitted by holders of marketing authorizations for new drugs. That governing body then makes recommendations as to whether or not the drug should be reimbursed and will often consider the reimbursement levels of competing marketed standards of care. For example, injectable somatostatin analogs currently marketed in the European Union are reimbursed at levels that are far less than in the United States on a per patient, per year basis. The pricing of octreotide capsules in the European Union, if approved, will likely be determined by government payors following an assessment of the relative efficacy, safety and benefits of octreotide capsules versus standard of care somatostatin analog injections. We believe the MPOWERED trial will provide the information required to make these assessments, and if octreotide capsules are deemed inferior to standard of care injectable somatostatin analogs, octreotide capsules may lose its orphan designation in the European Union and receive pricing determination decisions at levels that are less than standard of care injectables, which would severely impact our ability to profitably market octreotide capsules in the European Union. In these countries, pricing negotiations with governmental authorities can take 12 months or longer after the receipt of regulatory approval. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate, such as octreotide capsules, to other available therapies. Future U.S. pharmaceutical pricing regulations may require that the U.S. price for octreotide capsules, if approved, be referenced to the lower or lowest price levels of the product as set in other ex-U.S. countries, which reference pricing impact could significantly harm our business.

The longer-term growth of our business depends on our efforts to expand the approved uses of octreotide capsules beyond acromegaly, if approved, and leverage our TPE platform to expand our portfolio of product candidates, which may require substantial financial resources and may ultimately be unsuccessful.

The longer-term growth of our business depends upon our ability to expand the approved uses of octreotide capsules beyond acromegaly, if approved, and utilize our proprietary Transient Permeability Enhancer, or TPE, technology platform to potentially develop and commercialize other oral forms of therapies that are currently only available in injectable or other non-absorbable forms. In addition to the development and commercialization of octreotide capsules as a treatment for acromegaly, if approved, we may pursue development of octreotide capsules for other indications or develop other product candidates alone or in collaboration with other parties. Because we eliminated substantially all of our research and discovery functions during the August 2016 reduction in workforce, we now have only limited internal capacity to develop any new product candidates. We also may never be able to identify other peptide drugs or poorly absorbed small-molecule drugs that can successfully be developed into product candidates utilizing our TPE platform, let alone receive regulatory approval of such product candidates, and we may never be able to engage in licensing transactions that enable a third party to utilize TPE in the development of future product candidates.

Research programs to identify new disease targets and product candidates require substantial technical, financial and human resources whether or not we ultimately identify any product candidates, and we are not currently materially investing in such research programs. As a result, we may not be able to successfully identify any future product candidates or new indications for octreotide capsules.

There are a number of FDA, EMA and other health authority, as applicable, requirements that we must satisfy before we can commence a clinical trial. If we are able to identify additional potential product candidates, satisfaction of these regulatory requirements will entail substantial time, effort and financial resources. We may never satisfy these requirements. Any time, effort and financial resources we expend on development of other product candidates may impair our ability to continue development and commercialization of octreotide capsules for the treatment of acromegaly and other indications, if pursued, and we may never commence clinical trials of such development programs despite expending significant resources in pursuit of their development. If we do commence clinical trials of octreotide capsules in other indications besides acromegaly or other product candidates, these product candidates may never demonstrate sufficient safety and efficacy to be approved by the FDA or other regulatory authorities.

 

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Our ability to develop a viable pipeline of potential future products may require us to enter into acquisition, license or similar agreements with third parties, and we may not be successful in negotiating the necessary agreements, or in achieving economic terms that will be sufficiently favorable to justify development of one or more such future products.

As a result of the elimination of substantially all of our research functions, we are currently unable to develop future potential products through internal research programs. Therefore, we may consider expanding the scope of future potential product candidates by acquiring or licensing product candidates, discovery programs or other technologies from third parties or licensing our TPE technology to third parties.

We may, however, be unable to license or acquire suitable product candidates from third parties for a number of reasons. In particular, the licensing and acquisition of pharmaceutical products is a competitive area. For example, several more established companies are also pursuing strategies to license or acquire products in the somatostatin analog or endocrinology field. These established companies may have a competitive advantage over us due to their size, cash resources and greater research, clinical development and commercialization capabilities. Other factors that may prevent us from licensing or otherwise acquiring suitable product candidates include the following:

 

   

we may be unable to license or acquire the relevant product candidate or technology on terms that would allow us to make an appropriate return, or the financial terms required by the owners of those product candidates or technologies may be unfavorable enough to preclude successful development and commercialization for such products;

 

   

companies that perceive us to be their competitors may be unwilling to assign or license their product rights to us;

 

   

we do not currently have dedicated research, business development or commercial sales personnel on staff;

 

   

we may be unable to identify suitable products or product candidates within our areas of expertise; or

 

   

our receipt of the CRL or if we are unable to obtain the necessary regulatory approvals to commercialize octreotide capsules in the United States or unable to successfully commercialize octreotide capsules in the United States, in each case, in a timely manner or at all third-party confidence in our TPE platform could be reduced and potentially make us a less attractive partner.

In addition, even if we are able to successfully license or acquire suitable technology from third parties, there can be no assurance that we will be able to successfully develop product candidates from such technology or receive necessary approvals to commercialize any such product candidates.

We only have limited human and financial resources to develop suitable potential product candidates through internal research programs, we may not have the resources to obtain rights to technologies or product candidates from third parties, and we may not be able to license our TPE technology to third parties for development of future product candidates, thereby limiting our ability to develop a diverse product portfolio. If we are unable to develop such a portfolio, our business may suffer.

We may be unable to obtain orphan drug designation or exclusivity for future product candidates we may develop. If our competitors are able to obtain orphan drug exclusivity for their products that are the same as our product candidates, we may not be able to have competing products approved by the applicable regulatory authority for a significant period of time.

Our octreotide capsules product candidate has been granted orphan designation in the United States and the European Union for the oral treatment of acromegaly. Regulatory authorities in some jurisdictions, including the United States and the European Union, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act of 1983, as amended, the FDA may designate a product candidate as an orphan drug if it is intended to treat a rare disease or condition, which is generally defined as having a patient population of fewer than 200,000 individuals diagnosed annually in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. In the European Union, the European Commission, after reviewing the opinion of the EMA’s Committee for Orphan Medicinal Products, or COMP, grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting not more than five in 10,000 persons in the European Union. Additionally, designation is granted for products intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition when, without incentives, it is unlikely that sales of the drug in the European Union would be sufficient to justify the necessary investment in developing the product candidate. Even if we request orphan drug designation for any future product

 

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candidates we may develop, there can be no assurances that the FDA or the European Commission will grant any of these product candidates such designation. Additionally, the designation by the FDA or the European Commission of any potential product candidates as an orphan drug does not guarantee that the FDA or the EMA will accelerate regulatory review of or ultimately approve that product candidate.

Generally, if a product candidate with an orphan drug designation subsequently receives the first marketing approval of the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes the EMA or the FDA from approving another marketing application for the same drug and indication for that time period, except in limited circumstances. The applicable period is seven years in the United States and 10 years in the European Union. The European exclusivity period can be reduced to six years if a product no longer meets the criteria for orphan drug designation or if the product is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may be lost if the FDA or EMA determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the product to meet the needs of patients with the rare disease or condition.

Even though we have obtained orphan drug designation for octreotide capsules as a potential treatment for acromegaly and may obtain orphan drug designation for octreotide capsules in other indications or for future product candidates we may develop, we may not obtain orphan drug exclusivity and any such exclusivity that we do obtain may not effectively protect the product candidate from competition because different drugs can be approved for the same condition and the same drugs can be approved for different indications and might then be used off-label in our approved indication, if obtained. In the United States, even after an orphan drug is approved, the FDA can subsequently approve another drug for the same condition if the FDA concludes that such later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care. In addition, if a potential future product candidate of ours receives an orphan drug designation and is approved for a particular indication or use within the rare disease or condition, the FDA may later approve the same drug for additional indications or uses within that rare disease or condition that are not protected by our exclusive approval. As a result, if our product is approved and receives orphan drug status, the FDA can still approve other drugs for use in treating the same indication or disease covered by our product, which could create a more competitive market for us. Similarly, the European Commission may grant a marketing authorization for a similar medicinal product in the same therapeutic indication if the second applicant can establish that although their product is similar to the orphan medicinal product already authorized, the second product is safer, more effective or otherwise clinically superior.

Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of octreotide capsules and any future product candidates we may develop for which we obtain marketing approval. Our arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may affect the business or financial arrangements and relationships through which we would market, sell and distribute our products. Even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. Restrictions under applicable federal and state healthcare laws and regulations that may affect our operations and expose us to areas of risk including the following:

 

   

the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving or paying 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, order or recommendation of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid;

 

   

federal civil and criminal false claims laws and civil monetary penalty laws, which impose 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, including the Medicare and Medicaid programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

   

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also created federal criminal laws that prohibit knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statements in connection with the delivery of or payment for healthcare benefits, items or services;

 

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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, which also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of certain individually identifiable health information;

 

   

the ACA which requires certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid or Children’s Health Insurance Program to report annually to Centers for Medicare and Medicaid Services, or CMS, information related to payments and other transfers of value to physicians and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members;

 

   

the federal Physician Payments Sunshine Act requires certain manufacturers of drugs, devices, biologics, and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program, with specific exceptions, to report annually to the CMS information related to payments or transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as information regarding ownership and investment interests held by the physicians described above and their immediate family members; and

 

   

analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; some state laws which require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and may 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 which govern the privacy and security of health information in specified circumstances, many of which differ from each other in significant ways and often are not preempted by federal law, thus complicating compliance efforts.

Efforts to ensure that our business arrangements with third parties are compliant with applicable healthcare laws and regulations will involve the expenditure of appropriate, and possibly significant, resources. Nonetheless, it is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any physicians or other healthcare providers or entities with whom we expect to do business are found to not be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

Legislative or regulatory reform of the health care system in the United States and foreign jurisdictions may adversely impact our business, operations or financial results.

Our industry is highly regulated and changes in law may adversely impact our business, operations or financial results. In particular, in March 2010, the ACA was signed into law. This legislation changes the current system of healthcare insurance and benefits intended to broaden coverage and control costs. The law also contains provisions that will affect companies in the pharmaceutical industry and other healthcare related industries by imposing additional costs and changes to business practices. Provisions affecting pharmaceutical companies include the following:

 

   

mandatory rebates for drugs sold into the Medicaid program have been increased, and the rebate requirement has been extended to drugs used in risk-based Medicaid managed care plans;

 

   

the definition of “average manufacturer price” was revised for reporting purposes, which could increase the amount of Medicaid drug rebates by state;

 

   

the 340B Drug Pricing Program under the Public Health Service Act has been extended to require mandatory discounts for drug products sold to certain critical access hospitals, cancer hospitals and other covered entities;

 

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pharmaceutical companies are required to offer discounts on brand-name drugs to patients who fall within the Medicare Part D coverage gap, commonly referred to as the “donut hole”; and

 

   

pharmaceutical companies are required to pay an annual non-tax deductible fee to the federal government based on each company’s market share of prior year total sales of branded products to certain federal healthcare programs. If octreotide capsules or any of our future potential product candidates are approved, we expect our branded pharmaceutical sales to constitute a small portion of the total federal health program pharmaceutical market, and therefore would not expect this annual assessment to have a material impact on our financial condition.

Despite initiatives to invalidate the ACA, the U.S. Supreme Court has upheld certain key aspects of the legislation, including the requirement that all individuals maintain health insurance coverage or pay a penalty, referred to as the individual mandate, and a key provision of the ACA, which provides federal premium tax credits to individuals purchasing coverage through health insurance exchanges.

Some of the provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges. As a result of tax reform legislation passed in December 2017, the individual mandate has been eliminated effective January 1, 2019. Various portions of the ACA are currently undergoing legal and constitutional challenges in the Fifth Circuit Court and the United States Supreme Court; the Trump Administration has issued various Executive Orders which eliminated cost sharing subsidies and various provisions that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices; and Congress has introduced several pieces of legislation aimed at significantly revising or repealing the ACA. It is unclear whether the ACA will be overturned, repealed, replaced, or further amended. We cannot predict what affect further changes to the ACA would have on our business.

In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013, which will remain in effect until 2029 unless additional congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect that additional federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, and in turn could significantly reduce the projected value of certain development projects and reduce our profitability.

In addition, in September 2007, the Food and Drug Administration Amendments Act of 2007 was enacted giving the FDA enhanced post-marketing authority including the authority to require post-marketing studies and clinical trials, labeling changes based on new safety information and compliance with risk evaluations and mitigation strategies approved by the FDA. The FDA’s exercise of this authority could result in delays or increased costs during product development, clinical trials and regulatory review, increased costs to ensure compliance with post-approval regulatory requirements and potential restrictions on the sale and/or distribution of approved products. Other legislative and regulatory initiatives have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. For example, the Drug Supply Chain Security Act of 2013 imposes new obligations on manufacturers of certain pharmaceutical products related to product tracking and tracing. We do not know whether additional legislative changes will be enacted, or whether the FDA regulations, guidance documents or interpretations will be changed, or what the impact of such changes on the marketing approvals of octreotide capsules, if any, may be. In addition, increased scrutiny by Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.

Further, in some foreign jurisdictions, including the European Union and Canada, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take 12 months or longer after the receipt of regulatory approval and product launch. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of octreotide capsules and any future product candidate we may develop to other available therapies. Our business could be harmed if reimbursement of our products is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels.

 

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

Product liability lawsuits could cause us to incur substantial liabilities and limit potential commercialization of our product candidates, and we may not be able to maintain our current product liability coverage, and, even if we do, our coverage may not be adequate to cover any or all liabilities that we may incur, which could decrease our cash and harm our business.

We face an inherent risk of product liability exposure related to the testing of product candidates in human clinical trials and will face an even greater risk if we commercially sell any drugs that we may develop. For example, we may be sued if any drug we develop allegedly causes injury or is found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against claims that our product candidates or drugs caused injuries, we will incur substantial liabilities or be required to limit commercialization of our product candidates. Regardless of merit or eventual outcome, liability claims may result in:

 

   

decreased demand for any product candidates or drugs that we may develop;

 

   

injury to our reputation and significant negative media attention;

 

   

withdrawal of clinical trial participants;

 

   

initiation of investigations by regulators;

 

   

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

 

   

significant costs to defend the related litigation;

 

   

substantial monetary awards to trial participants or patients;

 

   

loss of revenue;

 

   

reduced resources of our management to pursue our business strategy;

 

   

potential disputes, including litigation, with our insurance provider regarding coverage and

 

   

the inability or significant limitations on the ability to commercialize any drugs that we may develop.

We currently have $10.0 million in product liability insurance coverage in the aggregate, which may not be adequate to cover any or all liabilities that we may incur. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise. We intend to expand our product liability insurance coverage to include the sale of commercial products if we obtain marketing approval of octreotide capsules and any future product candidates we may develop, but we may be unable to obtain commercially reasonable product liability insurance. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash and harm our business. In addition, we may not be able to maintain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims, which could prevent or inhibit the commercial production and sale of our products.

Risks Related to Our Reliance on Third Parties

* We are, and expect to be for the foreseeable future, dependent on a limited number of third parties to manufacture octreotide capsules.

We do not currently have, nor do we plan to acquire, the capability or infrastructure to manufacture the API in octreotide capsules for use in our clinical trials or for commercial product, if regulatory approvals are obtained. We have qualified Novetide Ltd., a subsidiary of Teva Pharmaceuticals Industries Ltd., in Israel and an affiliate of Teva API, Inc., and Bachem Americas Inc. in the United States as our suppliers of the generic API, octreotide acetate. The octreotide API is lyophilized, formulated with our TPE technology by Lyophilization Services of New England Inc., or LSNE, in Bedford, NH, and enteric-coated and blister packed by Capsugel, a division of Lonza, in Scotland. Almac Pharma Services Limited in Northern Ireland provides finished packaging and release services.

 

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The facilities used by our contract manufacturers to manufacture octreotide capsules are evaluated by the FDA and other regulatory bodies. We are completely dependent on our contract manufacturing partners for compliance with cGMPs for manufacture of both API and finished drug products. These cGMP regulations cover all aspects of the manufacturing, testing, quality control and record keeping relating to octreotide capsules. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, we will not be able to secure and/or maintain regulatory approval of our product candidate being manufactured at their manufacturing facilities. If the FDA or a comparable foreign regulatory authority finds deficiencies at these facilities, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval of or market octreotide capsules, if approved. The third-party contract manufacturers that we utilize or plan to utilize for commercial supply have been subject to regulatory inspections from time to time that resulted in inspectional observations. For example, in its CRL, the FDA advised that, during a site inspection, certain deficiencies were conveyed to the representative of one of our suppliers that would need to be resolved before approval of our NDA for octreotide capsules. However, we were informed in late 2016 that the supplier received an EIR from the FDA, indicating that the FDA has concluded its inspection of the supplier and as of the date of its report considers outstanding deficiencies resolved. In addition, we did not reference in the NDA resubmission our planned primary commercial API manufacturer due to unresolved observations from a recent regulatory inspection. We expect that our suppliers will be subject to additional regulatory inspections in the future, including in connection with the FDA’s review of the NDA we resubmitted seeking approval of octreotide capsules as a treatment for acromegaly and in connection with the review of our planned prior approval manufacturing supplements. There can be no assurances that our suppliers will pass all necessary inspections, the failure of which could result in delays to our ability to receive regulatory approval for octreotide capsules.

Our NDA resubmission that was accepted by the FDA in January 2020 for review references one small-scale API manufacturer that was included in our original NDA and is owned by our planned secondary commercial API manufacturer. However, we do not expect to procure commercial API from this small-scale manufacturing site. Accordingly, even if we obtain approval of our NDA from the FDA, in order to commercially launch octreotide capsules, following the June 26, 2020 PDUFA date, we plan to submit to the FDA a prior approval manufacturing supplement to the NDA to provide for the approval of our primary API manufacturer and one of its large-scale manufacturing sites that was included in our original NDA. We must obtain the approval of this planned prior approval manufacturing supplement in 2020 in order to have commercial product available for commercial launch in the fourth quarter of 2020. We also plan to file a second prior approval manufacturing supplement to the NDA to provide for a large-scale manufacturing site affiliated with the small-scale manufacturing site currently referenced in the NDA resubmission. In April 2020, the FDA requested that we include certain stability data in this second planned prior approval manufacturing supplement, which we expect will delay our planned submission of this supplement until early 2021. If we are unable to obtain or delayed in obtaining regulatory approval of our NDA and one of our two planned prior approval manufacturing supplements, we could be prevented from commercializing the product candidate in a timely manner or at all. The review of any prior approval manufacturing supplement to the NDA will require FDA review and approval of the manufacturing process, facility, equipment and procedures in place at each manufacturing site, including batch-to-batch comparability and API and drug product stability data, in accordance with the FDA’s cGMP requirements and may require regulatory inspections of each manufacturing site, which could prevent or delay approval of any such prior approval manufacturing supplement and prevent or delay our planned commercial launch. The timing of the FDA’s review process related to our planned prior approval manufacturing supplements and the outcome of such review are inherently uncertain, and we can provide no assurances that either planned prior approval manufacturing supplement will be approved in a timely manner or at all.

Our contract manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements. We do not have control over our contract manufacturers’ compliance with these regulations and requirements. Failure by any of our contract manufacturers to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure to grant approval to market octreotide capsules, delays, suspensions or withdrawals of approvals, operating restrictions and criminal prosecutions, any of which could harm our business. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. Failure by our contract manufacturers to comply with or maintain any of these requirements could impair our ability to develop, obtain regulatory approval of or market octreotide capsules.

If, for any reason, these third parties are unable or unwilling to perform, we may not be able to effectively terminate our agreements with them, and we may not be able to locate alternative manufacturers or formulators or enter into favorable

 

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agreements with them, and we cannot be certain that any such third parties will have the manufacturing capacity to meet future requirements. If these manufacturers or any alternate manufacturer of finished drug product experiences any significant difficulties in its respective manufacturing processes for our API or finished octreotide capsules product or should cease doing business with us, we could experience significant interruptions in the supply of octreotide capsules or may not be able to create a supply of octreotide capsules at all. Were we to encounter manufacturing issues, our ability to produce a sufficient supply of octreotide capsules might be negatively affected. Our inability to coordinate the efforts of our third-party manufacturing partners, or their inability to increase and maintain their capacity to meet our commercial demand, could impair our ability to supply octreotide capsules at required levels. Because of the significant regulatory requirements that are necessary to qualify a new API or finished product manufacturer or to qualify a new or existing site for a current manufacturer, which we plan to do by submitting prior approval manufacturing supplements for our planned sources of commercial API, we could experience significant interruptions in the supply of octreotide capsules if such regulatory qualifications are withheld or delayed, especially if we decided to transfer the manufacture of API or finished octreotide capsules to one or more alternative manufacturers in an effort to deal with any manufacturing, qualification or other difficulties.

Any manufacturing problem or the loss of a contract manufacturer or our failure to obtain FDA approval of at least one of our planned prior approval manufacturing supplements could be disruptive to our operations and, if our products receive marketing approval, result in lost sales. Additionally, we rely on third parties to supply the raw materials needed to manufacture octreotide capsules. Any reliance on suppliers may involve several risks, including a potential inability to obtain critical materials and reduced control over production costs, delivery schedules, reliability and quality. Any unanticipated disruption to future contract manufacturers caused by problems at suppliers could delay shipment of octreotide capsules and, if approved for marketing, increase our cost of goods sold and result in lost sales.

We cannot guarantee that our current manufacturing and supply partners or any alternative service providers will be able to reduce the costs of commercial-scale manufacturing of octreotide capsules over time, particularly following the suspension of our commercial commitments to certain of our manufacturers following the receipt of the CRL. If the manufacturing costs of octreotide capsules remain at current levels or increase, these costs may significantly impact our future operating results. In order to reduce costs and improve efficiencies, we plan to develop and implement process improvements and produce octreotide capsules at a larger scale. However, in order to do so, we will need, from time to time, to notify or make submissions with regulatory authorities, and the improvements may be subject to approval by such regulatory authorities. We cannot be sure that we will receive these necessary approvals or that these approvals will be granted in a timely fashion. We also cannot guarantee that we will be able to enhance and optimize output in our commercial manufacturing process. If we cannot enhance and optimize output, we may not be able to produce sufficient quantities of octreotide capsules or reduce our costs over time, which could be detrimental to the profitability of octreotide capsules in any market, and particularly the EU market where substantially lower prices are expected if we are able to secure marketing approvals for octreotide capsules there.

We have previously established commercial manufacturing agreements with Teva API, Inc. for the API in octreotide capsules and with LSNE for certain testing and lyophilization services. Following our receipt of the CRL in 2016, we indefinitely suspended our commercial production commitments and only recently reinitiated commercial production planning with these suppliers and expect to amend our commercial supply agreement with Teva API. We have also more recently entered into commercial supply agreements with Lonza and Almac. In the future, if octreotide capsules are approved, we may not be able to reach or maintain agreements containing terms that are acceptable to us with our commercial manufacturers.

If our third-party manufacturers use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.

Our development activities involve the controlled use of potentially hazardous substances, including chemical and biological materials by our third-party manufacturers. Our manufacturers are subject to federal, state and local laws and regulations in the United States governing medical, radioactive and hazardous materials. Although we believe that our manufacturers’ procedures for using, handling, storing and disposing of these materials comply with legally prescribed requirements, we cannot completely eliminate the risk of contamination or injury resulting from such materials. As a result of any such contamination or injury we may incur liability or local, city, state or federal authorities may curtail the use of these materials, interrupting our business operations. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our development and production efforts, which could harm our business, prospects, financial condition or results of operations.

 

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An important part of our strategy may be to enter into licensing or collaboration agreements with respect to octreotide capsules and future product candidates, if any, in certain territories. We may not be able to identify suitable collaborators and, even if we do, our dependence on such relationships may adversely affect our business.

Because we have limited resources, we may seek to enter into collaboration agreements with other pharmaceutical or biotechnology companies. Our strategy for commercializing octreotide capsules and any future product candidates we may develop may depend on our ability to enter into agreements with collaborators to obtain assistance and funding for the development and potential commercialization of our product candidates in the territories in which we may seek to partner. Despite our efforts, we may be unable to secure collaborative licensing or other arrangements that are necessary for us to further develop and commercialize our product candidates. Supporting diligence activities conducted by potential collaborators and negotiating the financial and other terms of a collaboration agreement are long and complex processes with uncertain results. Our receipt of the CRL from the FDA may cause potential collaborators to assign a lower probability to our regulatory or commercial success of octreotide capsules which could reduce the likelihood of our ability to enter into a collaboration on favorable terms, if at all. Even if we are successful in entering into one or more collaboration agreements, collaborations may involve greater uncertainty for us, as we have less control over certain aspects of our collaborative programs than we do over our proprietary development and commercialization programs.

Any failure by our partners to perform their obligations or any decision by our partners to terminate these agreements could negatively impact our ability to successfully develop, obtain regulatory approvals for and commercialize our product candidates. In the event we grant exclusive rights to such partners, we could be precluded from potential commercialization of our product candidate within the territories in which we have a partner. In addition, any termination of our collaboration agreements will terminate any funding we may receive under the relevant collaboration agreement and may impair our ability to fund further development efforts and our progress in our development programs.

Further, our potential future collaborators may develop alternative products or pursue alternative technologies either on their own or in collaboration with others, including our competitors, and the priorities or focus of our collaborators may shift such that our product candidates receive less attention or resources than we would like, or they may be terminated altogether. Any such actions by our potential future collaborators may harm our business prospects and ability to earn revenues. In addition, we could have disputes with our potential future collaborators, such as the interpretation of terms in our agreements. Any such disagreements could lead to delays in the development or commercialization of our product candidates or could result in time-consuming and expensive litigation or arbitration, which may not be resolved in our favor.

We rely, and will rely in the future, on third parties to conduct our clinical trials. If these third parties do not appropriately carry out their contractual duties, fail to conduct high-quality studies or meet expected deadlines, regulatory approval and commercialization of octreotide capsules or any future candidates we may develop could be delayed or not obtained at all.

We do not have the ability to conduct our clinical trials independently. We will continue to rely on third parties, including clinical investigators, third-party CROs and consultants, to monitor, manage data for, and execute our ongoing clinical programs for octreotide capsules, and we control only some aspects of their activities. Because we rely on third parties, our internal capacity to perform these functions is limited. We currently have a small number of employees, which limits the internal resources we have available to identify and monitor our third-party providers. Nevertheless, we are responsible for ensuring that each of our clinical trials are conducted in accordance with the applicable protocol and legal, regulatory and scientific requirements and standards, including, for example, Good Laboratory Practices and Good Clinical Practices, or GCPs. Our reliance on third parties does not relieve us of our regulatory responsibilities. Regulatory authorities enforce GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of these third parties fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the relevant regulatory authorities may require us to perform additional clinical trials in support of our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP requirements. Failure to comply with these regulations may require us to repeat nonclinical studies and clinical trials, which would delay the regulatory approval process.

The third parties conducting our clinical trials are not our employees, and we cannot control whether or not they devote sufficient time and resources to our ongoing clinical programs. To the extent we are unable to identify and successfully manage the performance of third-party service providers in the future, our business may be adversely affected. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to

 

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obtain regulatory approval of or successfully commercialize octreotide capsules and any future product candidates we may develop. As a result, our results of operations and the commercial prospects for our product candidates could be harmed, our costs could increase and our ability to generate revenues could be delayed.

Risks Related to Our Financial Position and Capital Resources

* We have identified conditions that raise substantial doubt about our ability to continue as a going concern.

We may be forced to amend, delay, limit, reduce or terminate the scope of our development program or commercialization efforts or limit or cease our operations if we are unable to obtain additional funding. As of March 31, 2020, we had cash, cash equivalents and marketable securities totaling approximately $79.3 million. Based on our current operating plans, we do not have sufficient cash, cash equivalents and marketable securities to fund our operating expenses, inventory purchases and capital expenditures for at least the next 12 months from the filing date of this Quarterly Report. We will require additional capital to sustain our operations, including our potential commercial launch. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs, in part, through the Revenue Interest Financing Agreement with HCR which we entered into in April 2020 and expect to further finance our cash needs through equity financing, and we will also opportunistically consider license and collaboration agreements with potential partners or convertible debt financing. However, there can be no assurance that we will be able to complete any such transaction on acceptable terms or otherwise. We may be unable to raise capital when needed or on attractive terms, or to enter into collaboration agreements, which could force us to delay, limit, reduce or terminate our product development efforts or preparations for our anticipated commercial launch of oral octreotide capsules. The failure to obtain sufficient funds on commercially acceptable terms when needed would have a material adverse effect on our business, results of operations and financial condition. These factors raise substantial doubt about our ability to continue as a going concern.

We have incurred significant losses since our inception and anticipate that we will incur continued losses for the next several years and thus may never achieve or maintain profitability.

We have funded our operations to date primarily through proceeds from sales of our common stock, redeemable convertible preferred stock and, to a lesser extent, the issuance of convertible notes. As of March 31, 2020, our cash, cash equivalents and marketable securities were $79.3 million. Since inception, we have incurred significant operating losses. Our net loss was $15.4 million for the three months ended March 31, 2020 and $36.3 million for the year ended December 31, 2019, respectively. As of March 31, 2020, we had an accumulated deficit of $288.3 million.

We have no products approved for commercialization and have never generated any product revenue. We expect to incur operating losses for at least the next several years. Past operating losses, combined with expected future operating losses, have had and will continue to have an adverse effect on our cash resources, stockholders’ equity and working capital. We expect to incur significant additional costs conducting and completing our MPOWERED clinical trial, to fund our operations in support of this clinical trial, to pursue regulatory approvals, to prepare for commercialization and to manufacture and commercialize octreotide capsules, if regulatory approval is obtained. In addition, we will continue to incur additional costs associated with operating as a public company. As a result of these and other factors, we expect to continue to incur significant operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing and commercializing pharmaceutical products, we are unable to predict the extent of any future losses, when we will become profitable, if at all, or whether we will have the funds necessary to continue as a standalone business in the long term.

Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable could depress the value of our stock and impair our ability to raise capital, expand our business, maintain our development efforts, obtain regulatory approvals, diversify our product pipeline or continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.

* Our Revenue Interest Financing Agreement with Healthcare Royalty Partners IV, L.P. could restrict our ability to commercialize MYCAPSSA, limit cash flow available for our operations and expose us to risks that could adversely affect our business, financial condition and results of operations.

On April 7, 2020, we entered into the Revenue Interest Financing Agreement with Healthcare Royalty Partners IV, L.P., or HCR. Under the terms of the Revenue Interest Financing Agreement, we are entitled to receive $25.0 million on

 

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April 14, 2020 and are entitled to receive an aggregate of up to an additional $50.0 million, subject to the satisfaction of certain conditions, in exchange for tiered quarterly royalty payments in the low double digits on worldwide net revenues of MYCAPSSA and any other future products, subject to step-downs upon the achievement of certain annual revenues. The Revenue Interest Financing Agreement expires upon the first to occur of April 7, 2030, or the Maturity Date, or when HCR has received aggregate payments equal to 195% of the total amount actually funded by HCR, or the Hard Cap. If we have not received FDA approval for MYCAPSSA by the first anniversary of the closing date, we must pay HCR $28.375 million, and the Revenue Interest Financing Agreement will terminate upon such payment. If HCR has not received the Hard Cap by the Maturity Date and no event of default has occurred or is ongoing, among other things, we must pay HCR a specified amount based on the total amount funded by HCR as of such date. Upon the occurrence of an event of default, HCR may accelerate payments due under the agreement up to the Hard Cap. Upon the occurrence of certain material adverse events or the material breach of certain representations and warranties, which will not be considered events of default, HCR may elect to terminate the agreement and require us to make payments to HCR equal to the funded portion of the investment under the agreement, minus payments received by HCR, plus a specified annual rate of return.

We must make gross up payments to HCR on September 30, 2023 and September 30, 2024, to the extent HCR has not received royalty payments totaling 60.0% and 100.0%, respectively, of the amount it has invested as of such dates. If a change of control occurs, we must immediately repay HCR the total amount actually funded plus a change of control premium, the amount of which is variable up to 95% based on timing and circumstances of such change of control and the amount funded and conditionally eligible to be funded by HCR as of the date of the change of control. Under the terms of the Revenue Interest Financing Agreement, we have certain obligations, including the obligation to use commercially reasonable and diligent efforts to commercialize MYCAPSSA ourselves in the United States. If we are held to not have met these obligations, HCR would have the right to terminate the Revenue Interest Financing Agreement and demand payment equal to the funded portion of its investment amount, plus a specific annual rate of return per annum on HCR’s investment amount, less amounts paid by us. The Revenue Interest Financing Agreement also requires us to obtain the consent of HCR prior to incurring additional indebtedness, other than specified permitted indebtedness. Further, the Revenue Interest Financing Agreement requires us to maintain a minimum of $20.0 million in securitized cash and investment accounts during any quarter that the trailing four quarters of net revenue of MYCAPSSA is below a certain threshold.

Our indebtedness under the Royalty Agreement could have significant negative consequences for our security holders and our business, results of operations and financial condition by, among other things:

 

   

increasing our vulnerability to adverse economic and industry conditions;

 

   

limiting our ability to obtain additional financing or enter into MYCAPSSA partnership agreements;

 

   

requiring the dedication of a portion of our cash flow from operations to service our indebtedness, which will reduce the amount of cash available for other purposes;

 

   

limiting our flexibility to plan for, or react to, changes in our business;

 

   

placing us at a possible competitive disadvantage with competitors that are less leveraged than us or have better access to capital; and

 

   

if we fail to comply with the terms of the Revenue Interest Financing Agreement, resulting in an event of default that is not cured or waived, HCR could seek to enforce its security interest in our cash and cash equivalents and all assets relating to MYCAPSSA that secures such indebtedness.

To the extent we incur additional debt (including without limitation additional amounts under the Revenue Interest Financing Agreement), the risks described above could increase.

We have not generated revenue from any commercial products and may never be profitable.

Our ability to become profitable depends upon our ability to generate revenue. Unless and until the necessary regulatory approvals for marketing octreotide capsules or any future product candidates we may develop are obtained from the FDA, we may not be able to generate sufficient revenue to attain profitability. In addition, our ability to generate profits after any FDA or EMA approval of our product candidates is subject to our ability to obtain regulatory approval of our planned commercial contract manufacturers and manufacturing sites, to contract for the manufacture of commercial quantities of our product candidates at acceptable cost levels and establish sales, market access and marketing capabilities or identify and enter into one or more strategic collaborations to effectively market and sell any approved product candidate.

 

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Even if we obtain regulatory approvals for octreotide capsules or any future product candidates and launch the commercial sale, any approved product may not gain market acceptance or achieve commercial success. In addition, we anticipate incurring significant costs associated with commercializing octreotide capsules if we obtain the necessary regulatory approvals and would anticipate incurring significant costs associated with commercializing any other approved product. We may not achieve profitability soon after generating product sales, if ever. If we are unable to generate sufficient levels of product revenues, we will not become profitable and may be unable to continue operations without continued funding.

We have a limited operating history and no history of commercializing drugs, which may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

Although we commenced operations in 2001, our operations to date have been largely focused on developing octreotide capsules, including undertaking nonclinical studies and conducting clinical trials. Our oral octreotide capsules product candidate is our only product candidate for which we have conducted clinical trials. We have completed only two Phase 3 clinical trials to date with this product candidate, and we are currently conducting one additional Phase 3 clinical trial of octreotide capsules in acromegaly. We have not yet demonstrated our ability to successfully obtain regulatory approvals, manufacture a commercial-scale drug or arrange for a third party to do so on our behalf, or conduct sales, market access and marketing activities necessary for successful commercialization. Consequently, any 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 drugs.

We may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors in achieving our business objectives. If we are successful in obtaining all necessary regulatory approvals of octreotide capsules in acromegaly in the United States, we will need to transition from a company with a development focus to a company capable of supporting commercial activities. We may not be successful in such a transition in the United States, which is planned in 2020, or in the European Union or elsewhere.

As we continue to build our business, we expect our financial condition and operating results may fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. Accordingly, stockholders should not rely upon the results of any particular quarterly or annual periods as indications of future operating performance.

* We will need additional capital to support our operations, including our product development efforts and preparations for our anticipated commercial launch, which may be difficult to obtain and restrict our operations and would result in additional dilution to our stockholders.

Our business will require additional capital that we have not yet secured. In the short term, we expect to continue to establish the infrastructure and manufacture the commercial supply for a planned commercial launch of octreotide capsules in the United States in the fourth quarter of 2020 subject to obtaining the necessary regulatory approvals, and conduct and complete our MPOWERED clinical trial, for which we expect top-line data in the fourth quarter of 2020. Because the outcome of any clinical trial, regulatory approval process and commercialization efforts is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development, regulatory approval process and commercialization of oral octreotide capsules. In addition, as noted above, we have identified conditions that raise substantial doubt as to our ability to continue as a going concern if we are unable to obtain funding on a timely basis. We may be unable to raise capital when needed or on attractive terms, or to enter into collaboration agreements, which could force us to delay, limit, reduce or terminate our product development efforts or preparations for our anticipated commercial launch of oral octreotide capsules.

Based on our current operating plans, we do not have sufficient cash, cash equivalents and marketable securities to fund our operating expenses, inventory purchases and capital expenditures for at least the next 12 months from the filing date of this Quarterly Report. We will require additional capital to sustain our operations, including our potential commercial launch.

 

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The actual amount of funds that we will need will be determined by many factors, some of which are beyond our control, and we may need funds sooner than currently anticipated. These factors include but are not limited to:

 

   

our efforts to obtain FDA approval of octreotide capsules as a treatment for acromegaly and obtain FDA approval of our planned prior approval manufacturing supplements for our commercial API manufacturing sources, and to conduct and complete our MPOWERED clinical trial;

 

   

the amount of our future operating losses;

 

   

the costs associated with establishing the infrastructure to support our planned commercial launch of octreotide capsules;

 

   

the timing of approvals, if any, of octreotide capsules in additional jurisdictions;

 

   

the need and cost of conducting one or more additional clinical trials for octreotide capsules and any future product candidates;

 

   

the amount of our research and development, marketing, selling and general and administrative expenses;

 

   

the extent to which we enter into, maintain, and derive revenues from licensing agreements, including potential agreements to out-license octreotide capsules, research and other collaborations, joint ventures and other business arrangements;

 

   

our success in integrating product candidates, technologies or companies that we may acquire; and

 

   

regulatory changes and technological developments in our markets.

General market conditions or the market price of our common stock may not support capital-raising transactions, such as an additional public or private offering of our common stock or other securities. In addition, our ability to raise additional capital may be dependent upon our stock being quoted on The NASDAQ Global Select Market or upon obtaining stockholder approval. There can be no assurance that we will be able to satisfy the criteria for continued listing on The NASDAQ Global Select Market or that we will be able to obtain stockholder approval if it is necessary. If we are unable to obtain additional funds on a timely basis or on terms favorable to us, we may be required to cease development or commercialization of octreotide capsules, if approved, to sell some or all of our technology or assets or to merge all or a portion of our business with another entity. In the event additional financing is needed or advisable, we may seek to fund our operations through the sale of equity securities, including pursuant to our ATM Agreement, convertible debt financing, license and collaboration agreements with potential partners. We cannot be sure that additional financing from any of these sources will be available when needed or that, if available, the additional financing will be obtained on terms favorable to us or our stockholders. If we raise additional funds by selling shares of our capital stock, the ownership interest of our current stockholders will be diluted. If we attempt to raise additional funds through strategic collaboration agreements, we may not be successful in obtaining collaboration agreements, or in receiving milestone or royalty payments under those agreements. The terms of any debt facility, if available, may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to develop and commercialize octreotide capsules or any future product candidates or operate our business. For example, during the term of the Revenue Interest Financing Agreement with HCR, we must obtain the consent of HCR prior to incurring additional indebtedness, other than specified permitted indebtedness, and we must maintain a minimum of $20.0 million in securitized cash and investment accounts during any quarter that the trailing four quarters of net revenue of MYCAPSSA is below a certain threshold. Any of these actions could raise substantial doubt about our ability to continue as a standalone business, materially impair our ability to remain in business and have a material adverse effect on our business, financial condition and results of operations.

* Unstable market and economic conditions, including as a result of the novel coronavirus COVID-19 pandemic, may have serious adverse consequences on our business, financial condition and stock price.

As widely reported, global credit and financial markets have experienced recent volatility and disruptions, including diminished liquidity and credit availability, predicted declines in economic growth, and uncertainty about economic stability, including as a result of the economic impact to the novel coronavirus COVID-19 pandemic. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. For example, given the pandemic, if a substantial number of acromegaly patients become unemployed or lose health insurance coverage, they may not be able to pay all or a portion of their prescription cost of octreotide capsules, if approved. If the current equity and credit markets deteriorate, it may make any necessary convertible debt or equity financing more difficult, more costly and more dilutive for us to achieve. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development and commercialization plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may be negatively impacted or not survive an economic downturn, which could directly affect our ability to attain our operating goals.

 

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* Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights.

We may seek additional capital through a combination of private and public equity offerings, convertible debt financings and collaboration, strategic and licensing transactions. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, making capital expenditures or declaring dividends. For example, as described above, during the term of the Revenue Interest Financing Agreement with HCR, we are restricted from incurring certain additional indebtedness without HCR’s consent and must satisfy a minimum liquidity covenant except during periods when we have met certain MYCAPSSA revenue thresholds. If we raise additional funds through collaboration, strategic alliance and licensing arrangements with third parties, we may have to pay royalties to HCR on annual revenues and/or payments received by us, and may have to relinquish valuable rights to our technologies or product candidates or grant licenses on terms that are not favorable to us.

Risks Related to Our Business and Industry

* Pandemics such as the coronavirus could have an adverse impact on our business and our financial condition.

In December 2019, a novel strain of coronavirus was first identified in Wuhan, Hubei Province, China. Any outbreak of contagious diseases, or other adverse public health developments, could have a material and adverse effect on our business operations. These could include disruption to our regulatory approval timelines due to diversion of government resources, delays in planned commercialization efforts due to manufacturing delays, slowed hiring of commercial personnel, limitations on face to face interactions with potential customers or other issues, restrictions on our ability to travel, attend in-person meetings, participate in industry conferences, pursue partnerships and other business transactions, disruption of our clinical trials, as well as impacts from the temporary closure of the facilities of suppliers and clinical trial sites or an overburdened healthcare system. Any disruption of regulators, physicians, suppliers, shippers, third-party warehouses, clinical trial sites or access to patients could impact our regulatory approval timing, commercialization efforts as well as our ability to access capital through the financial markets. The extent to which the coronavirus impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.

We depend on the knowledge and skill of our senior management and other key employees, and if we are unable to retain or if we fail to recruit additional highly skilled personnel, our business will be harmed.

Our ability to compete in the highly competitive pharmaceuticals industry depends in large part upon our ability to attract and retain highly qualified managerial and development personnel. As of March 31, 2020, we have a total of 49 full-time employees. In order to induce valuable employees to remain with us, we have provided employees with stock options that vest over time. The value to employees of stock options that vest over time is significantly affected by movements in our stock price that we cannot control and, together with our other compensation programs and benefits, may at any time be insufficient to counteract more lucrative offers from other companies.

We are highly dependent upon the principal members of our management team. These executives have significant commercial, research and development, regulatory, industry, operational, and/or corporate finance experience. The loss of any executive, other principal member of our management team, key employee or member of our board of directors could impair our ability to develop and commercialize octreotide capsules, if approved, and identify, develop and market new products and conduct successful operations.

In addition, if octreotide capsules are approved, we will likely need to hire a significant number of qualified technical, commercial, medical and administrative personnel. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. Other biopharmaceutical companies with which we compete for qualified personnel may have greater financial and other resources, different risk profiles, and a longer history in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than what we have to offer. If we are unable to continue to attract and retain high-quality personnel, the rate and success at which we can develop and commercialize octreotide capsules, if approved, and any future product candidates we may develop would be impaired and could adversely affect our growth and financial performance.

 

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

We may acquire additional businesses, products or technologies, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing business. If we acquire businesses with promising markets or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to successfully integrate them with our existing operations and company culture. We may have difficulty in developing, manufacturing and marketing the products of a newly acquired company that enhances the performance of our combined businesses or product lines to realize value from expected synergies. We cannot assure you that, following an acquisition, we will achieve the revenues or specific net income that justifies the acquisition.

Potential technological changes in our field of business create considerable uncertainty.

We are engaged in the biopharmaceutical field, which is characterized by extensive research efforts and rapid technological progress. New developments in research are expected to continue at a rapid pace in both industry and academia. We cannot assure you that research and discoveries by others will not render octreotide capsules or future product candidates we may develop uncompetitive or obsolete. The longer-term success of our business depends upon our ability to develop octreotide capsules for other approved indications and utilize our TPE platform to develop and commercialize oral forms of therapies that are currently only available in injectable or other non-absorbable forms, which strategy assumes we first obtain regulatory approval of octreotide capsules as a treatment for acromegaly. We cannot assure you that unforeseen problems will not develop with our TPE technology or applications thereof or that any commercially feasible products will ultimately be developed by us.

Our employees, independent contractors, consultants, commercial partners, principal investigators, CROs and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could cause significant liability for us and harm our reputation.

We are exposed to the risk that our employees, independent contractors, consultants, commercial partners, principal investigators, CROs and vendors may engage in fraudulent conduct or other misconduct, including intentional failures to comply with FDA regulations or similar regulations of comparable foreign regulatory authorities, to provide accurate information to the FDA or comparable foreign regulatory authorities, to comply with manufacturing standards we have established, to comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable foreign regulatory authorities, and to report financial information or data accurately or disclose unauthorized activities to us. The misconduct of our employees and contractors could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have a code of conduct and ethics for our directors, officers and employees, but it is not always possible to identify and deter such 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 be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and results of operations, including the imposition of significant fines or other sanctions.

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

Despite the implementation of security measures, our internal computer systems, and those of third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, malware, natural disasters, fire, terrorism, war and telecommunication, electrical failures, cyber-attacks or cyber-intrusions over the internet, attachments to emails, persons inside our organization, or persons with access to systems inside our organization. Cyber-attacks could include the deployment of harmful malware and key loggers, ransomware, a denial-of-service attack, a malicious website, the use of social engineering and other means to affect the confidentiality, integrity and availability of our technology systems and data. 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. In addition, our systems and those of our clinical service providers safeguard important confidential personal data regarding patients enrolled in our clinical trials. If a disruption event were to occur and cause interruptions in our operations, it could result in a disruption

 

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of our drug development programs. For example, the loss of clinical trial data from completed, ongoing or clinical trials that we may consider 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 results in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability, our reputation or competitive position could be damaged and the further development and potential commercialization of octreotide capsules and any future product candidates we may develop could be delayed or halted. We may also be vulnerable to cyber-attacks by hackers, or other malfeasance. This type of breach of our cybersecurity may compromise our confidential information and/or our financial information and adversely affect our business and operations or result in financial, legal, business or reputational harm to us. In addition, the cost and operational consequences of implementing further data protection measures could be significant. Moreover, because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate security measures. Our commercial insurance does not cover losses that may occur as a result of an event associated with cyber-attacks.

Business disruptions could seriously harm our future revenues and financial condition and increase our costs and expenses.

Our operations and those of our suppliers and other contractors could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics or pandemics, such as the recent outbreak of the novel coronavirus COVID-19, military conflicts, acts of terrorism and other natural or man-made disasters or business interruptions. For example, if the current novel coronavirus outbreak continues and results in a prolonged period of travel, commercial and other similar restrictions, we could experience business disruptions. In addition, some of our operations and our primary commercial supplier of octreotide acetate API are in Israel, which has a history of certain conflicts. The occurrence of any business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We rely on third-party manufacturers in multiple countries to produce octreotide capsules. Our ability to obtain supplies of octreotide capsules could be disrupted if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption, and we do not carry insurance to cover such risks.

Laws and regulations governing conduct of international operations may negatively impact our development, manufacture and sale of products outside of the United States and require us to develop and implement costly compliance programs.

As we have operations in Israel and may seek to further expand our operations outside of the United States, we must comply with numerous laws and regulations in Israel and each other jurisdiction in which we plan to operate. The creation and implementation of international business practices compliance programs is costly and such programs are difficult to enforce, particularly where we must rely on third parties.

The Foreign Corrupt Practices Act, or FCPA, prohibits any U.S. individual or business from paying, offering, authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with certain accounting provisions requiring such companies to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. The anti-bribery provisions of the FCPA are enforced primarily by the DOJ. The Securities and Exchange Commission, or SEC, is involved with enforcement of the books and records provisions of the FCPA.

Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical trials and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement actions.

Various laws, regulations and executive orders also restrict the use and dissemination outside of the United States, or the sharing with certain foreign nationals, of information classified for national security purposes, as well as certain products and technical data relating to those products. An expanding presence outside of the United States will require us to dedicate additional resources to comply with these laws, and these laws may preclude us from developing, manufacturing, or selling octreotide capsules and any future product candidates we may develop outside of the United States, which could limit our growth potential and increase our development costs.

 

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The failure to comply with laws governing international business practices may result in substantial penalties, including suspension or debarment from government contracting. Violation of the FCPA can result in significant civil and criminal penalties. Indictment alone under the FCPA can lead to suspension of the right to do business with the U.S. government until the pending claims are resolved. Conviction of a violation of the FCPA can result in long-term disqualification as a government contractor. The termination of a government contract or relationship as a result of our failure to satisfy any of our obligations under laws governing international business practices would have a negative impact on our operations and harm our reputation and ability to procure government contracts. Additionally, the SEC also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions.

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

We collect and store sensitive data, including intellectual property, our proprietary business information and that of our manufacturers, business partners, healthcare professionals and patients. This includes, where required or permitted by applicable laws, personally identifiable information. The secure maintenance of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, disrupt our operations, and damage our reputation which could adversely affect our business.

Compliance with changing European privacy laws could require us to incur significant costs or experience significant business disruption and failure to so comply could result in an adverse impact on our business.

In Europe, data protection regulation is an area of increased focus and changing requirements. On April 27, 2016 the European Union adopted the General Data Protection Regulation 2016/679, or GDPR, which took effect on May 25, 2018, replacing the data protection laws of each European Union member state. The GDPR applies to any company that collects and uses personal data in connection with offering goods or services to, or monitoring the behavior of, individuals in the European Union. The GDPR enhances data protection obligations with respect to European personal data, including, for example, by requiring expanded disclosures about how personal data is to be used, by placing limitations on retention of information, by imposing mandatory data breach notification requirements, and by creating expansive data subject rights. Non-compliance with the GDPR can trigger fines of up to €20 million, or 4% of total worldwide annual revenue, whichever is higher. Given the breadth and depth of changes in data protection obligations, complying with the GDPR’s requirements has caused us to expend significant resources and such expenditures are likely to continue into the near future as we respond to new interpretations and enforcement actions following the effective date.

The GDPR’s restriction on transfers of personal data outside of Europe to countries that have not been found to provide adequate protection to personal data, such as the United States, poses particular compliance challenges. One of the transfer mechanisms that allows companies to transfer personal data from Europe to the United States is the EU-US Privacy Shield (see https://www.privacyshield.gov/welcome for more information). We conducted a self-assessment and subsequently self-certified under the Privacy Shield Framework in September 2016. We received a notice of acceptance of our self-certification in October 2016 and our registration became final on October 26, 2016. There continues to be concerns about whether the EU-US Privacy Shield will face successful legal challenges (as its predecessor the Safe Harbor framework did). If this does occur, we may need to identify and implement an alternative mechanism for legitimizing cross-border data transfers. This may entail additional cost and expense as well as changes to our business practices.

Separate European Union laws and regulations (and member states’ implementations thereof) govern the protection of consumers and of electronic communications and these are also evolving. We cannot yet determine the impact that such future laws, regulations, and standards may have on our business. Such laws and regulations are often subject to differing interpretations and may be inconsistent among jurisdictions. We expect that for the immediate future, we will continue to face uncertainty as to whether our efforts to comply with our obligations under European privacy laws will be sufficient. We may incur substantial expense in complying with the new obligations to be imposed by the GDPR and we may be required to make significant changes in our business operations and product development, all of which may adversely affect our revenues and our business overall. If we are investigated by a European data protection authority, we may face fines and other penalties. Any such investigation or charges by European data protection authorities could have a negative effect on our existing business.

 

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Exchange rate fluctuations between the U.S. dollar and non-U.S. currencies may negatively affect our results of operations.

The U.S. dollar is our functional and reporting currency; however, a portion of our operations are currently conducted in Israel and most of the Israeli expenses are currently paid in New Israeli Shekels, or NIS. We also contract with CROs internationally, primarily for the execution of clinical trials and manufacturing activities. A portion of these transactions, including value added taxes, or VAT, are settled in Euros or Great British Pounds, or GBPs. As a result, we are exposed to the risk that the NIS, Euro or GBP may appreciate relative to the U.S. dollar, or, if the NIS, Euro or GBP instead devalue relative to the U.S. dollar, that the relative inflation rate may exceed such rate of devaluation, or that the timing of such devaluation may lag behind the relative inflation. In any such event, the U.S. dollar cost of our operations in Israel and transactions with certain CROs would increase and our U.S. dollar-denominated results of operations would be adversely affected. To date, we have not engaged in hedging transactions. In the future, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of our principal operating currencies. These measures, however, may not adequately protect us from the material adverse effects of such fluctuations. If the U.S. dollar cost of our operations increases, our U.S. dollar-measured results of operations will be adversely affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosure About Market Risk.”

Risks Related to Our Intellectual Property

If we are unable to protect our intellectual property rights or if our intellectual property rights are inadequate to protect our technology and product candidates, our competitors could develop and commercialize technology and drugs similar to ours, and our competitive position could be harmed.

Our commercial success will depend in large part on our ability to obtain and maintain patent and other intellectual property protection in the United States and other countries with respect to our proprietary technology and products. We rely on trade secret, patent, copyright and trademark laws, and confidentiality and other agreements with employees and third parties, all of which offer only limited protection. Our strategy is to seek patent protection for our product candidates and compositions, their methods of use and processes for their manufacture, and any other aspects of inventions that are commercially important to the development of our business.

The patent prosecution process is expensive and time-consuming, and we and any future licensors and licensees may not be able to apply for or prosecute patents on certain aspects of our product candidates or delivery technologies at a reasonable cost, in a timely fashion, or at all. We may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the rights to patents licensed to third parties. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. It is also possible that we or any future licensors or licensees, will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Therefore, our patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. It is possible that defects of form in the preparation or filing of our patents or patent applications may exist, or may arise in the future, such as with respect to proper priority claims, inventorship, claim scope or patent term adjustments. If any future licensors or licensees, are not fully cooperative or disagree with us as to the prosecution, maintenance, or enforcement of any patent rights, such patent rights could be compromised and we might not be able to prevent third parties from making, using, and selling competing products. If there are material defects in the form or preparation of our patents or patent applications, such patents or applications may be invalid or unenforceable. Moreover, our competitors may independently develop equivalent knowledge, methods, and know-how. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business, financial condition, and operating results.

The patent positions of biotechnology and pharmaceutical companies generally are highly uncertain, involve complex legal and factual questions and have in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of any patents that issue, are highly uncertain. The steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, both inside and outside the United States. Further, the examination process may require us to narrow the claims of pending patent applications, which may limit the scope of patent protection that may be obtained if these applications issue. The rights that may be granted under future issued patents may not provide us with the proprietary protection or competitive advantages we are seeking. 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 sufficient, our competitors could develop and commercialize technology and products similar or superior to ours, and our ability to successfully commercialize our technology and products may be impaired.

 

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With respect to patent rights, we do not know whether any of our patent applications will result in issued patents or, if any of our patent applications do issue, whether such patents will protect our technology and drugs, in whole or in part, or whether such patents will effectively prevent others from commercializing competitive technologies and products. There is no guarantee that any of our issued or granted patents will not later be found invalid or unenforceable. Publications of discoveries in the 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, until they are issued as a patent. Therefore, we cannot be certain that we were the first to make the inventions claimed in our pending patent applications, that we were the first to file for patent protection of such inventions, or that we have found all of the potentially relevant prior art relating to our patents and patent applications that could invalidate one or more of our patents or prevent one or more of our patent applications from issuing. Even if patents do successfully issue and even if such patents cover our product candidates, third parties may initiate oppositions, interferences, re-examinations, post-grant reviews, inter partes reviews, nullification or derivation actions in court or before patent offices or similar proceedings challenging the validity, enforceability, or scope of such patents, which may result in the patent claims being narrowed or invalidated. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property, provide exclusivity for our product candidates, or prevent others from designing around our claims. Any of these outcomes could impair our ability to prevent competition from third parties.

Furthermore, 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 freedom to operate 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 drugs, or limit the duration of the patent protection of our technology and drugs. Given the amount of time required for the development, testing and regulatory review of new drug candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. For example, our patents covering our TPE platform technology expire in 2029. At least some of our patents covering MYCAPSA also expire in 2029. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing drugs similar or identical to ours.

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

Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. In a 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, for example, lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. The outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable. 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. With respect to the validity question, for example, we cannot be certain that no invalidating prior art exists. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated, found unenforceable, or interpreted narrowly, and it could put our patent applications at risk of not issuing. 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. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on one or more of our products or certain aspects of our platform technology. Such a loss of patent protection could have an adverse impact on our business.

Interference proceedings brought by the USPTO may be necessary to determine the priority of inventions with respect to our patents and patent applications or those of our collaborators or licensors. An unfavorable outcome could require us to cease using the technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if a prevailing party does not offer us a license on terms that are acceptable to us. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction of our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our proprietary rights, particularly in countries where the laws may not protect those rights as fully as in the United States. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

 

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Moreover, we may be subject to a third-party pre-issuance submission of prior art to the USPTO or other foreign patent offices, or become involved in opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging our patent rights or the patent rights of others. 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 drugs and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize drugs 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.

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

Filing, prosecuting and defending patents on polypeptide containing capsules including octreotide capsules and our TPE platform throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States may be less extensive than those in the United States. In addition, the laws and practices of some foreign countries do not protect intellectual property rights, especially those relating to life sciences, to the same extent as federal and state laws in the United States. For example, novel formulations of existing drugs and manufacturing processes may not be patentable in certain jurisdictions, and the requirements for patentability may differ in certain countries, particularly developing countries. Also, some foreign countries, including European Union countries, India, Japan and China, have compulsory licensing laws under which a patent owner may be compelled under certain circumstances to grant licenses to third parties. Consequently, we may have limited remedies if patents are infringed or if we are compelled to grant a license to a third party, and 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 into or within the United States or other jurisdictions. This could limit our potential revenue opportunities. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and may export otherwise infringing products to territories where we have patent protection, but where 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 patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them from competing with us in these jurisdictions. Accordingly, our efforts to enforce intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from our intellectual property. We may not prevail in any lawsuits that we initiate in these foreign countries and the damages or other remedies awarded, if any, may not be commercially meaningful.

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 non-compliance with these requirements.

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and applications are required to be paid to the USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and applications. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process and after a patent has issued. There are situations in which non-compliance 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.

Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which could be uncertain and could harm our business.

While our product candidate is in clinical trials, we believe that the use of our product candidate in these clinical trials falls within the scope of the exemptions provided by 35 U.S.C. Section 271(e) in the United States, which exempts from patent infringement liability activities reasonably related to the development and submission of information to the FDA. As our current and any future product candidates progress toward commercialization, the possibility of a patent infringement claim against us increases. There can be no assurance that our current and any future product candidates do not infringe other parties’ patents or other proprietary rights, however, and competitors or other parties may assert that we infringe their proprietary rights in any event. We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our product candidates, including interference or derivation proceedings before the USPTO. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future. If we are found to infringe a third party’s intellectual

 

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property rights, we could be required to obtain a license from such third party to continue commercializing our product candidates. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if a license can be obtained on acceptable terms, the rights may be non-exclusive, which could give our competitors access to the same technology or intellectual property rights licensed to us. If we fail to obtain a required license, we may be unable to effectively market product candidates based on our technology, which could limit our ability to generate revenue or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our operations. Alternatively, we may need to redesign our infringing products, which may be impossible or require substantial time and monetary expenditure. Under certain circumstances, we could be forced, including by court order, to cease commercializing our product candidates. In addition, in any such proceeding or litigation, we could be found liable for substantial monetary damages, potentially including treble damages and attorneys’ fees, if we are found to have willfully infringed. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could harm our business. Any claims by third parties that we have misappropriated their confidential information or trade secrets could have a similar negative impact on our business.

The cost to us in defending or initiating any litigation or other proceeding relating to patent or other proprietary rights, even if resolved in our favor, could be substantial, and litigation would divert our management’s attention. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could delay our development efforts and limit our ability to continue our operations.

Octreotide capsules or any future products we may develop may infringe the intellectual property rights of others, which could increase our costs and delay or prevent our development and commercialization efforts.

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

 

   

result in costly litigation;

 

   

divert the time and attention of our technical personnel and management;

 

   

cause product development or commercialization delays;

 

   

prevent us from commercializing a product until the asserted patent expires or is held finally invalid or not infringed in a court of law;

 

   

require us to cease or modify our use of the technology and/or develop non-infringing technology; or

 

   

require us to enter into royalty or licensing agreements.

Although no third party has asserted a claim of infringement against us, others may hold proprietary rights that could prevent octreotide capsules or any future product candidates from being marketed. Any patent-related legal action against our collaborators or us claiming damages and seeking to enjoin commercial activities relating to octreotide capsules or our processes could subject us to potential liability for damages and require us to obtain a license to continue to manufacture or market octreotide capsules or any future product candidates. We cannot predict whether we would prevail in any such actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. In addition, we cannot be sure that we could redesign octreotide capsules or any future product candidates or processes to avoid infringement, if necessary. Accordingly, an adverse determination in a judicial or administrative proceeding, or the failure to obtain necessary licenses, could prevent us from developing and commercializing octreotide capsules or a future product candidate, which could harm our business, financial condition and operating results.

A number of companies, including several major pharmaceutical companies, have conducted research on pharmaceutical uses of somatostatin analogs, which resulted in the filing of many patent applications related to this research. If we were to challenge the validity of these or any issued U.S. patent in court, we would need to overcome a statutory presumption

 

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of validity that attaches to every U.S. patent. This means that, in order to prevail, we would have to present clear and convincing evidence as to the invalidity of the patent’s claims. If we were to challenge the validity of these or any issued U.S. patent in an administrative trial before the Patent Trial and Appeal Board in the USPTO, we would have to prove that the claims are unpatentable by a preponderance of the evidence. There is no assurance that a jury and/or court would find in our favor on questions of infringement, validity or enforceability.

Our competitors may be able to circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner.

Our competitors may seek to market generic versions of any approved products by submitting abbreviated NDAs to the FDA in which our competitors claim that our patents are invalid, unenforceable or not infringed. Alternatively, our competitors may seek approval to market their own products that are the same as, similar to or otherwise competitive with octreotide capsules and any future product candidates we may develop. In these circumstances, we may need to defend or assert our patents, by means including filing lawsuits alleging patent infringement requiring us to engage in complex, lengthy and costly litigation or other proceedings. In any of these types of proceedings, a court or government agency with jurisdiction may find our patents invalid, unenforceable or not infringed. We may also fail to identify patentable aspects of our development activities before it is too late to obtain patent protection. Even if we have valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives.

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

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

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

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

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

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

In addition to seeking patent protection for certain aspects of our product candidates and delivery technologies, we also consider trade secrets, including our confidential and unpatented know-how important to the maintenance of our competitive position. We protect our trade secrets and confidential and unpatented know-how, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to such knowledge, such as our employees, outside scientific collaborators, CROs, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants that obligate them to maintain confidentiality and assign their inventions to us. 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. Enforcing a claim that a party illegally disclosed or misappropriated a trade

 

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secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts in the United States and certain foreign jurisdictions are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or the subject matter independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or the subject matter independently developed by a competitor, our competitive position would be harmed.

If our trademarks are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

Our trademarks may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks or may be forced to stop using these names, which we need for name recognition by potential partners or customers in our markets of interest. If we are unable to establish name recognition based on our trademarks, we may not be able to compete effectively and our business may be adversely affected.

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

We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at other companies and universities. 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 these third parties or our employees’ former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.

Risks Related to Our Operations in Israel

The tax benefits available to us under Israeli law require us to meet several conditions and may be terminated or reduced in the future, which would increase our costs and taxes.

We are able to take advantage of tax exemptions and reductions resulting from the “beneficiary enterprise” status of our facilities in Israel. To remain eligible for these tax benefits, we must continue to meet certain conditions stipulated in the Israeli Law for the Encouragement of Capital Investments, 1959 and its regulations. If we fail to meet these conditions in the future, the tax benefits would be canceled and we could be required to refund any tax benefits we might already have received. These tax benefits may not be continued in the future at their current levels or at any level. In recent years, the Israeli government has reduced the benefits available and has indicated that it may further reduce or eliminate some of these benefits in the future. The termination or reduction of these tax benefits may increase our income taxes in the future. Additionally, if we increase our activities outside of Israel, for example, by future acquisitions, our increased activities generally will not be eligible for inclusion in Israeli tax benefit programs. For example, we moved out of our Jerusalem location in 2016, which negatively impacted the local tax benefits we previously received by operating there.

We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation and harm our business.

A significant portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the Israeli Patent Law, 5727-1967 (the Patent Law), and recent decisions by the Israeli Supreme Court and the Israeli Compensation and Royalties Committee, a body constituted under the Patent Law, employees may be entitled to remuneration for intellectual property that they develop for us unless they waive any such rights. Although we enter into agreements with our employees pursuant to which they agree that any inventions created in the scope of their employment or engagement are owned exclusively by us, and our current separation agreements with Israeli employees who have left our company include a waiver of all claims, rights or payments under Israeli law, we may still face claims demanding remuneration. As a consequence of such claims, we could be required to pay additional remuneration or royalties to our current and former employees, or be forced to litigate such claims, which could negatively affect our business.

Our development and administrative facilities and one of our third-party octreotide acetate API manufacturers are located in Israel and, therefore, our business could be hurt by political and military instability affecting Israel.

Our development and certain administrative facilities and one of our octreotide acetate API manufacturer’s facilities are located in Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region may

 

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directly affect our business. Any hostilities involving Israel or the interruption or curtailment of trade within Israel or between Israel and its trading partners could materially and adversely affect our business, financial condition and results of operations and could make it more difficult for us to raise capital. Instability in the region may lead to deterioration of the political relationships that exist between Israel and these countries and has raised concerns regarding security in the region and the potential for armed conflict. Our commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Any losses or damages incurred by us could have an adverse effect on our business. Any armed conflicts, terrorist activities or political instability in the region could materially and adversely affect our business, financial condition and results of operations.

Under current Israeli law, we may not be able to enforce our Israeli employees’ covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.

We generally enter into non-competition agreements with our key employees, in most cases within the framework of their employment agreements. These agreements prohibit our key employees, if they cease working for us, from competing directly with us or working for our competitors for a limited period. Under applicable Israeli law, it is difficult (and may even be impossible) to enforce these agreements or any part thereof against our Israeli employees unless it can be shown that there are special circumstances in any particular case. If we cannot enforce our non-competition agreements against our Israeli employees, then we may be unable to prevent our competitors from benefiting from the expertise of these former employees, which could impair our business, results of operations and ability to capitalize on our proprietary information.

Risks Related to Our Common Stock

* We may not be able to utilize a significant portion of our net operating loss carryforwards, which could negatively impact our profitability.

At March 31, 2020, we had federal operating loss, or NOL, carryforwards of approximately $232.5 million. The federal NOL carryforwards generated in 2017 and prior expire at various dates through 2037. The Federal NOL carryforwards generated in 2018 and after have an unlimited carryforward period. At March 31, 2020, we had state NOLs of approximately $182.5 million which expire at various dates through 2039. At March 31, 2020, there were no NOL carryforwards in our Israeli subsidiary.

Under Section 382 of the Internal Revenue Code of 1986, as amended, or Section 382, substantial changes in our ownership may limit the amount of federal NOL carryforwards that can be utilized annually in the future to offset our U.S. federal taxable income. Specifically, this limitation may arise in the event that the aggregate stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Our existing NOLs or credits may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change, our ability to utilize NOLs or credits could be further limited by Sections 382 and 383 of the Code. In addition, future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Sections 382 and 383 of the Code. Our NOLs or credits may also be impaired under state law. Accordingly, we may not be able to utilize a material portion of our NOLs or credits. NOLs generated after December 31, 2017 are not subject to expiration, and generally may not be carried back to prior taxable years except that, under the CARES Act, NOLs generated in 2018, 2019, and 2020 may be carried back five taxable years. Additionally, for taxable years beginning after December 31, 2020, the deductibility of such federal NOLs is limited to 80% of our taxable income in any future taxable year.

Our directors, executive officers and principal stockholders exercise significant influence over our company, which will limit your ability to influence corporate matters.

As of May 1, 2020, our executive officers, directors and principal stockholders collectively controlled approximately 44% of our outstanding common stock, excluding any shares of common stock that such persons may have the right to acquire upon exercise of outstanding options or warrants. As a result, these stockholders, if they act together, will be able to influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions.

 

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Provisions of Delaware law or our charter documents could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change our current management.

Provisions of Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws, may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include:

 

   

a classified board of directors;

 

   

limitations on the removal of directors;

 

   

advance notice requirements for stockholder proposals and nominations;

 

   

the inability of stockholders to act by written consent or to call special meetings;

 

   

the ability of our board of directors to make, alter or repeal our amended and restated bylaws; and

 

   

the authority of our board of directors to issue preferred stock with such terms as our board of directors may determine.

The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote, and not less than 75% of the outstanding shares of each class entitled to vote thereon as a class, is necessary to amend or repeal the above provisions that are contained in our amended and restated certificate of incorporation. In addition, absent approval of our board of directors, our amended and restated bylaws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote.

In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or more of our outstanding voting stock that our board of directors has not approved. These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation. These provisions may apply even if some stockholders may consider the transaction beneficial to them.

As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws provide that the Court of Chancery of the State of Delaware is the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation and amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for any state law claim for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers or other employee to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine; provided, however, that this Delaware forum provision does not apply to any actions arising under the Securities Act or the Exchange Act. Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may impose additional litigation costs on stockholders in pursuing such claims, particularly if the stockholders do not reside in or near the State of Delaware. Additionally, the provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage the filing of such lawsuits. The Court of Chancery of the State of Delaware may also reach different judgment or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments may be more or less favorable to us than our stockholders. Furthermore, the enforceability of similar exclusive forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could rule that this provision in our certificate of incorporation is inapplicable or unenforceable. If a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation and amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions.

 

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The trading price of our common stock may be volatile, and your investment in our common stock could decline in value and incur substantial losses.

On July 21, 2015, we completed the sale of 7,319,750 shares of our common stock in our IPO, at a price to the public of $16.00 per share. Since shares of our common stock were sold in our IPO, our stock price has reached a high of $30.52 per share and a low of $1.20 per share through May 1, 2020. There has been a public market for our common stock for only a relatively short period of time. Although our common stock is listed on The NASDAQ Global Select Market, an active public market for our common stock may not emerge or be sustained.

In addition, the market price for our common stock may fluctuate significantly in response to a number of factors, including:

 

   

our efforts to secure FDA approval for octreotide capsules as a treatment for acromegaly and FDA approval of our planned prior approval supplements for our planned commercial manufacturers of API for octreotide capsules;

 

   

the timing and results of our MPOWERED Phase 3 clinical trial of octreotide capsules or any future clinical trials we may conduct, or changes in the development status of octreotide capsules or any other product candidates we may develop;

 

   

any delay in our regulatory filings for octreotide capsules or any other future product candidate and any adverse development or perceived adverse development with respect to the applicable regulatory authority’s review of such filings;

 

   

adverse results or delays in clinical trials;

 

   

our decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;

 

   

adverse regulatory decisions, including failure to receive regulatory approval of octreotide capsules, such as occurred in April 2016 with the FDA’s CRL to our original NDA;

 

   

changes in laws or regulations applicable to octreotide capsules or any other future product candidates, including clinical trial requirements for approvals;

 

   

adverse developments concerning our manufacturers;

 

   

our inability to obtain adequate supply of clinical trial material or for any approved drug or inability to do so at acceptable prices;

 

   

our inability to acquire products or technologies or establish strategic collaborations, if needed;

 

   

failure to successfully commercialize octreotide capsules or any other future product candidates, if approved;

 

   

our ability to obtain market adoptions and coverage and adequate reimbursement from third-party payors for octreotide capsules or any other future product candidates, if approved;

 

   

unanticipated serious safety concerns related to the use of octreotide capsules or any other future product candidates;

 

   

our ability to effectively manage our operations or changes in organizational structure;

 

   

the size and growth of our initial target markets;

 

   

actual or anticipated variations in our operating results;

 

   

changes in financial estimates by us or by any securities analysts who might cover our stock;

 

   

conditions or trends in our industry;

 

   

changes in the market valuations of similar companies;

 

   

stock market price and volume fluctuations of comparable companies and, in particular, those that operate in the biopharmaceutical industry;

 

   

publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities analysts;

 

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business disruptions due to natural disasters, epidemics or pandemics, such as the recent outbreak of the novel coronavirus COVID-19, military conflicts, acts of terrorism or other unanticipated catastrophes;

 

   

announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures;

 

   

announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;

 

   

capital commitments;

 

   

investors’ general perception of our company and our business;

 

   

recruitment or departure of key personnel;

 

   

sales of our common stock in the future, including sales by our directors and officers or specific stockholders;

 

   

overall performance of the equity markets;

 

   

trading volume of our common stock;

 

   

changes in accounting practices;

 

   

ineffectiveness of our internal controls;

 

   

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

 

   

significant lawsuits, including patent or stockholder litigation, and developments related thereto;

 

   

general political and economic conditions; and

 

   

other events or factors, many of which are beyond our control.

We have been, and could become, the subject of securities litigation, which is expensive and may divert our management’s attention.

On June 9, 2016, Chiasma, Inc. and certain of our current and former officers were named as defendants in a purported federal securities class action lawsuit filed in the United States District Court for the District of Massachusetts, styled Gerneth v. Chiasma, Inc., et al. An amended complaint was filed by the lead plaintiff on February 10, 2017 challenging our statements regarding our first Phase 3 clinical trial methodology and results, and our ability to obtain FDA approval for octreotide capsules, in violation of Sections 11 and 15 of the Securities Act of 1933. The amended complaint added as defendants current and former members of our board of directors, as well as the investment banks that underwrote our initial public offering on July 15, 2015. The plaintiff sought an unspecified amount of compensatory damages on behalf of himself and members of a putative shareholder class, including interest and reasonable costs and expenses incurred in litigating the action, and any other relief the court determines is appropriate. The defendants filed a motion to dismiss the amended complaint on March 27, 2017 and on February 15, 2018, the court denied defendants’ motion to dismiss. The defendants filed an answer to the amended complaint on March 30, 2018. On February 27, 2019, the parties agreed to a settlement of all legal claims in which defendants expressly denied that they have committed any act or omission giving rise to any liability under Sections 11 or 15 of the Securities Act of 1933. On March 14, 2019, the court issued an order of preliminary approval of the settlement. As a result of this settlement agreement, we have recorded a litigation settlement liability of $18.8 million as of December 31, 2018. Additionally, we have recorded a litigation insurance settlement recovery receivable of $18.3 million as of December 31, 2018 which represents the estimated insurance claim proceeds from our insurance carriers. On June 27, 2019, the court issued an order of final approval of the settlement. The litigation insurance settlement recovery and litigation settlement liability were settled during the three months ended June 30, 2019.

Future litigation and any matters arising out of any allegations may result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business. We may not be successful in defending future claims and cannot provide assurance that insurance proceeds will be sufficient to cover any costs or liability under such claims.

In addition, the market price of our securities may be volatile, and in the past companies that have experienced volatility in the market price of their securities, including our company, have been subject to securities class action litigation. We may be the target of this type of litigation again in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

 

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We are an “emerging growth company” and we intend to take advantage of reduced disclosure and governance requirements applicable to emerging growth companies, which could result in our securities being less attractive to investors.

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company through 2020. For as long as we continue to be an emerging growth company, we intend to take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more, (ii) December 31, 2020, (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years, or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC based on market value of our common stock held by non-affiliates. 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 not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our securities less attractive as a result, there may be a less active trading market for our securities and the price of our securities may be more volatile.

Under the JOBS Act, emerging growth companies can also 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, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, changes in U.S. generally accepted accounting principles or their interpretation, the adoption of new guidance or the application of existing guidance to changes in our business could adversely affect our financial position and results of operations.

We have never paid cash dividends on our capital stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases, which may not occur.

We have not paid cash dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from your investment in our common stock if the price of our common stock increases.

We incur significant increased costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives and other activities associated with being a public company.

As a public company, we incur significant legal, accounting, insurance and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and The NASDAQ Stock Market, has imposed various new requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel are required to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations have substantially increased our legal and financial compliance costs and have made some activities more time consuming and costly. These rules and regulations may make it more difficult and more expensive for us to maintain our existing director and officer liability insurance or to obtain similar coverage from an alternative provider.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, pursuant to Section 404 of the Sarbanes-Oxley Act, we are required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require us to continue to incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we may need to hire additional accounting and financial staff. Moreover, if we are not able to

 

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comply with the requirements of Section 404 in a timely manner or if we or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by The NASDAQ Stock Market, the SEC or other regulatory authorities, which would require additional financial and management resources.

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.

We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the stock market on which our common stock is listed. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act. This requires that we incur substantial additional professional fees and that we expend significant management efforts. Prior to our IPO, we had never been required to test our internal control within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner.

We may discover weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement of our financial statements. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities.

In addition, if we increase our reliance on contractors for important business functions, it may be more difficult to collect, analyze and report the information we are obligated to disclose as a public company and this could result in a material misstatement or omission in our disclosures.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is otherwise doing well.

If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline significantly. As of March 31, 2020, we had 42,265,341 outstanding shares of common stock, assuming no exercise of outstanding options or warrants. In addition, the 7,408,536 shares subject to outstanding options under our stock option plans, the 1,598,475 shares reserved for future issuance under our stock option plans and the 3,567,015 shares subject to outstanding warrants will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.

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

The trading market for our securities will depend in part on the research and reports that securities or industry analysts publish about us or our business. Shortly following our IPO, four securities analysts initiated coverage on our company. Following the receipt of the CRL to our original NDA from the FDA, each of these analysts downgraded their ratings on and lowered their price targets for our stock, and all four of the analysts either since dropped coverage or discontinued coverage following their departure from their employer. As of May 1, 2020, five securities analysts, including one of the original four analysts, initiated coverage on our company. In the event that one or more analysts who now, or in the future, cover us downgrades our stock or publishes inaccurate or unfavorable research about our business, our trading price would likely decline. If one or more analysts, now or in the future, cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our trading price and trading volume to decline.

 

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

In the quarter ended March 31, 2020, we did not repurchase any shares of our common stock.

 

Item 6.

Exhibits

The following exhibits are filed as part of this Quarterly Report on Form 10-Q:

 

Exhibit
  No.  

 

Description

  10.1*   Revenue Interest Financing Agreement, dated April 7, 2020, by and between the Company and HealthCare Royalty Partners IV, L.P.
  10.2**†   Employment Agreement, dated as of April 8, 2020, by and between the Company and Anand Varadan
  10.3   Open Market Sales Agreement, dated April  7, 2020, by and between the Company and Jefferies LLC, incorporated by reference from our Current Report on Form 8-K filed on April 8, 2020.
  31.1**   Certification of Principal Executive Officer pursuant to Exchange Act rules 13a-14 or 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2**   Certification of Principal Financial Officer pursuant to Exchange Act rules 13a-14 or 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1+   Certification of Principal Executive Officer and Principal Financial Officer pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**   XBRL Instance Document.
101.SCH**   XBRL Taxonomy Extension Schema Document.
101.CAL**   XBRL Taxonomy Extension Calculation Document.
101.DEF**   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**   XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE**   XBRL Taxonomy Extension Presentation Link Document.

 

*

Filed herewith. Certain portions of this exhibit (indicated by “[***]”) have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K.

**

Filed herewith.

Indicates a management contract or compensatory plan

+

The certification furnished in Exhibit 32.1 hereto is deemed to be furnished with this Quarterly Report on Form 10-Q and will not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the Registrant specifically incorporates it by reference.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 7, 2020.

 

CHIASMA, INC.
By:  

/s/ Raj Kannan

  Raj Kannan
 

Chief Executive Officer and Director

(Principal Executive Officer)

By:  

/s/ Mark J. Fitzpatrick

  Mark J. Fitzpatrick
 

President

(Principal Financial Officer)

 

77

EX-10.1

Exhibit 10.1

Portions of this Exhibit have been redacted because they are both (i) not material and (ii) would be competitively harmful if publicly disclosed. Information that was omitted has been noted in this document with a placeholder identified by the mark “[***]”.

 

 

 

REVENUE INTEREST FINANCING AGREEMENT

between

CHIASMA, INC.,

as the Company,

and

HEALTHCARE ROYALTY PARTNERS IV, L.P.,

as Investor

Dated April 7, 2020

 

 

 


TABLE OF CONTENTS

 

         Page  
  ARTICLE I   
  DEFINED TERMS AND RULES OF CONSTRUCTION   

Section 1.1

  Defined Terms      1  

Section 1.2

  Rules of Construction      35  
  ARTICLE II   
  REVENUE INTEREST FINANCING   

Section 2.1

  Investment Amount      36  

Section 2.2

  No Assumed Obligations      37  

Section 2.3

  Excluded Assets      37  
  ARTICLE III   
  PAYMENTS ON ACCOUNT OF THE REVENUE INTEREST FINANCING   

Section 3.1

  Payments on Account of the Revenue Interest Financing      38  

Section 3.2

  Collection Account; Collection Account Management      41  

Section 3.3

  Mode of Payment/Currency Exchange      42  

Section 3.4

  Included Product Payment Reports and Records Retention      42  

Section 3.5

  Audits      43  
  ARTICLE IV   
  REPRESENTATIONS AND WARRANTIES OF THE COMPANY   

Section 4.1

  Organization      44  

Section 4.2

  No Conflicts      44  

Section 4.3

  Authorization      45  

Section 4.4

  Ownership      45  

Section 4.5

  Governmental and Third Party Authorizations      45  

Section 4.6

  No Litigation      45  

Section 4.7

  Solvency      46  

Section 4.8

  No Brokers’ Fees      46  

Section 4.9

  Compliance with Laws      46  

Section 4.10

  Intellectual Property Matters      46  

Section 4.11

  Margin Stock      49  


Section 4.12

  Material Contracts      49  

Section 4.13

  Bankruptcy      49  

Section 4.14

  Office Locations; Names      50  

Section 4.15

  Permitted Debt      50  

Section 4.16

  Financial Statements; No Material Adverse Effect      50  

Section 4.17

  No Default; No Special Termination Event      51  

Section 4.18

  Insurance      51  

Section 4.19

  ERISA Compliance      51  

Section 4.20

  Subsidiaries      51  

Section 4.21

  Perfection of Security Interests in the Collateral      52  

Section 4.22

  Disclosure      52  

Section 4.23

  Sanctions Concerns; Anti-Corruption Laws; PATRIOT Act      52  

Section 4.24

  Compliance of Included Products      53  

Section 4.25

  Labor Matters      55  

Section 4.26

  EEA Financial Institution      55  

Section 4.27

  Taxes      55  

Section 4.28

  Data Privacy      56  
  ARTICLE V   
  REPRESENTATIONS AND WARRANTIES OF THE INVESTOR   

Section 5.1

  Organization      56  

Section 5.2

  No Conflicts      56  

Section 5.3

  Authorization      56  

Section 5.4

  Governmental and Third Party Authorizations      57  

Section 5.5

  No Litigation      57  

Section 5.6

  No Brokers’ Fees      57  

Section 5.7

  Funds Available      57  

Section 5.8

  Access to Information      57  

Section 5.9

  Tax Status      57  
  ARTICLE VI   
  AFFIRMATIVE COVENANTS   

Section 6.1

  Collateral Matters; Guarantors      58  

Section 6.2

  Update Meetings      59  

Section 6.3

  Notices      59  

Section 6.4

  Public Announcement      61  

Section 6.5

  Further Assurances      61  

Section 6.6

  IP Rights      62  

Section 6.7

  Existence      64  

Section 6.8

  Commercialization of the Included Product      64  

Section 6.9

  Financial Statements      65  

Section 6.10

  Certificates; Other Information      65  


Section 6.11

  Payment of Obligations      66  

Section 6.12

  Maintenance of Properties      67  

Section 6.13

  Maintenance of Insurance      67  

Section 6.14

  Books and Records      67  

Section 6.15

  Use of Proceeds      67  

Section 6.16

  ERISA Compliance      67  

Section 6.17

  Compliance with Contractual Obligations      68  

Section 6.18

  Included Products      68  

Section 6.19

  Anti-Corruption Laws      68  

Section 6.20

  Data Privacy      68  

Section 6.21

  Tax      69  
  ARTICLE VII   
  NEGATIVE COVENANTS   

Section 7.1

  Liens      70  

Section 7.2

  Indebtedness      70  

Section 7.3

  Dispositions      70  

Section 7.4

  Change in Nature of Business      70  

Section 7.5

  Prepayment of Other Indebtedness      70  

Section 7.6

  Organization Documents; Fiscal Year; Legal Name, State of Formation and Form of Entity; Certain Amendments      71  

Section 7.7

  Restricted Payments      71  

Section 7.8

  Minimum Cash      73  

Section 7.9

  Burdensome Actions      73  

Section 7.10

  Affiliates      73  
  ARTICLE VIII   
  THE CLOSINGS   

Section 8.1

  Closing      74  

Section 8.2

  Conditions to Subsequent Closing      74  

Section 8.3

  Closing Deliverables of the Company      74  
  ARTICLE IX   
  CONFIDENTIALITY   

Section 9.1

  Confidentiality; Permitted Use      77  

Section 9.2

  Exceptions      77  

Section 9.3

  Permitted Disclosures      77  

Section 9.4

  Return of Confidential Information      78  


  ARTICLE X   
  INDEMNIFICATION   

Section 10.1

  Indemnification by the Company      78  

Section 10.2

  Indemnification by the Investor      79  

Section 10.3

  Procedures      79  

Section 10.4

  Other Claims      80  

Section 10.5

  Exclusive Remedies      80  

Section 10.6

  Certain Limitations      81  
  ARTICLE XI   
  EVENTS OF DEFAULT AND REMEDIES   

Section 11.1

  Events of Default      81  

Section 11.2

  Remedies Upon Event of Default      84  
  ARTICLE XII   
  MISCELLANEOUS   

Section 12.1

  Survival      84  

Section 12.2

  Specific Performance      84  

Section 12.3

  Notices      84  

Section 12.4

  Successors and Assigns      86  

Section 12.5

  Independent Nature of Relationship      86  

Section 12.6

  Entire Agreement      87  

Section 12.7

  Governing Law      87  

Section 12.8

  Waiver of Jury Trial      88  

Section 12.9

  Severability      88  

Section 12.10

  Counterparts      88  

Section 12.11

  Amendments; No Waivers      88  

Section 12.12

  No Third Party Rights      89  

Section 12.13

  Table of Contents and Headings      89  

 

Schedule 1   Mycapssa
Schedule 1.1   Knowledge Persons
Schedule 4.6   No Litigation
Schedule 4.9   Compliance with Laws
Schedule 4.10   IP Rights
Schedule 4.12(a)   Material Contracts
Schedule 4.15(a)   Permitted Debt Facility Documents
Schedule 4.15(b)   Permitted Debt
Schedule 4.20   Subsidiaries
Schedule 4.24(a)   Compliance of the Included Products


Schedule 4.24(b)   Included Products
Schedule 6.2   Additional Information
Schedule 6.8   License Agreements
Schedule 12.4   Ineligible Assignees
Exhibit A   Form of Press Release
Exhibit B   Subsequent Closing Condition
Exhibit C   Form of Compliance Certificate
Exhibit D   Example of Calculation of Included Product Payment Amount
Exhibit E   Special Termination Amount
Exhibit F   Form of Joinder Agreement
Exhibit G   Expenses
Exhibit H   Product Plans
Exhibit I   Special Maturity Payment Amount
Exhibit J   Form of Guaranty


REVENUE INTEREST FINANCING AGREEMENT

This REVENUE INTEREST FINANCING AGREEMENT (this “Agreement”) dated as of April 7, 2020 (the “Effective Date”) is between CHIASMA, INC., a Delaware corporation (the “Company”), and HEALTHCARE ROYALTY PARTNERS IV, L.P. Each of the Company and any Investor are referred to in this Agreement as a “Party” and collectively as the “Parties”.

W I T N E S S E T H:

WHEREAS, the Company has developed Mycapssa (as defined in Section 1.1.) for the purposes of sale in the Territory (including in the United States under the conditional trade name Mycapssa® and the registered trademark Mycapssa); and

WHEREAS, the Company desires to secure financing from the Investor, and the Investor has indicated its willingness to provide financing, upon and subject to the terms and conditions set forth in this Agreement;

NOW, THEREFORE, in consideration of the premises and the mutual agreements, representations and warranties set forth herein, the parties hereto covenant and agree as follows:

ARTICLE I

DEFINED TERMS AND RULES OF CONSTRUCTION

Section 1.1 Defined Terms. The following terms, as used herein, shall have the following respective meanings:

Acquired Debt” means Indebtedness (1) of a Person existing at the time such Person becomes a Subsidiary through the acquisition of the Equity Interests in such Subsidiary, (2) assumed in connection with the acquisition of assets from such Person or (3) of a Person at the time such Person merges or amalgamates with or into or consolidates or otherwise combines with the Company or any Subsidiary, in each case, so long as (i) such Indebtedness was not incurred in connection with, or in anticipation or contemplation of, such Person becoming a Subsidiary or such acquisition, merger, amalgamation or consolidation, as the case may be, (ii) the property acquired (or the property of the Person acquired) in such acquisition, merger, amalgamation or consolidation, as the case may be, is used or useful in the same or a related line of business as the Company and its Subsidiaries were engaged in on the Initial Closing Date (or any reasonable extensions or expansions thereof), (iii) the Investor Representative shall have received such items as may be necessary or desirable for the Investor Representative to have a first priority security interest in such Equity Interests or property constituting the Collateral pursuant to the terms of this Agreement, (iv) no Special Termination Event, Default or Event of Default shall have occurred and be continuing or would result from such acquisition, merger, amalgamation or consolidation, as the case may be, and (v) the Company shall deliver to the Investor Representative within 90 days of the consummation of such acquisition, merger,

 

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amalgamation or consolidation, as the case may be, pro forma financial statements for the Company and its Subsidiaries after giving effect to such acquisition, merger, amalgamation or consolidation, as the case may be, for the twelve month period ending as of the most recent fiscal quarter end in a form reasonably satisfactory to the Investor Representative. Acquired Debt shall be deemed to have been incurred, with respect to clause (1) of the preceding sentence, on the date such Person becomes a Subsidiary and, with respect to clause (2) of the preceding sentence, on the date of consummation of such acquisition of assets and, with respect to clause (3) of the preceding sentence, on the date of the relevant merger, amalgamation, consolidation or other combination.

Acquisition” means, with respect to any Person, the acquisition by such Person, in a single transaction or in a series of related transactions, of (a) assets of another Person which constitute all or substantially all of the assets of such Person, or of any division, line of business or other business unit of such Person, (b) at least a majority of the Voting Stock of another Person, in each case whether or not involving a merger or consolidation with such other Person and whether for cash, property, services, assumption of Indebtedness, securities or otherwise, (c) one or more Acquisition Products or a Person or division, line of business or other business unit of another Person holding an Acquisition Product(s), or (d) IP Rights of a Person or division, line of business or other business unit of another Person holding such IP Rights.

Acquisition Product” means any product or service developed, manufactured, marketed, offered for sale, promoted, sold, tested, used or otherwise distributed by a Person other than the Company or any of its Subsidiaries.

Additional Amounts” has the meaning set forth in Section 3.1(h).

Affiliate” means, with respect to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person. For purposes of this definition, “control” of a Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of securities entitled to elect the Board of Directors or management board, by contract or otherwise, and the terms “controlled” and “controlling” have meanings correlative to the foregoing.

Annual Net Revenues” means, with respect to any Calendar Year, the aggregate amount of worldwide Net Revenues in the Territory for that Calendar Year.

Applicable Law” means, with respect to any Person, all Laws, rules, regulations and orders of Governmental Authorities applicable to such Person or any of its properties or assets.

 

-2-


Applicable Tiered Percentage” means the percentage based on the applicable portion of Annual Net Revenues, as set forth below:

 

Payment Tiers based on Annual Net Revenues

   Applicable Tiered Percentage  

A. Portion of Annual Net Revenues less than or equal to $125,000,000

     12.25

B. Portion of Annual Net Revenues exceeding $125,000,000 and less than or equal to $250,000,000

     4.00

C. Portion of Annual Net Revenues in excess of $250,000,000

     1.00

provided that if the cumulative Mycapssa U.S. Net Sales with respect to Calendar Year [***], Calendar Year [***], Calendar Year [***] and Calendar Year [***] exceed $[***], then (i) each of the percentages set forth in the rows A and B shall be decreased by [***]% (i.e., the percentages in rows A and B shall be [***]% and [***]%, respectively) for each Calendar Quarter, starting with the first Calendar Quarter of [***], and (ii) the Payment Tier applicable to the portion of the Annual Net Revenues in excess of $[***] in row C will no longer be applicable, starting with the first Calendar Quarter of [***].

Approved Patent Rights” and “Approved Trademarks” have the respective meanings set forth in Section 6.6.

Audited Financial Statements” means the audited consolidated balance sheet of the Company and its Subsidiaries for the fiscal year ended December 31, 2019, and the related consolidated statements of operations, stockholders’ equity and cash flows for such fiscal year of the Company and its Subsidiaries, including the notes thereto, audited by independent public accountants of recognized national standing and prepared in conformity with GAAP.

Bankruptcy Event” means the occurrence of any of the following in respect of a Person: (a) such Person shall generally not, shall be unable to, or an admission in writing by such Person of its inability to, pay its debts as they come due or a general assignment by such Person for the benefit of creditors; (b) the filing of any petition or answer by such Person seeking to adjudicate itself as bankrupt or insolvent, or seeking for itself any liquidation, winding-up, reorganization, arrangement, adjustment, protection, relief or composition of such Person or its debts under any Applicable Law relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization, examination, relief of debtors or other similar Applicable Law now or hereafter in effect, or seeking, consenting to or acquiescing in the entry of an order for relief in any case under any such Applicable Law, or the appointment of or taking possession by a receiver, trustee, custodian, liquidator, examiner, assignee, sequestrator or other similar official for such Person or for any substantial part of its property; (c) corporate or other entity action taken by such Person to authorize any of the actions set forth in clause (a) or clause (b) above; or (d) without the consent or acquiescence of such Person, the commencement of an action seeking entry of an order for relief or approval of a petition for relief or reorganization or any other petition seeking any reorganization, arrangement, composition, readjustment, liquidation,

 

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dissolution or other similar relief under any present or future bankruptcy, insolvency or similar Applicable Law, or the filing of any such petition against such Person, or, without the consent or acquiescence of such Person, the commencement of an action seeking entry of an order appointing a trustee, custodian, receiver or liquidator of such Person or of all or any substantial part of the property of such Person, in each case where such petition or order shall remain unstayed or shall not have been stayed or dismissed within 90 days from entry thereof.

Board of Directors” means (a) with respect to a company or corporation, the board of directors of the company or corporation or any committee thereof duly authorized to act on behalf of such board, (b) with respect to a partnership, the board of directors of the general partner of the partnership, (c) with respect to a limited liability company, the managing member or members or any controlling committee of managing members thereof, and (d) with respect to any other Person, the board or committee of such Person serving a similar function.

Business” means, at any time, a collective reference to the businesses operated by the Company and its Subsidiaries at such time.

Business Day” means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by Applicable Law to remain closed.

Calendar Quarter” means, for the first calendar quarter, the period beginning on the Initial Closing Date and ending on the last day of the calendar quarter in which the Initial Closing Date falls, and thereafter each successive period of three (3) consecutive calendar months ending on March 31, June 30, September 30 or December 31.

Calendar Year” means (a) for the first such Calendar Year the period beginning on the Initial Closing Date and ending on December 31 of the year in which the Initial Closing Date occurs, (b) for each year of the Payment Term thereafter, each successive period beginning on January 1 and ending twelve (12) consecutive calendar months later on December 31, and (c) for the last year of the Payment Term, the period beginning on January 1 of the year in which this Agreement expires or terminates and ending on the effective date of expiration or termination of this Agreement.

Cash Equivalents” means, as at any date, (a) securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided, that, the full faith and credit of the United States is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition, (b) Dollar denominated time deposits and certificates of deposit of (i) any domestic commercial bank of recognized standing having capital and surplus in excess of $500,000,000 or (ii) any bank whose short-term commercial paper rating from S&P is at least A-1 or the equivalent thereof or from Moody’s is at least P-1 or the equivalent thereof (any such bank being an “Approved Bank”), in each case with maturities of not more than 365 days from the date of acquisition, (c) commercial paper and variable or fixed rate notes issued by any Approved Bank (or by the parent company thereof) or any variable rate notes issued by, or guaranteed by, any domestic corporation rated A-1 (or the equivalent thereof) or better by S&P or P-1 (or the equivalent thereof) or better by Moody’s and maturing within twelve months of the date of acquisition, (d) repurchase agreements entered into

 

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by any Person with a bank or trust company or recognized securities dealer having capital and surplus in excess of $500,000,000 for direct obligations issued by or fully guaranteed by the United States in which such Person shall have a perfected first priority security interest (subject to no other Liens) and having, on the date of purchase thereof, a fair market value of at least 100% of the amount of the repurchase obligations and (e) Investments, classified in accordance with GAAP as current assets, in money market investment programs registered under the Investment Company Act of 1940 which are administered by reputable financial institutions having capital of at least $500,000,000 and the portfolios of which are limited to Investments of the character described in the foregoing subdivisions (a) through (d).

CDA” means the Confidentiality Agreement dated as of December 23, 2019 by and between HealthCare Royalty Management, LLC and the Company.

“CFC” means any Foreign Subsidiary that is a “controlled foreign corporation” within the meaning of Section 957(a) of the Internal Revenue Code.

Change of Control” means the occurrence of any of the following events:

(a) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) is or becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person or group shall be deemed to have “beneficial ownership” of all securities that such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time (such right, an “option right”)), directly or indirectly, of Equity Interests representing [***]% or more of the aggregate ordinary voting power in the election of the Board of Directors of the Company represented by the issued and outstanding Equity Interests of the Company on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right) provided, however, that (x) a person shall not be deemed beneficial owner of, or to own beneficially, (A) any securities tendered pursuant to a tender or exchange offer made by or on behalf of such person or any of such person’s Affiliates until such tendered securities are accepted for purchase or exchange thereunder, or (B) any securities if such beneficial ownership (i) arises solely as a result of a revocable proxy delivered in response to a proxy or consent solicitation made pursuant to the applicable rules and regulations under the Exchange Act, and (ii) is not also then reportable on Schedule 13D (or any successor schedule) under the Exchange Act and (y) a transaction will not be deemed to involve a change of control under this clause (a) if (A) the Company becomes a direct or indirect wholly owned subsidiary of a holding company and (B)(i) the direct or indirect holders of the voting Equity Interests of such holding company immediately following that transaction are the same as the holders of the Company’s voting Equity Interests immediately prior to that transaction and each holder holds the same percentage of voting Equity Interests of such holding company as such holder held of the Company’s voting Equity Interests immediately prior to that transaction or (ii) the Company’s voting Equity Interests outstanding immediately prior to such transaction are converted into or exchanged for, a majority of the voting Equity Interests of such holding company immediately after giving effect to such transaction; or

 

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(b) during any period of twelve (12) consecutive months, a majority of the members of the Board of Directors of the Company cease to be composed of individuals (i) who were members of that Board of Directors on the first day of such period, (ii) whose election, appointment or nomination to that Board of Directors was approved by individuals referred to in clause (i) above constituting at the time of such election, appointment or nomination at least a majority of that Board of Directors (either by a specific vote or by approval of the proxy statement of the Company in which such member was named as a nominee for election as a director, without objection to such nomination) or (iii) whose election or nomination to that Board of Directors was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election, appointment or nomination at least a majority of that Board of Directors;

(c) any “change of control”, “fundamental change” or any comparable term shall occur under any Permitted Debt Facility Document; or

(d) the Company or any of its Subsidiaries grants or transfers the right to Commercialize Mycapssa in the United States to any Person other than to the Company or any of its Subsidiaries.

Closing” has the meaning set forth in Section 8.1.

Closing Date” means the Initial Closing Date or Subsequent Closing Date, as applicable.

Collateral means (i) all cash and Cash Equivalents of the Company and each Grantor, and (ii) all of each Grantor’s right, title and interest in, to and under, any assets relating to Mycapssa whether now owned or hereafter acquired, including, without limitation:

(a) the Material Contracts (including, without limitation, the License Agreements) and any other contracts relating to Mycapssa to which such Grantor is a party;

(b) the IP Rights relating to Mycapssa, including without limitation (i) income, fees, royalties, damages, claims and payments now or hereafter due and/or payable thereunder and with respect thereto including damages and payments for past, present or future infringements thereof, (ii) rights corresponding thereto throughout the world and (iii) rights to sue for past, present or future infringements thereof, in each such case, which are owned or controlled by, issued or licensed to, licensed by, or hereafter acquired or licensed by, the Company or any Subsidiary, including without limitation those identified in Schedule 4.10(a);

(c) gross revenues of the Company and its Subsidiaries generated from Mycapssa;

(d) the Collection Account and all rights (contractual and otherwise and whether constituting accounts, contract rights, financial assets, cash, investment property or general intangibles) arising under, connected with or in any way related to the Collection Account;

(e) all of the Equity Interests in the Guarantors;

 

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(f) to the extent that any Subsidiary that owns any portion of any asset relating to Mycapssa is organized as a Massachusetts Securities Corporation, all of the Equity Interests in such Subsidiary;

(g) to the extent that any Subsidiary that owns any portion of any asset relating to Mycapssa is an Excluded Subsidiary, 100% of the non-voting Equity Interests (if any) and 65% of its voting Equity Interests in such Excluded Subsidiary;

(h) any assets relating to Mycapssa that may be acquired by any Grantor after the Initial Closing Date; and

(i) all proceeds resulting from the assets described in each of the foregoing clauses.

For the avoidance of doubt, “Collateral” shall include the portion of the assets related to the TPE Technology that is utilized in connection with the development, manufacture, distribution, sale and Commercialization of Mycapssa, but shall not include any product candidates other than Mycapssa, whether or not developed utilizing the TPE Technology, that the Company may develop in the future.

Collection Account” means the Deposit Account established and maintained at any Depositary Bank solely for the purpose of receiving remittance of proceeds of accounts and royalty receivables of the Company arising from sales of the Included Product or Other Royalty Payments and disbursement thereof as provided herein, and any successor Collection Account entered into in accordance with Section 3.2(d).

Collection Account Deposit Agreement” means the deposit account control agreement entered into by the Depositary Bank, the Investor Representative and the Company (and any Permitted Debt Creditors, if applicable) with respect to the Collection Account, which shall be in form and substance reasonably acceptable to the Investor Representative and the Company, as amended, supplemented or otherwise modified from time to time and any replacements thereof.

Commercialization” means, on a country-by-country basis, any and all activities with respect to the manufacture, distribution, marketing, detailing, promotion, selling and securing of reimbursement of the Included Product in accordance with the Product Plans in a country after Marketing Authorization for the Included Product in that country has been obtained, which shall include, as applicable, post-marketing approval studies, post-launch marketing, promoting, detailing, marketing research, distributing, customer service, selling the Included Product, importing, exporting or transporting the Included Product for sale, and regulatory compliance with respect to the foregoing, in each case in accordance with the Product Plans and Applicable Law. When used as a verb, “Commercialize” means to engage in Commercialization.

Commercially Reasonable and Diligent Efforts” means, with respect to the efforts to be expended with respect to any Included Product in any country or regulatory jurisdiction, such efforts and resources normally used by a reasonably prudent company in the biotechnology industry of a size and product portfolio comparable, and with similar resources

 

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available, to the Company and its Affiliates with the marketing, sale and product development and research plans similar to the Product Plans in the biopharmaceutical industry, taken as a whole, in such applicable country or jurisdiction, with respect to a pharmaceutical product for which substantially the same Regulatory Approval is held as for such Included Product, which pharmaceutical product is owned or licensed in the same manner as such Included Product, which pharmaceutical product is at a similar stage in its product life and of similar market and profit potential as such Included Product, taking into account efficacy, safety, approved labeling, the competitiveness of alternative products in such country or jurisdiction, pricing/reimbursement for the pharmaceutical product in such country or jurisdiction relative to other countries and jurisdictions, the intellectual property and regulatory protection of the pharmaceutical product in such country or jurisdiction, the regulatory structure in such country or jurisdiction and the profitability of the pharmaceutical product in such country or jurisdiction, all as measured by the facts and circumstances in existence at the time such efforts are due.

Company” has the meaning set forth in the preamble.

Company Account” means an account established for the benefit of Company that is not a Collection Account.

Company Indemnification Obligations” has the meaning set forth in Section 10.1.

Company Indemnified Party” has the meaning set forth in Section 10.2.

Company Party” means any of the Company, the Guarantors and the Pledged Subsidiaries.

Compliance Certificate” means a certificate substantially in the form of Exhibit C.

Confidential Information” means any and all technical and non-technical non-public information provided by either Party to the other (including, without limitation, the reports provided pursuant to Section 3.4 and any notices or other information provided pursuant to Section 6.3), either directly or indirectly, and including any materials prepared on the basis of such information, whether in graphic, written, electronic or oral form, and marked or identified at the time of disclosure as confidential, or which by its context would reasonably be deemed to be confidential, including without limitation information relating to a Party’s technology, products and services, and any business, financial or customer information relating to a Party. The existence and terms of this Agreement shall be deemed the Confidential Information of both Parties. For clarity, this Agreement shall supersede the CDA and the CDA shall cease to be of any force and effect following the execution of this Agreement; provided, however, that all information falling within the definition of “Confidential Information” set forth in the CDA shall also be deemed Confidential Information disclosed pursuant to this Agreement, and the use and disclosure of such Confidential Information following the date of this Agreement shall be subject to the provisions of Article IX.

 

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Contractual Obligation” means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.

Copyright License” means any agreement, whether written or oral, providing for the grant of any right to use any Work under any Copyright.

Copyrights” means (a) all proprietary rights afforded Works pursuant to Title 17 of the United States Code, including, without limitation, all rights in mask works, copyrights and original designs, and all proprietary rights afforded such Works by other countries for the full term thereof (and including all rights accruing by virtue of bilateral or international treaties and conventions thereto), whether registered or unregistered, including, but not limited to, all applications for registration, renewals, extensions, reversions or restorations thereof now or hereafter provided for by Law and all rights to make applications for registrations and recordations, regardless of the medium of fixation or means of expression, which are owned by or licensed to the Company or any Subsidiary or with respect to which the Company or any Subsidiary is authorized or granted rights under or to; and (b) all copyright rights under the copyright Laws of the United States and all other countries for the full term thereof (and including all rights accruing by virtue of bilateral or international copyright treaties and conventions), whether registered or unregistered, including, but not limited to, all applications for registration, renewals, extensions, reversions or restorations of copyrights now or hereafter provided for by Law and all rights to make applications for copyright registrations and recordations, regardless of the medium of fixation or means of expression, which are owned by or licensed to the Company or any Subsidiary or with respect to which the Company or any Subsidiary is authorized or granted rights under or to.

Debtor Relief Laws” means the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect.

Default” means any event or condition that constitutes an Event of Default or that, with the giving of any notice, the passage of time, or both, would be an Event of Default.

Deposit Account” means a “deposit account” (as defined in Article 9 of the Uniform Commercial Code), investment account or other account in which funds are held or invested to or for the credit or account of any Party.

Deposit Agreement” means a deposit account control agreement entered into by a Depositary Bank, the Investor Representative and the Company (and any other Company Party and Permitted Debt Creditors, if applicable), which shall be in form and substance reasonably acceptable to the Investor Representative and the Company, as amended, supplemented or otherwise modified from time to time and any replacements thereof.

Depositary Bank” means Bank of America, N.A. or such other bank or financial institution approved by the Investor Representative and the Company, including any successor Depositary Bank appointed pursuant to Section 3.2(d).

 

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Designated Jurisdiction” means any country, territory or region to the extent that such country, territory or region is the subject of any Sanction.

Disposition” or “Dispose” means the sale, transfer, license, lease or other disposition (including any Sale and Leaseback Transaction or any issuance by any Subsidiary of its Equity Interests other than to a Grantor) of any property included in the Collateral (or owned by any Pledged Subsidiary and relating to Mycapssa) by any Company Party or any Affiliate of the Company, including any sale, assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith, but excluding the following (collectively, the “Permitted Transfers”): (a) the sale, lease, license, transfer or other disposition of inventory in the ordinary course of business, (b) the sale, lease, license, transfer or other disposition in the ordinary course of business of duplicative, surplus, obsolete or worn out property no longer used or useful in the conduct of Business of the Company and its Affiliates, (c) any sale, lease, license, transfer or other disposition of property to any Company Party; provided, that, if the transferor of such property is a Company Party (i) the transferee thereof must be a Company Party or (ii) to the extent such transaction constitutes an Investment, such transaction is permitted under Section 7.2, (d) the abandonment or other disposition of IP Rights that are not material or are no longer used or useful in any material respect in the Business of the Company and its Affiliates, (e) licenses, sublicenses, leases or subleases (other than relating to IP Rights, in each case) granted to third parties in the ordinary course of business and not interfering with the Business of the Company and its Affiliates, (f) any Involuntary Disposition or any sale, lease, license or other disposition of property (other than, for the avoidance of doubt, IP Rights) in settlement of, or to make payment in satisfaction of, any property or casualty insurance, (g) dispositions of cash and Cash Equivalents, in each case, in the ordinary course of business, (h) dispositions consisting of the sale, transfer, assignment or other disposition of unpaid and overdue accounts receivable in connection with the collection, compromise or settlement thereof in the ordinary course of business and not as part of a financing transaction, (i) Permitted Licenses, (j) to the extent constituting Permitted Liens, (k) sales, leases, licenses, transfers or other dispositions of property to the extent that (i) such property is exchanged for credit against the purchase price of similar replacement property or (ii) the proceeds of such sale, lease, license, transfer or other disposition are promptly applied to the purchase price of similar replacement property, (l) the sale, transfer, issuance or other disposition of a de minimis number of shares of the Equity Interests of a Foreign Subsidiary of a Company Party in order to qualify members of the governing body of such Subsidiary if required by Applicable Law, (m) dispositions of property the aggregate net book value of which does not exceed $1,500,000 during the term of this Agreement; (n) the sale, lease, license, transfer or other disposition of any asset among non-Company Parties; (o) issuance of Equity Interests not constituting a Change of Control by any Company Party expressly permitted under this Agreement; (p) the creation of any Lien permitted under this Agreement; (q) the surrender or waiver of obligations of trade creditors or customers or other contract rights that were incurred in the ordinary course of business of any Company Party, including pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of any trade creditor or customer; (r) Dispositions arising from foreclosures, condemnations, eminent domain, seizure, nationalization or any similar action with respect to assets, dispositions of property subject to casualty events; (s) Dispositions of property to the extent that (i) such property is exchanged for credit against the purchase price of similar replacement property that is purchased within 60 days of such disposition or (ii) the proceeds of such Asset Sale are applied within 60 days of such

 

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disposition to the purchase price of such replacement property (which replacement property is purchased within 60 days of such disposition); (t) Restricted Payments made in accordance with Section 7.7; and (u) dispositions of cash and Cash Equivalents between the Company and its Subsidiaries (to the extent in compliance with the minimum cash requirements under Section 7.8). It is understood and agreed that, notwithstanding anything to the contrary set forth in this definition, in no event shall a “Permitted Transfer” include any license of any Included Product included in the Collateral or owned by any Pledged Subsidiary and relating to Mycapssa (or any IP Rights associated therewith) other than Permitted Licenses.

Disputes” has the meaning set forth in Section 4.10(k).

Disqualified Capital Stock” means any Equity Interests that (i) by its terms, (ii) by the terms of any security into which it is convertible or for which it is exchangeable, or (iii) by contract or otherwise, is, or upon the happening of any event or passage of time would be, required to be redeemed, or is redeemable at the option of the holder thereof, in any such case on or prior to the date that is 91 days after the Outside Maturity Date; provided that only the portion of Equity Interests (or portion of security into which it is convertible or for which it is exchangeable) which is, or upon the happening of any event or passage of time would be, required to be redeemed, or is redeemable at the option of the holder thereof, on or prior to such date will be deemed to be Disqualified Capital Stock; and provided further that if such Equity Interests are issued to any plan for the benefit of directors, managers, employees, officers or consultants of the Company or its Subsidiaries or by any such plan to such directors, managers, employees, officers or consultants, such Equity Interests shall not constitute Disqualified Capital Stock solely because it may be required to be repurchased by the Company or its Subsidiaries in order to satisfy applicable statutory or regulatory obligations. Notwithstanding the preceding sentence, any Equity Interests that would constitute Disqualified Capital Stock solely because the holders thereof have the right to require the redemption or repurchase of such Equity Interests upon the occurrence of a Change of Control, fundamental change or an asset sale will not constitute Disqualified Capital Stock if the “asset sale,” “fundamental change” or “Change of Control” provisions applicable to such Equity Interests provide that the issuer thereof will not redeem or repurchase any such Equity Interests pursuant to such provisions prior to all other Obligations (other than contingent indemnification obligations for which no claim has been asserted) having been irrevocably paid in full in cash.

Dollar” or the sign “$” means United States dollars.

Domain Names” means all domain names and URLs that are registered and/or owned by or licensed to the Company or any Subsidiary or with respect to which the Company or any Subsidiary is authorized or granted rights under or to.

Domestic Subsidiary” means any Subsidiary that is organized under the Laws of the United States, any state of the United States or the District of Columbia.

Drug Application” means a New Drug Application or an Abbreviated New Drug Application, as those terms are defined in the FDCA and the FDA regulations promulgated thereunder, for any Included Product, as appropriate, in each case of the Company or any Subsidiary.

 

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EEA Financial Institution” means (a) any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent.

EEA Member Country” means any of the member states of the European Union, the United Kingdom, Iceland, Liechtenstein, and Norway.

EEA Resolution Authority” means any public administrative authority or any person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.

Effective Date” has the meaning set forth in the preamble.

Equity Interests” means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including partnership, member, membership or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination.

ERISA” means the Employee Retirement Income Security Act of 1974.

ERISA Affiliate” means any trade or business (whether or not incorporated) under common control with the Company within the meaning of Section 414(b) or (c) of the Internal Revenue Code (and Sections 414(m) and (o) of the Internal Revenue Code for purposes of provisions relating to Section 412 of the Internal Revenue Code).

ERISA Event” means (a) a Reportable Event with respect to a Pension Plan, (b) the withdrawal of the Company or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which such entity was a “substantial employer” as defined in Section 4001(a)(2) of ERISA or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA, (c) a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) by the Company or any ERISA Affiliate from a Multiemployer Plan, (d) the filing by the plan administrator of a notice of intent to terminate a Pension Plan or the treatment of a Pension Plan amendment as a termination under Sections 4041 of ERISA, (e) the institution by the PBGC of proceedings under Section 4042 of ERISA to terminate a Pension Plan, (f) the determination that any Multiemployer Plan is considered an at-risk plan or a plan in endangered or critical status within the meaning of Section 432 of the Internal Revenue Code or Section 305 of ERISA or is insolvent, within the meaning of Section 4245 of ERISA, or has been terminated, within the meaning of Section 4041A of ERISA, (g) the determination that any Pension Plan is at at-risk status within the meaning of Section 303 of ERISA, or (h) the imposition of any liability pursuant to Sections 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA upon the Company or any ERISA Affiliate.

 

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Event of Default” has the meaning set forth in Section 11.1.

Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

Excluded Foreign Subsidiary” means (a) any CFC and (b) any Subsidiary of a CFC.

Excluded Liabilities and Obligations” has the meaning set forth in Section 2.2.

Excluded Subsidiary” means (a) any Subsidiary organized as a Massachusetts Securities Corporation, (b) any Excluded Foreign Subsidiary, and (c) any Foreign Subsidiary Holding Company; provided, that in the case of either (b) or (c), either (i) the pledge of all of the Equity Interests of such Subsidiary as Collateral or (ii) the guaranteeing by such Subsidiary of the Obligations, would, in the good faith judgment of the Company, with the consent of the Investor Representative, be reasonably expected to result in material adverse tax consequences to any Company Party.

Excluded Taxes” means (i) Taxes imposed on or measured by the Investor’s net income, however denominated, franchise (and similar) Taxes imposed in lieu of net income Taxes, and branch profits taxes (or any similar taxes), in each case, imposed by any jurisdiction as a result of the Investor being organized in or having its principal office in such jurisdiction, or as a result of any other present or former connection between the Investor and such jurisdiction other than any connections arising from executing, delivering, being a party to, engaging in any transactions pursuant to, performing its obligations under, receiving payments under, or enforcing any Transaction Document, (ii) Taxes attributable to the failure of the Investor to deliver any documentation reasonably requested by the Company that the Investor is legally eligible to deliver, and (iii) any U.S. federal withholding Taxes.

Existing Mycapssa Material Contracts” means the Material Contracts relating to Mycapssa set forth on Schedule 4.12(a) as of the Effective Date, and any replacement therefor.

FDA” means the U.S. Food and Drug Administration or any successor agency or authority thereto.

Final Payment Amount” means as of any date of determination, the amount equal to the Hard Cap less the aggregate of all of the payments made to the Investor Representative prior to such date.

First Investment Amount” has the meaning set forth in Section 2.1(a).

Foreign Subsidiary” means any Subsidiary that is not a Domestic Subsidiary.

 

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Foreign Subsidiary Holding Company” means any Subsidiary that has no material assets other than directly or indirectly owned Equity Interests in one or more CFCs or other Foreign Subsidiary Holding Companies.

Fourth Closing Date” has the meaning set forth in Section 2.1(d).

Fourth Investment Amount” has the meaning set forth in Section 2.1(d).

GAAP” means generally accepted accounting principles in effect as the standard financial accounting guidelines in the United States from time to time (consistently applied and on a basis consistent with the accounting policies, practices, procedures, valuation methods and principles used in preparing the Company’s financial statements), and any successor thereto; provided that if a transition in such generally accepted accounting principles would substantively change the recognition of revenue with respect to Net Revenues (as currently defined) and its calculation as set forth in this Agreement, then the Parties shall mutually agree to amendments to this Agreement in order to cause the amount of Revenue Interests as determined after giving effect to such transition in generally accepted accounting principles to be substantially the same as the amount of Revenue Interests as determined under generally accepted accounting principles in effect as the standard financial accounting guidelines in the United States as of the Effective Date.

Governmental Authority” means the government of the United States, any other nation or any political subdivision thereof, whether state, local or otherwise, and any agency, authority (including supranational authority), commission, instrumentality, regulatory body, court, central bank or other Person exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government, including each Patent Office, the FDA and any other government authority in any jurisdiction.

Governmental Licenses” means all authorizations issuing from a Governmental Authority, including the FDA, based upon or as a result of applications to and requests for approval from a Governmental Authority for the right to manufacture, import, store, market, promote, advertise, offer for sale, sell, use and/or otherwise distribute a Included Product, which are owned by or licensed to the Company or any Subsidiary, acquired by the Company or any Subsidiary via assignment, purchase or otherwise or that the Company or any Subsidiary is authorized or granted rights under or to.

Grantors” means the Company and the Guarantors.

Guarantors” means (i) each Subsidiary (other than the Excluded Subsidiaries) that owns any portion of the Collateral as of the Initial Closing Date and (ii) any other Subsidiary of the Company that executes and delivers a Joinder Agreement pursuant to Section 6.1.

Guaranty” means a guaranty substantially in the form of Exhibit J hereto, executed in favor of the Investor Representative, for the benefit of the Investor, by the Company and each of the Guarantors, as amended or modified from time to time in accordance with the terms hereof.

 

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Hard Cap” means, except as set forth in Section 3.1(c), one hundred ninety-five percent (195%) of the Investment Amount.

Hedging Agreements” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a “Master Agreement”), including any such obligations or liabilities under any Master Agreement.

Included Product” means Mycapssa and any other product that may be developed or marketed by the Company or any of its Subsidiaries. For clarity, references in this Agreement to “an” Included Product or to “the” Included Product refer to any Included Product.

Included Product Payment Amount” means, for each Calendar Quarter that ends after the Second Closing Date, an amount equal to the Applicable Tiered Percentage multiplied by the Quarterly Net Revenues for such Calendar Quarter. For clarity, (i) the Applicable Tiered Percentage used to calculate the Included Product Payment Amount for a given Calendar Quarter will be based on the aggregate Net Revenues in the Territory billed or invoiced in such Calendar Quarter and all prior Calendar Quarters in the applicable Calendar Year, and (ii) the calculation of the Included Product Payment Amount for the first Calendar Quarter that ends after the Second Closing Date shall take into account all Net Revenues in the Territory prior to the Second Closing Date even if such Net Revenues were billed, invoiced or accrued following the Initial Closing but prior to the Second Closing Date. The Included Product Payment Amount for each Quarterly Payment Date shall be determined in a manner consistent with the example of such calculation set forth in Exhibit D.

Indebtedness” of any Person means (a) any obligation of such Person for borrowed money, (b) any obligation of such Person evidenced by a bond, debenture, note or other similar instrument, (c) any obligation of such Person to pay the deferred purchase price of property or services (except (i) trade accounts payable that arise in the ordinary course of business, (ii) payroll liabilities and deferred compensation, and (iii) any purchase price adjustment, royalty, earnout, milestone payments, contingent payment or deferred payment of a similar nature incurred in connection with any license, lease, contract research and clinic trial arrangements or acquisition), (d) any obligation of such Person as lessee under a capital lease (under GAAP as in effect on the date hereof), (e) any obligation of such Person to purchase securities or other property that arises out of or in connection with the sale of the same or substantially similar securities or property, (f) any non-contingent obligation of such Person to

 

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reimburse any other Person in respect of amounts paid under a letter of credit or other guaranty issued by such other Person, (g) any Indebtedness of others secured by a Lien on any asset of such Person, and (h) any Indebtedness of others guaranteed by such Person; provided that notwithstanding the foregoing, Indebtedness shall be deemed not to include (1) prepaid or deferred revenue arising in the ordinary course of business, (2) any balance that constitutes a trade payable or similar obligation to a trade creditor, accrued in the ordinary course of business, or (3) asset retirement obligations and obligations in respect of workers’ compensation (including pensions and retiree medical care) that are not overdue by more than thirty (30) days; provided, further, that intercompany loans among the Company and its Affiliates shall not constitute Indebtedness.

Indemnified Taxes” means all Taxes imposed on or with respect to any payment made by or on account of any obligation of any Company Party under any Transaction Document, other than Excluded Taxes.

Initial Closing” has the meaning set forth in Section 8.1(a).

Initial Closing Date” has the meaning set forth in Section 8.1(a).

Intellectual Property” means all intellectual property, including but not limited to all trade secrets, Know-How, Patents, registered or unregistered trademarks, trade names and service marks, registered and unregistered copyrights and all applications thereof, in each such case, relating to, embodied by, covering or involving, or necessary for or used to manufacture of any Included Products for Commercialization or the sale, offer for sale, marketing, promotion, importation or exportation of any Included Product.

Internal Revenue Code” means the United States Internal Revenue Code of 1986, as amended.

Investment” means, as to any Person, any direct or indirect acquisition or investment by such Person, whether by means of (a) the purchase or other acquisition of Equity Interests of another Person, (b) a loan, advance or capital contribution (excluding accounts receivable, credit card and debit card receivables, trade credit, advances to customers and advances to employees for moving, entertainment and travel expenses, drawing accounts and similar expenditures, in each case made in the ordinary course of business), guarantee or assumption of debt of, or purchase or other acquisition of any other debt or equity participation or interest in, another Person, including any partnership or joint venture interest in such other Person and any arrangement pursuant to which the investor guarantees Indebtedness of such other Person, or (c) an Acquisition. For purposes of covenant compliance, the amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the value of such Investment but giving effect (without duplication) to all subsequent reductions in the amount of such Investment as a result of (x) any dividend, distribution, interest payment, return of capital, repayment or other payment or disposition thereof (valued at its fair market value at the time of such sale) or (y) any cancellation of any Investment in the form of a guarantee without payment therefor by such guarantor, in each case, not to exceed the original amount, or fair market value, of such Investment.

 

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Investment Amount” means the aggregate of the First Investment Amount and if funded pursuant to Section 2.1(b), Section 2.1(c), and Section 2.1(d), respectively, the Second Investment Amount, the Third Investment Amount and the Fourth Investment Amount.

Investor” or “Investors” means the Persons identified as an “Investor” on the signature pages hereto and their successors and assigns.

Investor Account” means such account as designated by the Investor Representative to the Company in writing from time to time.

Investor Indemnification Obligations” has the meaning set forth in Section 10.2.

Investor Indemnified Party” has the meaning set forth in Section 10.1.

Investor Representative” means HealthCare Royalty Management, LLC, as agent for the Investor.

Involuntary Disposition” means any loss of, damage to or destruction of, or any condemnation or other taking for public use of, any property of any Party or any of its Subsidiaries.

IP Rights” means, collectively, all Copyrights, all Copyright Licenses, all Domain Names, all Drug Applications, all Other Intellectual Property, all Other IP Agreements, all Patent Licenses, all Patents, all Proprietary Databases, all Proprietary Software, all Trademarks, all Trademark Licenses, all Trade Secrets, all Websites, all Website Agreements and all Regulatory Approvals, in each case, which are owned or controlled by, issued or licensed to, licensed by, or hereafter acquired or licensed by, the Company, including (but not limited to) the items listed on Schedule 4.10.

IRS” means the United States Internal Revenue Service.

Joinder Agreement” means a joinder agreement substantially in the form of Exhibit F executed and delivered by each Subsidiary in accordance with the provisions of Section 6.1.

Know-How” means all non-public information, results and data of any type whatsoever, in any tangible or intangible form (and whether or not patentable), including databases, practices, methods, techniques, specifications, formulations, formulae, knowledge, skill, experience, data and results (including pharmacological, medicinal chemistry, biological, chemical, biochemical, toxicological and clinical study data and results), analytical and quality control data, stability data, studies and procedures, and manufacturing process and development information, results and data.

Knowledge” means, with respect to the Company, (a) for purposes of Article IV, the actual knowledge, after due inquiry, as of the date of this Agreement, of any of the officers of the Company identified on Schedule 1.1, and (b) for all other purposes of this Agreement, the actual knowledge, after due inquiry, as of a specified time, of any of the officers of the Company identified on Schedule 1.1 or any successor to any such officer holding the same or substantially similar officer position at such time.

 

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Laws” means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case, whether or not, having the force of law.

License Agreement” means (i) each agreement identified on Schedule 6.8 as of the Effective Date and (ii) any New License Agreements, which may be added to Schedule 6.8.

Licensee” means, with respect to the Included Product, a Third Party to whom the Company or any Affiliate of the Company has granted a license or sublicense to any Third Party to develop, have developed, make, have made, seek Regulatory Approvals for, distribute, use, have used, import, sell, offer to sell, have sold or otherwise Commercialize such Included Product under the applicable License Agreement. As used in this Agreement “Licensee” includes any Third Party to whom the Company or any Affiliate of the Company has granted the right (or any Third Party to whom any such Third Party has granted the right) to distribute the Included Product.

Lien” means any security interest, mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), charge against or interest in property or other priority or preferential arrangement of any kind or nature whatsoever, in each case to secure payment of a debt or performance of an obligation, including any conditional sale or any sale with recourse.

Loss” means any actual loss, assessment, award, cause of action, claim, charge, cost, expense (including reasonable expenses of investigation and reasonable attorneys’ fees), fine, judgment, liability, obligation or penalty; provided, however that Loss shall not include any lost profits or revenue or consequential, punitive, special or incidental damages except (a) the amount of any Revenue Interests that are not received by Investor Representative due to failure by any Third Party to make payment thereof (other than resulting from any matter described in Section 10.1(a), (b), (c) or (d)) and (b) any lost profits or revenue or consequential, punitive, special or incidental damages awarded or payable by Investor to a Third Party in connection with a claim or action for which the Company is required to indemnify Investor pursuant to Section 10.1.

Marketing Authorization” means, with respect to the Included Product, the Regulatory Approval required by Applicable Law to sell the Included Product in a country or region, including, to the extent required by Applicable Law for the sale of the Included Product, all pricing approvals and government reimbursement approvals.

 

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Material Adverse Effect” means (a) a material adverse change in, or a material adverse effect upon, the business, assets, properties, liabilities or financial condition of the Company and its Subsidiaries taken as a whole, (b) a material impairment of the rights and remedies of the Investor under any Transaction Document to which it is a party or a material impairment in the perfection or priority of the Investor’s security interests in the Collateral, (c) an impairment of the ability of the Company Parties (taken as a whole) to perform their respective obligations under the Transaction Documents that could reasonably be expected to have a material adverse effect on the business, assets, properties, liabilities or financial condition of the Company and its Subsidiaries taken as a whole, (d) a material adverse effect upon the legality, validity, binding effect or enforceability against any Company Party of any Transaction Document to which it is a party or (e) an adverse effect (other than any de minimis effect) on the timing, amount or duration of amounts payable in respect of the Revenue Interests in accordance with the Transaction Documents or the right of the Investor to receive the Revenue Interests.

Material Contract Counterparty” means a counterparty to any Material Contract.

Material Contracts” means each contract or other agreement to which the Company or any of its Subsidiaries is a party, and that is material to the marketing, sale, distribution, supply or production (including manufacturing, packaging or labeling) of the Included Product (including, without limitation, all waivers, amendments, supplements and other modifications thereto).

Minimum Cash Account” has the meaning set forth in Section 7.8.

Moody’s” means Moody’s Investors Service, Inc. and any successor thereto.

Multiemployer Plan” means any “employee benefit plan” (as defined in Section 3(3) of ERISA) that is a “multiemployer plan” as defined in Section 4001(a)(3) of ERISA, to which the Company or any ERISA Affiliate makes or is obligated to make contributions, or during the preceding five plan years, has made or been obligated to make contributions.

Mycapssa” means the compound described on Schedule 1, and any pharmaceutical or biological composition containing octreotide, including the product conditionally trade named Mycapssa® and currently trademarked in the United States as Mycapssa.

Mycapssa Material Contracts” means any Material Contract relating to Mycapssa.

Mycapssa U.S. Net Sales” means the Net Sales attributable to Mycapssa in the United States.

Net Revenues” means the Net Sales, Other Royalty Payments and any other payments made in lieu of the sale of any Included Product (to the extent such payments are not included in the Net Sales or Other Royalty Payments) recognized as revenue by the Company and its Subsidiaries in accordance with GAAP; provided, that for purposes of calculating Investor’s Revenue Interest with respect to sales or other dispositions of any Included Product outside the United States by any Third Party, (i) the definition of “Net Sales” shall be deemed amended to omit the words “by the Company and its Subsidiaries” in both instances and (ii) this definition of “Net Revenues” shall be deemed amended to omit the words “recognized as revenue by the Company or its Subsidiaries in accordance with GAAP.

 

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Net Sales” means, with respect to the Included Product, the gross amount billed or invoiced or otherwise recognized as revenue by the Company and its Subsidiaries in accordance with GAAP in respect of sales or other dispositions of the Included Product in the Territory by the Company, its Affiliates or Licensees (or any permitted assignee or transferee hereunder) (but not including sales to an Affiliate or Licensee unless the Affiliate or Licensee is the ultimate end user of the Included Product; provided that for purposes of this Net Sales definition, a Third-Party distributor to which the Company has sold Included Product for no less than wholesale value shall be considered an “end user”, and sales by such distributor to any Third Parties shall not be included in Net Sales), less the following deductions to the extent included in the gross amount billed or invoiced in respect of sales or other dispositions of the Included Product or otherwise recognized as revenue by the Company and its Subsidiaries in accordance with GAAP: (a) rebates, credits or allowances actually granted for damaged or defective products, returns or rejections of Included Products or recalls, or for retroactive price reductions and billing errors; (b) normal and customary trade, cash, quantity, prompt pay and other customary discounts, allowances and credits (including chargebacks) given to Third Parties in the ordinary course of business; (c) excise taxes, sales taxes, duties, VAT taxes and other taxes to the extent imposed upon and paid with respect to the sales price, and a pro rata portion of pharmaceutical excise taxes imposed on sales of pharmaceutical products as a whole and not specific to Included Products (such as those imposed by the U.S. Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148, as amended) (and excluding in each case taxes based on income); (d) freight, postage, shipping and shipping insurance expense and other transportation charges directly related to the distribution of the Included Product; (e) distribution services agreement fees and other similar amounts allowed or paid to Third Party distributors, including specialty distributors of the Included Product, (f) rebates made with respect to sales paid for by any Governmental Authority, their agencies and purchasers and reimbursers, managed health care organizations, or to trade customers; (g) the portion of administrative fees paid during the relevant time period to group purchasing organizations or pharmaceutical benefit managers relating to the Included Product; (h) any invoiced amounts that are not collected by the Company, its Affiliates or Licensees, including bad debts; and (i) any customary or similar payments to the foregoing (a) – (h) that apply to the sale or disposition of pharmaceutical products.

In the case of any sale or other disposal for value, such as barter or counter-trade, of an Included Product, or part thereof, other than in an arm’s length transaction exclusively for cash, Net Sales shall be calculated as above on the value of the non-cash consideration received or the fair market price (if higher) of such Included Product in the country of sale or disposal, as determined in accordance with GAAP.

New License Agreement” means any partnership agreement, license agreement or similar agreement entered into by the Company, pursuant to which the Company or an Affiliate of the Company has granted a license or sublicense to any Third Party to develop, have developed, make, have made, seek Regulatory Approvals for, distribute, use, have used, import, sell, offer to sell, have sold or otherwise Commercialize such Included Product.

 

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Obligations” means all liabilities, obligations, covenants and duties of any the Company Parties arising under this Agreement or any other Transaction Document or otherwise with respect to the payment, without duplication, of the Hard Cap and the obligations of the Company to pay any interest accrued on any unpaid Revenue Interests or the Final Payment Amount and reimburse or indemnify the Investor for any Losses incurred by the Investor in connection with the enforcement of its rights under this Agreement.

OFAC” means the Office of Foreign Assets Control of the United States Department of the Treasury.

Organization Documents” means, (a) with respect to any corporation, the certificate or articles of incorporation and the bylaws (or equivalent or comparable constitutive documents with respect to any non-U.S. jurisdiction), (b) with respect to any limited liability company, the certificate or articles of formation or organization and operating agreement, and (c) with respect to any partnership, joint venture, trust or other form of business entity, the partnership, joint venture or other applicable agreement of formation or organization and any agreement, instrument, filing or notice with respect thereto filed in connection with its formation or organization with the applicable Governmental Authority in the jurisdiction of its formation or organization and, if applicable, any certificate or articles of formation or organization of such entity.

Other Intellectual Property” means all worldwide intellectual property rights, industrial property rights, proprietary rights and common-law rights, whether registered or unregistered, which are not otherwise included in Confidential Information, Copyrights, Copyright Licenses, Domain Names, Governmental Licenses, Other IP Agreements, Patents, Patent Licenses, Trademarks, Trademark Licenses, Proprietary Databases, Proprietary Software, Websites, Website Agreements and Trade Secrets, including, without limitation, all rights to and under all new and useful algorithms, concepts, data (including all clinical data relating to a Included Product), databases, designs, discoveries, inventions, Know-How, methods, processes, protocols, chemistries, compositions, formulas, show-how, software (other than commercially available, off-the-shelf software that is not assignable in connection with a Change of Control), specifications for Included Products, techniques, technology, trade dress and all improvements thereof and thereto, in each of the foregoing cases, which is owned by or licensed to the Company or any Subsidiary or with respect to which the Company or any Subsidiary is authorized or granted rights under or to.

Other IP Agreements” means any agreement, whether written or oral, providing for the grant of any right under any Proprietary Database, Proprietary Software, Trade Secret and/or any other IP Right, to the extent that the grant of any such right is not otherwise the subject of a Copyright License, Trademark License, Patent License or Website Agreement.

Other Royalty Payments” means, without duplication, any partnership distributions, upfront payments, milestone payments or similar payments or any other amounts payable by the Licensees to the Company or its Affiliates under or in respect of the applicable License Agreement or any other amounts or proceeds arising from the applicable License Agreement other than: (a) payments by Licensees for payment or reimbursement of expenses, including patent prosecution, defense, enforcement or maintenance expenses in respect of any

 

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intellectual property or IP Rights; (b) the fair market value of payments received by Company from a Licensee for any debt and/or equity securities or instruments issued by Company, or payments for an acquisition of all or substantially all of its assets that include the assignment of this Agreement; and (c) funds received from a Licensee as a reimbursement of expenses for bona fide research and development of products (including payments for employees and contractors, clinical development, regulatory and quality affairs, process development and manufacturing expenses).

Outside Maturity Date” means the date that is the ten (10) year anniversary of the Initial Closing Date.

Patent License” means any agreement, whether written or oral, providing for the grant of any right under any Patent.

Patent Office” means the applicable patent office, including the United States Patent and Trademark Office and any comparable foreign patent office, for any patent.

Patent Rights” means the Patents that claim, cover or that would otherwise be infringed by the Company’s Commercialization of the Included Product but for the Company’s ownership or right to use such Patents.

Patents” means any and all issued patents and pending patent applications, including without limitation, all provisional applications, substitutions, continuations, continuations-in-part, divisions, and renewals, all letters patent granted thereon, and all patents-of-addition, reissues, reexaminations and extensions or restorations by existing or future extension or restoration mechanisms (including regulatory extensions), and all supplementary protection certificates, together with any foreign counterparts thereof anywhere.

Payment Term” means the time period commencing on the Initial Closing Date and expiring on the date upon which the Investor Representative has received in full (i) cash payments in respect of the Revenue Interests totaling, in the aggregate, the Hard Cap and (ii) any other Obligations payable by the Company under this Agreement.

Pension Plan” means any “employee pension benefit plan” (as defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is maintained or is contributed to by the Company and any ERISA Affiliate and is either covered by Title IV of ERISA or is subject to minimum funding standards under Section 412 of the Internal Revenue Code.

Permits” means licenses, Governmental Licenses, certificates, accreditations, Regulatory Approvals, other authorizations, registrations, permits, consents, clearances and approvals required in connection with the conduct of the Company’s or any Subsidiary’s Business or to comply with any Applicable Laws, and those issued by state governments for the conduct of the Company’s or any Subsidiary’s Business.

Permitted Convertible Notes” means any unsecured Indebtedness of the Company in the form of convertible notes; provided, that (i) such convertible notes shall not be guaranteed by any Subsidiary of the Company that is a Guarantor and any Subsidiary the Equity Interests of which are pledged to the Investor, (ii) such convertible notes mature no sooner than

 

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the date that is the seven-year anniversary of the Initial Closing Date and (iii) the aggregate of the principal amounts of all of the outstanding convertible notes (after giving effect to the issuance of such convertible notes and the use of proceeds of the issuance of such convertible notes to redeem or repay any Indebtedness) does not exceed [***] percent ([***]%) of the market capitalization of the Company (determined at the time of signing of the definitive agreement for the issuance of such convertible notes, after taking into account all of the outstanding convertible notes immediately after giving effect to the issuance of such convertible notes and the use of proceeds of the issuance of such convertible notes to redeem or repay Indebtedness).

Permitted Convertible Notes Creditors” means the lenders or holders of Permitted Convertible Notes.

Permitted Debt” means any of the following Indebtedness of the Company and its Subsidiaries (which, for purposes of determining whether such Indebtedness exceeds any maximum amount provided in the applicable clause below, shall be calculated on a consolidated basis with respect to the Company and its Subsidiaries):

(a) the Indebtedness of the Company and its Subsidiaries in respect of any Permitted Debt Facility;

(b) Indebtedness under the Transaction Documents;

(c) unsecured Indebtedness to trade creditors incurred in the ordinary course of business;

(d) Guarantees of the Company and its Subsidiaries in respect of Indebtedness and other obligations of the Company and any Subsidiary otherwise permitted hereunder;

(e) Indebtedness incurred by the Company or its Subsidiaries consisting of (i) the financing of the payment of insurance premiums, (ii) take or pay obligations contained in supply agreements, in each case, in the ordinary course of business or consistent with past practice, (iii) deferred compensation or equity based compensation to current or former officers, directors, consultants, advisors or employees thereof, in each case in the ordinary course of business, and (iv) customer deposits and advance payments received in the ordinary course of business or consistent with past practice from customers for goods or services purchased in the ordinary course of business or consistent with past practice;

(f) Indebtedness owed to any Person providing worker’s compensation, health, disability or other employee benefits or property, casualty or liability insurance to the Company or any Subsidiary incurred in connection with such Person providing such benefits or insurance pursuant to customary reimbursement or indemnification obligations to such Person;

(g) Indebtedness in respect of performance, indemnity, bid, stay, customs, appeal, replevin and surety bonds, performance and completion guarantees and other similar bonds or guarantees, trade contracts, government contracts and leases, in each case, incurred in the ordinary course of business but excluding guaranties with respect to any obligations for borrowed money;

 

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(h) Indebtedness arising from (i) the honoring by a bank or other financial institution of a check, draft, or similar instrument drawn against insufficient funds in the ordinary course of business or other cash management services in the ordinary course of business; provided that such Indebtedness is extinguished within five (5) Business Days of notification to the Company of its incurrence and (ii) Treasury Management Arrangements;

(i) (i) Indebtedness of the Company or any Subsidiary of the Company supported by a letter of credit issued pursuant to any Permitted Debt Facility in an amount not in excess of the stated amount of such letter of credit, and (ii) letters of credit, bankers’ acceptances, guarantees or other similar instruments or obligations issued or relating to liabilities or obligations incurred in the ordinary course of business; provided, that, the aggregate outstanding amount of such letters of credit issued under clause (ii) above shall not exceed $[***] at any time outstanding;

(j) judgments, decrees, attachments or awards (to the extent that they would be deemed Indebtedness) that do not constitute an Event of Default under Section 11.1(f);

(k) Indebtedness in the form of (i) guarantees of loans and advances to officers, directors, consultants, managers and employees, in an aggregate amount not to exceed $[***] at any one time outstanding, and (ii) reimbursements owed to officers, directors, managers, consultants and employees of the Company or any Subsidiary for business expenses of the Company or any Subsidiary;

(l) Indebtedness consisting of obligations to make payments to current or former officers, directors and employees of the Company or any of its Subsidiaries, their respective estates, spouses or former spouses with respect to the cancellation, purchase or redemption of Equity Interests of the Company or any of its Subsidiaries to the extent such cancellation, purchase or redemption is permitted under Section 7.7;

(m) Acquired Debt; provided, that the aggregate outstanding amount of all of the Acquired Debt shall not exceed $[***] at any one time outstanding;

(n) to the extent constituting Indebtedness, the grant of any indefeasible right of use or similar arrangements, including put rights granted in connection therewith;

(o) the incurrence by the Company or any Subsidiary of Indebtedness arising from agreements providing for indemnification, holdback, earnout, adjustment of purchase price, working capital adjustments or similar obligations, or guarantees or letters of credit, surety bonds or performance bonds securing any obligations of the Company or any Subsidiary pursuant to such agreements, in any case incurred in connection with the disposition or acquisition of any Business or assets of the Company or any Subsidiary or Equity Interests of a Subsidiary that is permitted under this Agreement; provided that the aggregate outstanding amount of such Indebtedness shall not exceed $[***] at any time outstanding;

 

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(p) Indebtedness consisting of capitalized lease obligations and purchase money Indebtedness, in each case incurred to finance the acquisition, repair, improvement or construction of fixed or capital assets of such person, provided that the principal amount of such Indebtedness does not exceed the lower of the cost or fair market value of the property so acquired or built or of such repairs or improvements financed with such Indebtedness (each measured at the time of such acquisition, repair, improvement or construction is made; provided, that, (i) the total of all such Indebtedness for all such Persons taken together shall not exceed an aggregate principal amount of $[***] at any one time outstanding, (ii) such Indebtedness when incurred shall not exceed the purchase price of (or the repair, improvement or constructions costs for) the asset(s) financed and (iii) no such Indebtedness shall be refinanced, renewed or extended for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing, renewal or extension;

(q) Indebtedness in respect of Hedging Agreements; provided, that, such obligations are (or were) entered into by such Person in the ordinary course of business for the purpose of directly mitigating risks associated with liabilities, commitments, investments, assets, or property held or reasonably anticipated by such Person, or changes in the value of securities issued by such Person, and not for purposes of speculation or taking a “market view”;

(r) Indebtedness incurred to refinance the Permitted Debt set forth in any of clauses (a) through (e); provided that the type and amount of such refinancing Indebtedness is permitted under such clause;

(s) Indebtedness secured by Liens of any of the types described under clauses (c), (d) and (g) of the definition of Permitted Liens, but only to the extent of the Indebtedness related thereto;

(t) other unsecured Indebtedness not otherwise permitted under clauses (a) through (s) inclusive of this definition in an aggregate outstanding principal amount not to exceed at any time $[***];

(u) the Indebtedness set forth on Schedule 4.15(b); and

(v) Indebtedness incurred pursuant to the CARES Act Paycheck Protection Program to the extent that such indebtedness qualifies for forgiveness under the CARES Act;

provided, however, that at all times prior to the Third Closing Date, “Permitted Debt” shall not include the Indebtedness described in clauses (k)(i), (m), and (t) above.

Permitted Debt Creditors” means the lenders or noteholders, and any administrative agent, collateral agent, security agent or similar agent under any Permitted Debt Facility.

Permitted Debt Facility” means any credit facility provided under the Permitted Convertible Notes.

 

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Permitted Debt Facility Documents” means the documents relating to any Permitted Debt Facility.

Permitted Licenses” means, collectively:

(a) licenses of over-the-counter software that is commercially available to the public;

(b) non-exclusive and exclusive licenses for the use of the intellectual property of the Company or any of its Subsidiaries entered into in the ordinary course of business in the Territory, including non-exclusive licenses for the import, export, manufacture, make, use, sale, offer for sale, promotion or distribution of an Included Products so long as (other than as provided in clause (c)) such non-exclusive license does not grant to any Third Party the right to sell, offer for sale, market or promote such Included Product on a royalty payment basis, profit sharing basis or any other similar payment structure;

(c) licenses of Mycapssa outside the United States or of any other Included Product in the Territory (in each case, together with any IP Rights related thereto), which may grant to any Third Party the right to sell, offer for sale, market or promote such Included Product on a royalty payment basis, profit sharing basis or any other similar payment structure;

(d) any license granted to any Third Party for the manufacture of any Included Product or otherwise granted to a vendor or service provider in order to provide services for the benefit of the Company or its Affiliates; and

(e) any sponsored research, co-development or similar agreement providing for the development of an Included Product and funding thereof, that does not grant Commercialization rights with respect to any Included Product;

provided, that, with respect to each such license described in clause (b) or (c), (i) no Special Termination Event, Default or Event of Default has occurred or is continuing at the time of entry into such license, (ii) the license constitutes an arms-length transaction, the terms of which, on their face, do not provide for a sale or assignment from the Company or its Affiliates to a Third Party of any intellectual property that, at the time of execution of such license, comprises a portion of the Collateral (other than, in the case of any license of an Included Product that is not included in the Collateral, the TPE Technology, solely to the extent that (x) the TPE Technology is necessary to the development, manufacture, distribution and sale of such Included Product and (y) such license does not (1) interfere with the Commercialization of Mycapssa, (2) materially impair the rights and remedies of the Investor under this Agreement or (3) impair the perfection or priority of the Investor’s security interests in the Collateral) or the assets of the Pledged Subsidiaries relating to Mycapssa, and do not restrict the ability of the Company or any of its Subsidiaries, as applicable, to pledge, grant a Lien on or assign or otherwise transfer such intellectual property (in each case other than customary non-assignment provisions that restrict the assignability of the license but do not otherwise restrict the ability of the Company or any Subsidiary (as applicable) to pledge, grant a Lien on or assign any such intellectual property), (iii) in the case of any exclusive license, (A) the Company delivers to the Investor Representative a copy of the final executed exclusive license promptly upon

 

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consummation thereof, subject to reasonable redaction to comply with obligations of confidentiality, (B) may be exclusive in respects other than Territory, (C) with respect solely to Mycapssa, may be exclusive as to Territory only as to geographical areas outside of the United States and (D) with respect solely to Included Products not included in the Collateral, may be exclusive as to Territory and (iv) all Other Royalty Payments that are payable to the Company or any of its Subsidiaries thereunder are paid to the Collection Account. It is understood and agreed that, notwithstanding anything to the contrary set forth in this definition, in no event shall a “Permitted License” include any license to Commercialize Mycapssa (or any IP Rights associated therewith) in the United States (or any state or other political subdivision thereof).

Permitted Liens” means:

(a) Liens created in favor of the Investor pursuant to the Transaction Documents;

(b) Liens incurred by the Investor;

(c) inchoate Liens for ad valorem property Taxes not yet delinquent;

(d) Liens in respect of property of the Company imposed by Applicable Law which were incurred in the ordinary course of Business and do not secure Indebtedness for borrowed money, such as carriers’, warehousemen’s, landlord’s, distributors’, wholesalers’, materialmen’s and mechanics’ liens and other similar Liens arising in the ordinary course of Business and secure payment obligations (i) not then due, (ii) if due, not yet overdue by more than thirty (30) days, (iii) that if overdue by more than thirty (30) days, are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP or (iv) with respect to which the failure to make payment would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;

(e) Liens incurred in the ordinary course of business in connection with worker’s compensation, unemployment insurance or other forms of governmental insurance or benefits, insurance, surety bonds, or other obligations of a like nature or to secure the performance of letters of credit, banker’s acceptances, bids, tenders, statutory obligations, leases and contracts (other than for borrowed money) entered into in the ordinary course of business, other than any Lien imposed by ERISA which has resulted or would result in liability, together with any other Lien imposed by ERISA, in an aggregate amount in excess of $1,500,000;

(f) Liens for Taxes, assessments and governmental charges that are not yet delinquent for a period of more than forty-five (45) days or remain payable without any penalty or that are being contested in good faith and with due diligence by appropriate proceedings and for which adequate reserves have been established in accordance with GAAP;

(g) banker’s liens for collection or rights of set off or similar rights and remedies as to Deposit Accounts or other funds maintained with depositary institutions; provided that such Deposit Accounts or funds are not established or deposited for the purpose of providing collateral for any Indebtedness and are not subject to restrictions on access by the Company in excess of those required by applicable banking regulations;

 

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(h) Liens on assets that do not constitute (i) Collateral or (ii) the assets of the Pledged Subsidiaries relating to Mycapssa;

(i) Liens in favor of the Company or any Subsidiary;

(j) Liens on property or Equity Interests of another Person existing at the time such other Person becomes a Subsidiary of the Company; provided that such Liens were in existence prior to the contemplation of such merger, amalgamation or consolidation and do not extend to any assets other than those of the Person that becomes a Subsidiary of the Company; and provided further that such Liens were granted to secure repayment of Acquired Debt.

(k) Liens on property of a Person existing at the time of acquisition thereof by the Company or any Subsidiary of the Company; provided that such Liens were in existence prior to the contemplation of such acquisition and do not extend to any property other than the property so acquired by the Company or the Subsidiary; and provided further that such Liens were granted to secure repayment of Acquired Debt.

(l) Liens on Equity Interests of Subsidiaries that are not (i) Guarantors or (ii) Pledged Subsidiaries;

(m) Liens existing on the date of this Agreement;

(n) Liens securing Indebtedness permitted to be incurred under clause (p) of the definition of “Permitted Debt” covering only the assets acquired with or financed by such Indebtedness; provided that individual financings provided by one lender may be cross collateralized to other financings provided by such lender or its Affiliates;

(o) customary Liens incurred in the ordinary course of business to secure obligations in respect of payment processing services, business credit card programs, and netting services, overdrafts and related liabilities arising from treasury, depositary and cash management services;

(p) Liens on insurance policies, premiums and proceeds thereof, or other deposits, to secure insurance premium financings with respect to unearned premiums and other liabilities to insurance carriers;

(q) Liens on specific items of inventory or other goods (and the proceeds thereof) of the Company securing such Person’s obligations in respect of bankers’ acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods;

(r) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into in the ordinary course of business;

(s) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods in the ordinary course of business;

 

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(t) any interest or title of a lessor or licensor under any lease, sublease, license or sublicense entered into by the Company or any Subsidiary entered into in the ordinary course of its business;

(u) Liens on cash collateral securing hedging agreements entered into for bona fide hedging purposes in the ordinary course of business and not for speculative purposes;

(v) survey exceptions, encumbrances, ground leases, easements (including reciprocal easement agreements), survey exceptions or reservations of, or rights of others for, licenses, rights of way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning, building codes or other restrictions (including minor defects or irregularities in title and similar encumbrances) as to the use of real property or Liens incidental to the conduct of the business of such Person or to the ownership of its properties that do not in the aggregate materially adversely affect the value of said properties or materially impair their use in the operation of the business of such Person;

(w) (i) Liens securing or arising out of judgments, decrees, orders, awards or notices of lis pendens and associated rights related to litigation with respect to which such Person shall then be proceeding with an appeal or other proceedings for review, or in respect of which the period within which such appeal or proceedings may be initiated shall not have expired, and Liens on litigation proceeds securing obligations to pay expenses incurred in connection with such litigation and (ii) Liens arising from judgments, decrees, attachments or awards that do not constitute an Event of Default under Section 11.1(g);

(x) Liens in favor of collecting or payor banks having a right of setoff, revocation, refund or chargeback with respect to money or instruments of the Company or any Subsidiary on deposit with or in possession of such bank;

(y) any interest or title of a lessor, licensor or sublicensor in the property subject to any lease, license or sublicense;

(z) Liens on equipment or inventory of the Company or any Subsidiary granted in the ordinary course of business to the Company’s or such Subsidiary’s supplier at which such equipment or inventory is located;

(aa) Liens arising from precautionary Uniform Commercial Code financing statements regarding operating leases or consignments and other precautionary UCC financing statements or similar filings;

(bb) Liens on any assets held by a trustee (i) under any indenture (including the Indenture) or other debt instrument where the proceeds of the securities issued thereunder are held in escrow pursuant to customary escrow arrangements pending the release thereof, and (ii) under any indenture pursuant to customary discharge, redemption or defeasance provisions;

(cc) Liens of (i) a collection bank arising under Section 4 210 of the Uniform Commercial Code (or any analogous statutory provision of applicable foreign Law) on items in the course of collection and which arise from general banking conditions, (ii) attaching to commodity trading accounts or other commodities brokerage accounts incurred in the ordinary

 

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course of business and (iii) in favor of a banking or other financial institution arising as a matter of law or under customary general terms and conditions encumbering deposits or other funds maintained with a financial institution (including the right of setoff) and that are within the general parameters customary in the banking industry or arising pursuant to such banking institutions general terms and conditions;

(dd) Liens on deposits or other amounts held in escrow to secure payments (contingent or otherwise) payable by the Company with respect to (i) the settlement, satisfaction, compromise or resolution or judgments, litigation, arbitration or other Disputes and (ii) any commercial contracts for manufacturing, production and other service arrangements entered into in the ordinary course of business; or

(ee) Liens securing Indebtedness arising from Treasury Management Arrangements.

Person” means any natural person, firm, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, Governmental Authority or any other legal entity, including public bodies, whether acting in an individual, fiduciary or other capacity.

Plan” means any “employee benefit plan” within the meaning of Section 3(3) of ERISA (including a Pension Plan) that is maintained for employees of the Company or, in the case of any Pension Plan, any ERISA Affiliate or to which the Company or, in the case of any Pension Plan, any ERISA Affiliate is required to contribute on behalf of any of its employees.

Pledged Subsidiaries” has the meaning set forth in Section 6.1.

Product Plans” means the key marketing, sale and product development and research plans with respect to Mycapssa set forth on Exhibit H.

Proprietary Databases” means any material non-public proprietary database or information repository that is owned by or licensed to the Company or any Subsidiary or with respect to which the Company or any Subsidiary is authorized or granted rights under or to.

Proprietary Software” means any proprietary software (other than any software that is generally commercially available, off-the-shelf and/or open source) including, without limitation, the object code and source code forms of such software and all associated documentation, which is owned by or licensed to the Company or any Subsidiary or with respect to which the Company or any Subsidiary is authorized or granted rights under or to.

Purpose” has the meaning set forth in Section 9.1.

Qualified Capital Stock” of any Person means any Equity Interests of such Person that are not Disqualified Capital Stock.

Quarterly Net Revenues” means, with respect to any Calendar Quarter, the aggregate amount of Net Revenues in the Territory for that Calendar Quarter.

 

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Quarterly Payment Date” means each February 15, May 15, August 15 and November 15 following the end of the first Calendar Quarter after the Initial Closing Date (provided if any such date is not a Business Day, the Quarterly Payment Date shall be the next succeeding Business Day).

Recipient” has the meaning set forth in Section 9.1.

Regulatory Agency” means a Governmental Authority with responsibility for the approval of the marketing and sale of pharmaceuticals or other regulation of pharmaceuticals in any jurisdiction.

Regulatory Approvals” means, collectively, all regulatory approvals, registrations, certificates, authorizations, permits and supplements thereto, as well as associated materials (including the product dossier) pursuant to which the Included Product may be marketed, sold and distributed in a jurisdiction, issued by the appropriate Regulatory Agency.

Regulatory Non-Approval Amount” has the meaning set forth in Section 3.1(a).

Reportable Event” means any of the events set forth in Section 4043(c) of ERISA, other than events for which the thirty-day notice period has been waived.

Responsible Officer” means the chief executive officer, president, chief financial officer, chief operating officer, senior vice president, general counsel, managing director, vice president of finance, treasurer, assistant treasurer or controller of a Company Party and, solely for purposes of the delivery of certificates pursuant to this Agreement, the secretary or any assistant secretary of a Company Party. Any document delivered hereunder that is signed by a Responsible Officer of a Company Party shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of such Company Party and such Responsible Officer shall be conclusively presumed to have acted on behalf of such Company Party.

Restricted Payment” means (a) any dividend or other distribution, direct or indirect, on account of any shares (or equivalent) of any class of Equity Interests of the Company or any of its Subsidiaries, now or hereafter outstanding, (b) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of (i) any shares (or equivalent) of any class of Equity Interests of the Company or any of its Subsidiaries, now or hereafter outstanding or (ii) any call option on any shares (or equivalent) of any class of Equity Interests of the Company or any of its Subsidiaries (irrespective of whether such call option can be cash, net share or physically settled), (c) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of Equity Interests of the Company or any of its Subsidiaries, now or hereafter outstanding and (d) any payment made in cash to the holders of Permitted Debt under the Permitted Debt Facility Documents in excess of the original principal (or notional) amount thereof, interest thereon and any fees due thereunder.

Revenue Interests” means all of the Company’s rights, title and interest in and to, free and clear of any and all Liens, that portion of the Annual Net Revenues of the Company in an amount equal to the Included Product Payment Amount for each Calendar Quarter during the Payment Term.

 

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S&P” means Standard & Poor’s Financial Services LLC, a subsidiary of McGraw-Hill Financial, Inc., and any successor thereto.

Safety Notices” means any recalls, field notifications, market withdrawals, warnings, “dear doctor” letters, investigator notices, safety alerts or other notices of action issued or instigated by the Company, any Subsidiary or any Governmental Authority relating to an alleged lack of safety or regulatory compliance of the Included Products.

Sale and Leaseback Transaction” means, with respect to any Party or any Subsidiary, any arrangement, directly or indirectly, with any Person whereby the Party or such Subsidiary shall sell or transfer any property used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property that it intends to use for substantially the same purpose or purposes as the property being sold or transferred.

Sanction(s)” means any sanction administered or enforced by the United States government (including, without limitation, OFAC), the United Nations Security Council, the European Union, Her Majesty’s Treasury (“HMT”) or other relevant sanctions authority.

SEC” means the Securities and Exchange Commission or any successor agency or authority thereto.

Second Closing Date” has the meaning set forth in Section 2.1(b).

Second Investment Amount” has the meaning set forth in Section 2.1(b).

Securities Account” means a “securities account” (as defined in Article 8 of the Uniform Commercial Code) or other account to or for the credit or account of any Party to which a financial asset is or may be credited in accordance with an agreement under which the Person maintaining the account undertakes to treat the Person for whom the account is maintained as entitled to exercise the rights that comprise the financial asset.

Security Agreement” means the security agreement dated as of the Initial Closing Date executed in favor of the Investor Representative, for the benefit of the Investor, by the Company and each of the Guarantors, as amended or modified from time to time in accordance with the terms hereof.

Set-off” means any set-off, off-set, reduction or similar deduction.

Solvent” or “Solvency” means, with respect to any Person as of a particular date, that on such date (a) such Person is able to pay its debts and other liabilities, contingent obligations and other commitments as they mature in the ordinary course of business, (b) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay as such debts and liabilities mature in their ordinary course, (c) such Person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such Person’s property would constitute unreasonably small capital after

 

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giving due consideration to the prevailing practice in the industry in which such Person is engaged or is to engage, (d) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person and (e) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that would become an actual or matured liability.

Special Maturity Payment Amount” means the amount calculated in accordance with Exhibit I.

Special Termination Amount” means the amount calculated in accordance with Exhibit E.

Special Termination Event” has the meaning set forth in Exhibit E.

Subsequent Closing Date” has the meaning set forth in Section 8.1(b).

Subsequent Closing” has the meaning set forth in Section 8.1(b).

Subsidiary” means with respect to any Person (a) any entity as to which such Person directly or indirectly owns outstanding voting securities with power to vote fifty percent (50%) or more of the outstanding Voting Stock of such entity or (b) any entity as to which fifty percent (50%) or more of its outstanding Voting Stock are directly or indirectly owned, controlled or held by such Person with power to vote such securities. As of the Effective Date, the Subsidiaries of the Company are set forth on Schedule 4.20.

Tax” or “Taxes” means any U.S. federal, state, local or non-U.S. tax, levy, impost, duty, assessment or withholding or other similar fee, deduction or charge, including all excise, sales, use, value added, transfer, stamp, documentary, filing, recordation and other fees imposed by any taxing authority (and interest, fines, penalties and additions related thereto).

Territory” means worldwide.

Third Closing Date” has the meaning set forth in Section 2.1(c).

Third Investment Amount” has the meaning set forth in Section 2.1(c).

Third Party” means any Person other than (a) the Company, (b) the Investor or (c) an Affiliate of either the Company or the Investor (as applicable).

Third Party Claim” means any claim, action, suit or proceeding by a Third Party, excluding any lender, officer, directors, employee or agent or other representative of a Party, including any investigation by any Governmental Authority.

TPE Technology” means the Transient Permeability Enhancer technology platform.

 

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Trade Secrets” means any data or information that is not commonly known by or available to the public, and which (a) derives economic value, actual or potential, from not being generally known to and not being readily ascertainable by proper means by other Persons who can obtain economic value from its disclosure or use, (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy, and (c) which are owned by or licensed to the Company or any Subsidiary or with respect to which the Company or any Subsidiary is authorized or granted rights under or to.

Trademark License” means any agreement, written or oral, providing for the grant of any right to use any Trademark.

Trademark Office” means the applicable trademark office, including the United States Patent and Trademark Office and any comparable foreign trademark office, for any Trademarks.

Trademarks” means all statutory and common-law trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and the goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications to register in connection therewith, under the Laws of the United States, any state thereof or any other country or any political subdivision thereof, or otherwise, for the full term and all renewals thereof, which are owned by or licensed to the Company or any Subsidiary or with respect to which the Company or any Subsidiary is authorized or granted rights under or to.

Transaction Documents” means this Agreement, the Security Agreement, the Guaranty, the Deposit Agreements and each Instruction to Payors.

Treasury Management Arrangement” means any agreement or other arrangement governing the provision of treasury or cash management services, including Deposit Accounts, netting services, overdraft, credit or debit card, funds transfer, automated clearinghouse, zero balance accounts, returned check concentration, controlled disbursement, lockbox, account reconciliation and reporting, direct debit, cash concentration, trade finance services and other cash management services.

U.S.” or “United States” means the United States of America, its 50 states, each territory and possession thereof and the District of Columbia.

UCC” means the Uniform Commercial Code as in effect from time to time in New York; provided, that, if, with respect to any financing statement or by reason of any provisions of Applicable Law, the perfection or the effect of perfection or non-perfection of the back-up security interest or any portion thereof granted pursuant to the Security Agreement is governed by the Uniform Commercial Code as in effect in a jurisdiction of the United States other than New York, then “UCC” means the Uniform Commercial Code as in effect from time to time in such other jurisdiction for purposes of the provisions of this Agreement and any financing statement relating to such perfection or effect of perfection or non-perfection.

Under Performance Payments” has the meaning set forth in Section 3.1(b).

 

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Unused Amounts” has the meaning set forth in Section 7.7(k).

Voting Stock” means, with respect to any Person, Equity Interests issued by such Person the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even though the right so to vote has been suspended by the happening of such a contingency.

Website Agreements” means all agreements between the Company and/or any Subsidiary and any other Person pursuant to which such Person provides any services relating to the hosting, design, operation, management or maintenance of any Website, including without limitation, all agreements with any Person providing website hosting, database management or maintenance or disaster recovery services to the Company and/or any Subsidiary and all agreements with any domain name registrar, as all such agreements may be amended, supplemented or otherwise modified from time to time.

Websites” means all websites that the Company or any Subsidiary shall operate, manage or control through a Domain Name, whether on an exclusive basis or a nonexclusive basis, including, without limitation, all content, elements, data, information, materials, hypertext markup language (HTML), software and code, works of authorship, textual works, visual works, aural works, audiovisual works and functionality embodied in, published or available through each such website and all IP Rights in each of the foregoing.

Work” means any work or subject matter that is subject to protection pursuant to Title 17 of the United States Code.

Section 1.2 Rules of Construction. Unless the context otherwise requires, in this Agreement:

(a) An accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP.

(b) Words of the masculine, feminine or neuter gender shall mean and include the correlative words of other genders.

(c) The definitions of terms shall apply equally to the singular and plural forms of the terms defined.

(d) The terms “include”, “including” and similar terms shall be construed as if followed by the phrase “without limitation”.

(e) Unless otherwise specified, references to an agreement or other document include references to such agreement or document as from time to time amended, restated, reformed, supplemented or otherwise modified in accordance with the terms thereof (subject to any restrictions on such amendments, restatements, reformations, supplements or modifications set forth herein or in any of the other Transaction Documents) and include any annexes, exhibits and schedules attached thereto.

 

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(f) References to any Applicable Law shall include such Applicable Law as from time to time in effect, including any amendment, modification, codification, replacement or reenactment thereof or any substitution therefor.

(g) References to any Person shall be construed to include such Person’s successors and permitted assigns (subject to any restrictions on assignment, transfer or delegation set forth herein or in any of the other Transaction Documents), and any reference to a Person in a particular capacity excludes such Person in other capacities.

(h) The word “will” shall be construed to have the same meaning and effect as the word “shall”.

(i) The words “hereof”, “herein”, “hereunder” and similar terms when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision hereof, and Article, Section and Exhibit references herein are references to Articles and Sections of, and Exhibits to, this Agreement unless otherwise specified.

(j) In the computation of a period of time from a specified date to a later specified date, the word “from” means “from and including” and each of the words “to” and “until” means “to but excluding”.

(k) Where any payment is to be made, any funds are to be applied or any calculation is to be made under this Agreement on a day that is not a Business Day, unless this Agreement otherwise provides, such payment shall be made, such funds shall be applied and such calculation shall be made on the succeeding Business Day, and payments shall be adjusted accordingly.

(l) Unless otherwise specified, references to an agreement or other document include references to such agreement or document as from time to time amended, restated, reformed, supplemented or otherwise modified in accordance with the terms thereof (subject to any restrictions on such amendments, restatements, reformations, supplements or modifications set forth herein or in any of the other Transaction Documents) and include any annexes, exhibits and schedules attached thereto.

ARTICLE II

REVENUE INTEREST FINANCING

Section 2.1 Investment Amount. Subject to the terms and conditions set forth herein, the Investor shall pay (or cause to be paid) to the Company, or the Company’s designee, the following:

(a) on the Initial Closing Date, subject to satisfaction of the conditions set forth in Section 8.3(a), the sum of twenty-five million Dollars ($25,000,000) (the “First Investment Amount”), in immediately available funds by wire transfer to an account designated in writing by the Company to the Investor Representative prior to the Initial Closing;

 

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(b) on the Subsequent Closing Date following the Initial Closing (the “Second Closing Date”), subject to the satisfaction of the conditions set forth in Section 8.2, the sum of twenty-five million Dollars ($25,000,000) (the “Second Investment Amount”), in immediately available funds by wire transfer to an account designated in writing by the Company to the Investor Representative prior to the Second Closing Date. The term “Investment Amount” shall thereafter be deemed amended to include the funds paid on the Second Closing Date (i.e., an aggregate of fifty million Dollars ($50,000,000));

(c) on the Subsequent Closing Date following the Second Closing Date (the “Third Closing Date”), subject to the satisfaction of the conditions set forth in Section 8.2, the sum of fifteen million Dollars ($15,000,000) (the “Third Investment Amount”), in immediately available funds by wire transfer to an account designated in writing by the Company to the Investor Representative prior to the Third Closing Date. The term “Investment Amount” shall thereafter be deemed amended to include the funds paid on the Third Closing Date (i.e., an aggregate of sixty-five million Dollars ($65,000,000))

(d) on the Subsequent Closing Date following the Third Closing Date (the “Fourth Closing Date”), subject to the satisfaction of the conditions set forth in Section 8.2, the sum of ten million Dollars ($10,000,000) (the “Fourth Investment Amount”), in immediately available funds by wire transfer to an account designated in writing by the Company to the Investor Representative prior to the Fourth Closing Date. The term “Investment Amount” shall thereafter be deemed amended to include the funds paid on the Fourth Closing Date (i.e., an aggregate of seventy-five million Dollars ($75,000,000)); and

(e) In connection with the funding of the First Investment Amount on the Initial Closing Date, the Investor shall have the right to, at its option, fund the amount due under Section 2.1(a), on a net basis less the reimbursement owed by the Company pursuant to Section 8.3(a)(vi).

Section 2.2 No Assumed Obligations. Notwithstanding any provision in this Agreement or any other writing to the contrary, the Investor is not assuming any liability or obligation of the Company or any of the Company’s Affiliates of whatever nature, whether presently in existence or arising or asserted hereafter. All such liabilities and obligations shall be retained by and remain liabilities and obligations of the Company or the Company’s Affiliates, as the case may be (the “Excluded Liabilities and Obligations”).

Section 2.3 Excluded Assets. The Investor does not, pursuant to any of the Transaction Documents, purchase, acquire or accept any assets or contract rights of the Company, or any other assets of the Company, other than its rights with respect to the Revenue Interests and, to the extent provided in the Transaction Documents, the Collateral. The Company has sole authority and responsibility for the research, development and Commercialization of Included Product.

 

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ARTICLE III

PAYMENTS ON ACCOUNT OF THE REVENUE INTEREST FINANCING

Section 3.1 Payments on Account of the Revenue Interest Financing.

(a) In consideration of the Investor paying the First Investment Amount and the Second Investment Amount hereunder, the Company shall pay the Revenue Interests to the Investor Representative as follows: On each Quarterly Payment Date, the Company shall pay the Revenue Interests to the Investor Representative for such Quarterly Payment Date until the earlier of (i) the date on which the Investor Representative has received payments equal to the Hard Cap or (ii) the Outside Maturity Date. Notwithstanding the foregoing, in the event that the conditions set forth on Exhibit B have not been satisfied on or prior to the date that is the one-year anniversary of the Initial Closing Date, the Company shall pay to the Investor Representative, within fifteen (15) days following delivery by the Investor Representative to the Company of a written notice that the Investor Representative does not intend to waive the conditions set forth on Exhibit B, an amount in U.S. Dollars equal to the sum of (A) one hundred-thirteen and one-half percent (113.5%) of the Investment Amount and (B) any Obligations (other than with respect to the Hard Cap) then accrued and outstanding ((A) and (B) together, the “Regulatory Non-Approval Amount”), following the payment of which (i) the Company shall have no further obligations to the Investor Representative with respect to the Revenue Interests (other than in respect of its indemnification obligations under this Agreement or any Transaction Document, which shall survive termination of this Agreement under this Section 3.1(a)), and the Investor Representative will not be entitled to any additional payments in respect of Revenue Interests (other than payments which are or may become payable pursuant to the Company’s indemnification obligations under this Agreement or any Transaction Document) and (ii) the Transaction Documents shall terminate. If (A) the Investor Representative has not received payments equal to the Hard Cap by the Outside Maturity Date (after giving effect to any payments made on the Outside Maturity Date) and (B) no Special Termination Event, Default or Event of Default has occurred or is continuing, the Company shall pay the Special Maturity Payment Amount to the Investor Representative within five (5) Business Days following the Outside Maturity Date. The Company shall have the right, at any time and from time to time, to make voluntary prepayments to the Investor Representative, and such payments shall be credited against the Hard Cap and the Under Performance Payments set forth in Section 3.1(b). Subject to Section 3.1(c) and this Section 3.1(a), this Agreement shall be in full force and effect until the Hard Cap and all other Obligations of the Company have been paid in full.

 

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(b) If the Investor Representative has not received cumulative Revenue Interest payments equal to the minimum multiple of the Investment Amount set forth below, during the period commencing on the Initial Closing Date and ending on the first Quarterly Payment Date immediately following the reference date set forth below, the Company shall, within two (2) Business Days following such Quarterly Payment Date, make a cash payment to the Investor Representative equal to the applicable minimum multiple of the Investment Amount less the cumulative Revenue Interest payments previously paid to the Investor Representative (including any Under Performance Payment) such that the Investor Representative shall be “grossed up” to such minimum amount (the “Under Performance Payments”):

 

Minimum Multiple

   Reference Date  

0.60x

     September 30, 2023  

1.00x

     September 30, 2024  

(c) Upon the occurrence of a Change of Control (or, at the Company’s option, immediately prior to the occurrence of a Change of Control), the Company shall immediately pay to the Investor Representative the Final Payment Amount and all of the other Obligations owed by the Company under this Agreement and other Transaction Documents, following the payment of which (i) the Company shall have no further obligations to the Investor Representative with respect to the Revenue Interests (other than in respect of its indemnification obligations under this Agreement or any Transaction Document, which shall survive termination of this Agreement under this Section 3.1(c)), and Investor Representative will not be entitled to any additional payments in respect of Revenue Interests (other than payments which are or may become payable pursuant to the Company’s indemnification obligations under this Agreement or any Transaction Document) and (ii) the Transaction Documents shall terminate; provided, however, that solely for purposes of calculating the Final Payment Amount payable by the Company to the Investor Representative pursuant to this Section 3.1(c):

(A) if the Change of Control occurs [***];

(B) if the Change of Control occurs [***]; and

(C) if the Change of Control occurs [***].

(d) If a Special Termination Event has occurred and is continuing, the Investor Representative may, in its sole discretion, terminate this Agreement and notify the Company of its election to terminate this Agreement. In consideration for such termination, the Company shall pay the Special Termination Amount and any other accrued and unpaid Obligations (other than with respect to the Hard Cap) to the Investor Representative within, in the case of clause (i) of the definition of Special Termination Event, [***] ([***]) days, and, in the case of clause (ii) of the definition of Special Termination Event, [***] ([***]) days, in each case, after receipt of such notice of the election to terminate this Agreement. The remedy set forth in this Section 3.1(d) shall be the Investor’s and the Investor Representative’s sole and exclusive remedy in the event of a Special Termination Event; provided, however, that (i) the

 

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Company’s indemnification obligations under this Agreement or any Transaction Document shall survive termination of this Agreement under this Section 3.1(d), and (ii) to the extent the Special Termination Amount is not paid as aforesaid in full within such applicable period, for the avoidance of doubt, the failure to make such payment shall constitute an Event of Default under Section 11.1(a)(ii).

(e) Once the Investor Representative has received payments equal to the Hard Cap and all of the other Obligations (other than with respect to the Hard Cap) owed by the Company and outstanding under this Agreement and other Transaction Documents, (i) the Company shall have no further obligations to the Investor Representative with respect to the Revenue Interests (other than in respect of its indemnification obligations under this Agreement or any Transaction Document, which shall survive termination of this Agreement under this Section 3.1(e)), and the Investor Representative will not be entitled to any additional payments in respect of Revenue Interests (other than payments which are or may become payable pursuant to the Company’s indemnification obligations under this Agreement or any Transaction Document) and (ii) the Transaction Documents shall terminate. Immediately upon termination of this Agreement pursuant to Section 3.1(a), (c), (d) or (e), (A) all Liens on the Collateral granted to the Investor Representative pursuant to this Agreement and the other Transaction Documents shall automatically be released, without the delivery of any instrument or performance of any act by any Person, (B) the Company shall be permitted, and is hereby authorized to terminate any financing statement which has been filed pursuant to the Transaction Documents, and (C) the Investor and the Investor Representative shall execute and deliver to, or at the direction of, the Company, at the Company’s sole cost and expense, all other releases and other documents as the Company shall reasonably request to evidence any such release.

(f) All Revenue Interests and any other Obligations required to be paid but not paid to the Investor on each Quarterly Payment Date shall bear interest at a rate of one percent (1.0%) per month from the due date until paid in full or, if less, the maximum interest rate permitted by Applicable Law. In addition, in the event that an Event of Default has occurred, and for so long as it is occurring, interest shall accrue on the Final Payment Amount that remains unpaid at a rate of one percent (1.0%) per month from the date on which Company receives notice from the Investor Representative of such Event of Default until the Final Payment Amount is paid in full or, if less, the maximum interest rate permitted by Applicable Law. Any such overdue payment shall, when made, be accompanied by, and credited first to, all interest so accrued.

(g) The Company shall deposit all amounts payable by the Company to the Investor Representative under this Agreement into the Investor Account, unless otherwise instructed by the Investor Representative.

(h) For all purposes of this Section 3.1, the amount of payments deemed received by the Investor shall (i) include any additional amounts payable to the Investor pursuant to Section 6.21(c)(3) (“Additional Amounts”) and (ii) be computed net of any applicable tax withholding (including any tax withholding in respect of any Additional Amounts), other than any withholding in respect of Excluded Taxes.

 

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(i) Notwithstanding anything to the contrary, if the Revenue Interests shall remain outstanding after the fifth (5th) anniversary of the Initial Closing Date, then the Company shall prepay to the Investor Representative on the first Quarterly Payment Date following the fifth (5th) anniversary of the Initial Closing Date and on each applicable Quarterly Payment Date thereafter that portion of the outstanding Obligations necessary to prevent the Obligations from constituting “applicable high yield discount obligations” within the meaning of Section 163(i) of the Code, and any such payments made shall, subject to Section 3.1(h), be fully creditable against the Hard Cap and any Underperformance Payment.

Section 3.2 Collection Account; Collection Account Management.

(a) On or prior to the date that is thirty (30) Business Days following the Initial Closing Date, the Company shall establish with the Depositary Bank the Collection Account and enter into the Collection Account Deposit Agreement. The Company shall deliver instructions to all Licensees and account debtors (the “Instruction to Payors”) with respect to any proceeds arising from sales of Mycapssa by the Company or its Subsidiaries in the United States and any Other Royalty Payments relating to Mycapssa (which instruction shall be in form and substance reasonably satisfactory to the Investor Representative and identify the Investor as having a right to a receive a portion of such amounts, and a copy of which shall be delivered to the Investor Representative promptly following delivery to such Licensee or account debtor) to remit such proceeds and Other Royalty Payments to the Collection Account, to the extent the Instruction to Payors was not sent to such Licensees and account debtors on or prior to the Initial Closing Date. To the extent any such proceeds are paid directly to the Company, the Company shall remit to the Collection Account all such amounts within fifteen (15) Business Days of its Knowledge of such receipt of any such funds.

(b) With respect to any amounts that are deposited into the Collection Account on any day, so long as no Default or Event of Default has occurred and is continuing, (A) a minimum of 12.25% of such amounts shall remain in the Collection Account until the Quarterly Payment Date immediately following the date of such deposit and may not be transferred to the Company Account, except as otherwise permitted by this Section 3.2(b), and (B) any remaining amounts may be disbursed to the Company Account from time to time at the direction of the Company; provided that if the aggregate of funds to be retained in the Collection Account pursuant to clause (A) exceeds $6,000,000 on any date, such amount in excess of $6,000,000 may be disbursed to the Company Account at the direction of the Company on or after such date. The Company shall provide the Depositary Bank notice no more frequently than daily of such amount to be disbursed to the Company Account pursuant to this Section 3.2(b). During the Payment Term, on each Quarterly Payment Date, the Company shall instruct the Depositary Bank to disburse to the Investor Account an amount equal to the lesser of (x) the funds on deposit in the Collection Account and (y) the Revenue Interests for such Quarterly Payment Date. If the amount to be disbursed to the Investor Account on any Quarterly Payment Date pursuant to the preceding sentence is less than the Revenue Interests to which the Investor is entitled for the relevant Calendar Quarter, the Company shall pay the amount of such shortfall to the Investor Representative on such Quarterly Payment Date. If the amount of funds on deposit in the Collection Account on any Quarterly Payment Date exceeds the Revenue Interests for such Quarterly Payment Date, such excess amount may be transferred to the Company Account at the direction of the Company.

 

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(c) If a Default or Event of Default has occurred and is continuing, no funds in the Collection Account shall be transferred to the Company Account, and the Investor Representative shall have the right to exercise all of its rights and remedies under Article XI, including, without limitation, directing the Depositary Bank to transfer all of the funds in the Collection Account to the Investor Representative until all of the Obligations owed by the Company under this Agreement and other Transaction Documents and then outstanding have been paid in full.

(d) During the Payment Term, the Company shall have no right to terminate the Collection Account without the Investor Representative’s prior written consent; provided that, without the Investor Representative’s consent to the change of location of such accounts (provided such location is in the United States), the Company shall have the right from time to time to establish a replacement Collection Account with a replacement Depositary Bank, provided that such replacement Depositary Bank first enter into a Deposit Agreement with respect to such replacement accounts effective no later than the date of replacement. For purposes of this Agreement, any reference to the “Collection Account”, “Depositary Bank” or “Deposit Agreement” shall refer to such replacement Collection Account, Depositary Bank or Deposit Agreement, as the context requires.

Section 3.3 Mode of Payment/Currency Exchange. All payments made by a Party hereunder shall be made by deposit of U.S. Dollars by wire transfer in immediately available funds into the applicable account. With respect to sales outside the U.S., for the purpose of calculating Net Revenues for the purposes of determining the Revenue Interests payable under Section 3.1, Net Revenues shall be calculated, if pursuant to a License Agreement, in the currency set forth therein, or otherwise in the currency of sale, and then such amounts shall be converted into U.S. Dollars at the monthly rate of exchange utilized by the Company, in accordance with GAAP, fairly applied and as employed on a consistent basis throughout the Company’s operations. Should the Company change its foreign currency translation methodology, the new methodology will be disclosed in writing to the Investor Representative prior to its implementation. For clarity, to the extent that the Company receives a payment from a Third Party in U.S. Dollars on which Revenue Interests are payable to Investor Representative under Section 3.1, the foregoing currency exchange rates shall not apply to such amount, and in particular the Company will have no obligation to re-calculate any currency conversion that was employed in connection with such Third Party payment.

Section 3.4 Included Product Payment Reports and Records Retention. On or prior to each Quarterly Payment Date, the Company shall deliver to the Investor Representative a written report of the amount of gross sales of the Included Product in each country during the applicable Calendar Quarter, an itemized calculation of Net Revenues and Other Royalty Payments on a country-by-country basis and a calculation of the amount of the Revenue Interests due under Section 3.1(a) in respect of the applicable Calendar Quarter, showing the Applicable Tiered Percentage applied thereto and a calculation of the Under Performance Payment (if any) pursuant to Section 3.1(b). For three (3) years after each sale of the Included Product made by the Company or any of its Affiliates, the Company shall keep (and shall ensure that its Affiliates shall keep) complete and accurate records of such sale in sufficient detail to confirm the accuracy of the applicable Revenue Interests paid pursuant to Section 3.1(a). The Company shall use commercially reasonable efforts to include, in each contract of

 

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the Company for the distribution, marketing or selling of Mycapssa entered into on or after the Initial Closing Date, obligations reasonably appropriate to ensure that the counterparty to such contract shall furnish to the Company all information necessary for the Company to comply with this Section 3.4 and calculate the Revenue Interests that are payable as set forth in this Agreement.

Section 3.5 Audits.

(a) Upon the written request of the Investor Representative, and not more than once in each Calendar Year (so long as no Special Termination Event, Default or Event of Default has occurred and is continuing), the Company shall permit an independent certified public accounting firm of national prominence selected by the Investor Representative, and reasonably acceptable to the Company, to have access to and to review, during normal business hours and upon not less than thirty (30) days’ prior written notice, the relevant documents and records of the Company and its Subsidiaries as may reasonably be necessary to verify the accuracy and timeliness of the reports and payments (including calculation and payment of any Revenue Interest) made by the Company under this Agreement. Such review may cover the records for sales or other dispositions of the Included Product, Net Revenues, Other Royalty Payments and the aggregate amount of deposits into the Collection Account in any Calendar Year ending no earlier than the first day of the previous Calendar Year. The accounting firm shall be permitted to prepare and disclose to the Investor Representative a written report stating only whether Revenue Interests paid to the Investor Representative hereunder and the reports provided by the Company relating to such Revenue Interests required hereunder are correct or incorrect and the specific details concerning any discrepancies. Notwithstanding the foregoing, after the occurrence and during the continuance of a Special Termination Event, Default or Event of Default, the Investor Representative shall have the right, as often, at such times and with such prior notice, as the Investor shall determine, in its reasonable discretion, to have an independent certified public accounting firm of national prominence selected by the Investor Representative review the relevant documents and records of the Company and its Subsidiaries.

(b) If such accounting firm reasonably concludes that any Revenue Interests were owed and were not paid when due during such period pursuant to the provisions of this Agreement, the Company shall pay any late or unpaid Revenue Interests within [***] days after the date the Investor Representative delivers to the Company a notice including the accounting firm’s written report and requesting such payment. If the amount of the underpayment (exclusive of interest accrued thereon pursuant to Section 3.1(a)) is greater than the lesser of (i) [***] percent ([***]%) of the total amount actually owed for the period audited or (ii) [***] dollars ($[***]), then the Company shall in addition (i) reimburse the Investor Representative for all reasonable costs and fees of the accounting firm related to such audit and (ii) pay interest accrued on such amount of the underpayment at a rate of [***] percent ([***]%) per month from the initial due date until paid in full or, if less, the maximum interest rate permitted by Applicable Law. In the event of overpayment, any amount of such overpayment shall be fully creditable against Revenue Interests payable for the immediately succeeding Calendar Quarter(s). The Investor Representative shall (i) treat all information that it receives under this Section 3.5 or under any License Agreement of the Company in accordance with the provisions of Article IX and (ii) cause its accounting firm to enter into a reasonably acceptable confidentiality agreement with the Company obligating such firm to retain all such information in confidence pursuant to such confidentiality agreement, in each case except to the extent necessary for the Investor Representative to enforce its rights under this Agreement.

 

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ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company hereby represents and warrants to the Investor Representative as of the Effective Date and as of the date of each Closing as follows:

Section 4.1 Organization. The Company is a corporation duly organized, validly existing and in good standing under the Laws of Delaware and has all powers and authority, and all licenses, permits, franchises, authorizations, consents and approvals of all Governmental Authorities, required to own its property and conduct its business as now conducted. The Company is duly qualified to transact business and is in good standing in every jurisdiction in which such qualification or good standing is required by Applicable Law (except where the failure to be so qualified or in good standing would not result in a Material Adverse Effect).

Section 4.2 No Conflicts.

(a) None of the execution and delivery by the Company of any of the Transaction Documents to which the Company is party, the performance by the Company of the obligations contemplated hereby or thereby or the consummation of the transactions contemplated hereby or thereby will: (i) contravene, conflict with, result in a breach, violation, cancellation or termination of, constitute a default (with or without notice or lapse of time, or both) under, require prepayment under, give any Person the right to exercise any remedy (including termination, cancellation or acceleration) or obtain any additional rights under, or accelerate the maturity or performance of or payment under, in any respect, (A) any Applicable Law or any judgment, order, writ, decree, permit or license of any Governmental Authority to which the Company or any of its Subsidiaries or any of their respective assets or properties may be subject or bound, (B) any term or provision of any contract, agreement, indenture, lease, license, deed, commitment, obligation or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of their respective assets or properties is bound or committed or (C) any term or provision of any of the organizational documents of the Company or any of its Subsidiaries, except in the case of clause (A) or (B) where any such event would not result in a Material Adverse Effect; or (ii) except as provided in any of the Transaction Documents to which it is party, result in or require the creation or imposition of any Lien on the Collateral or any assets of any Pledged Subsidiary relating to Mycapssa (other than Permitted Liens).

(b) The Company has not granted, nor does there exist, any Lien on the Transaction Documents or the Collateral (other than Permitted Liens).

 

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Section 4.3 Authorization. The Company has all powers and authority to execute and deliver, and perform its obligations under, the Transaction Documents to which it is party and to consummate the transactions contemplated hereby and thereby. The execution and delivery of each of the Transaction Documents to which the Company is party and the performance by the Company of its obligations hereunder and thereunder have been duly authorized by the Company. Each of the Transaction Documents to which the Company is party has been duly executed and delivered by the Company. Each of the Transaction Documents to which the Company is party constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting creditors’ rights generally, general equitable principles and principles of public policy.

Section 4.4 Ownership. The Grantors are the exclusive owners of the entire right, title (legal and equitable) and interest in, to and under the Collateral, free and clear of all Liens, other than Permitted Liens, and the Pledged Subsidiaries own their respective assets relating to Mycapssa, free and clear of all Liens, other than Permitted Liens. The Revenue Interests sold, assigned, transferred, conveyed and granted to the Investor on the Closing Date and the other Collateral have not been pledged, sold, assigned, transferred, conveyed or granted by the Company to any other Person. The Company has full right to sell, assign, transfer, convey and grant the Revenue Interests to the Investor. Upon the sale, assignment, transfer, conveyance and granting by the Company of the Revenue Interests to the Investor Representative, the Investor shall acquire good and marketable title to the Revenue Interests free and clear of all Liens, other than Permitted Liens, and shall be the exclusive owner of the Revenue Interests. The Company has not caused, and to the Knowledge of the Company no other Person has caused, the claims and rights of Investor created by any Transaction Document in and to the Revenue Interests, the Collateral and the assets of the Pledged Subsidiaries relating to Mycapssa, in each case, to be subordinated to any creditor or any other Person.

Section 4.5 Governmental and Third Party Authorizations. The execution and delivery by the Company of the Transaction Documents to which the Company is party, the performance by the Company of its obligations hereunder and thereunder and the consummation of any of the transactions contemplated hereunder and thereunder (including the sale, assignment, transfer, conveyance and granting of the Revenue Interests to the Investor) do not require any consent, approval, license, order, authorization or declaration from, notice to, action or registration by or filing with any Governmental Authority or any other Person, except for applicable filings under U.S. securities laws, the filing of UCC financing statements and those previously obtained or made or to be obtained or made on the Closing Date.

Section 4.6 No Litigation. Except as set forth on Schedule 4.6, there is no action, suit, arbitration proceeding, claim, citation, summons, subpoena, investigation or other proceeding (whether civil, criminal, administrative, regulatory, investigative or informal, and including by or before a Governmental Authority) pending or, to the Knowledge of the Company, threatened by or against the Company or any of its Subsidiaries, at law or in equity, that (i) if adversely determined, would result in a Material Adverse Effect, or (ii) challenges or seeks to prevent or delay the consummation of any of the transactions contemplated by any of the Transaction Documents to which the Company is party.

 

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Section 4.7 Solvency. The Company has determined that, and by virtue of its entering into the transactions contemplated by the Transaction Documents to which the Company is party and its authorization, execution and delivery of the Transaction Documents to which the Company is party, the Company’s incurrence of any liability hereunder or thereunder or contemplated hereby or thereby is in its own best interests. Upon consummation of the transactions contemplated by the Transaction Documents and the application of the proceeds therefrom, (a) the fair saleable value of the Company’s assets will be greater than the sum of its debts, liabilities and other obligations, including known contingent liabilities, (b) the present fair saleable value of the Company’s assets will be greater than the amount that would be required to pay its probable liabilities on its existing debts, liabilities and other obligations, including known contingent liabilities, as they become absolute and matured, (c) the Company will be able to realize upon its assets and pay its debts, liabilities and other obligations, including known contingent obligations, as they mature, (d) the Company will not have unreasonably small capital with which to engage in its business and will not be unable to pay its debts as they mature, (e) the Company has not incurred, will not incur and does not have any present plans or intentions to incur debts or other obligations or liabilities beyond its ability to pay such debts or other obligations or liabilities as they become absolute and matured, (f) the Company will not have become subject to any Bankruptcy Event and (g) the Company will not have been rendered insolvent within the meaning of any Applicable Law. No step has been taken or is intended by the Company or, to its Knowledge, any other Person to make the Company subject to a Bankruptcy Event.

Section 4.8 No Brokers Fees. The Company has not taken any action that would entitle any person or entity to any commission or broker’s fee in connection with the transactions contemplated by this Agreement.

Section 4.9 Compliance with Laws. Except as set forth on Schedule 4.9, none of the Company or any of its Subsidiaries (a) has violated or is in violation of, or, to the Knowledge of the Company, is under investigation with respect to or has been threatened to be charged with or been given notice of any violation of, any Applicable Law or any judgment, order, writ, decree, injunction, stipulation, consent order, permit or license granted, issued or entered by any Governmental Authority or (b) is subject to any judgment, order, writ, decree, injunction, stipulation, consent order, permit or license granted, issued or entered by any Governmental Authority, in each case, that would result in a Material Adverse Effect. Each of the Company and each Subsidiary of the Company is in compliance with the requirements of all Applicable Laws, a breach of any of which would result in a Material Adverse Effect.

Section 4.10 Intellectual Property Matters.

(a) Schedule 4.10 sets forth an accurate and complete list of the Patent Rights included in the Collateral existing as of the Effective Date. For each Patent Right set forth on Schedule 4.10(a) the Company has indicated: (i) the application number; (ii) the patent or registration number, if any; (iii) the country or other jurisdiction where the Patent Right was issued, registered, or filed; (iv) the expected expiration date of any issued Patent Right, including a notation if such expected expiration date includes a term extension or supplementary protection certificate; and (v) the registered owner thereof.

 

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(b) The Company (or the Company Party indicated on Schedule 4.10(a)) is the sole and exclusive owner of the entire right, title and interest in each of the Patent Rights included in the Collateral, none of which are subject to any encumbrance, lien or claim of ownership by any Third Party other than Permitted Liens and Permitted Licenses, and, to the Knowledge of the Company, there are no facts that would preclude the Company from having unencumbered title to the Patent Rights included in the Collateral. The Company has not received any written notice of any claim by any Third Party challenging the ownership of the rights of the Company Parties in and to the Patent Rights included in the Collateral.

(c) Each Person who has or has had any rights in or to the Patent Rights, including each inventor named on the Patent Rights, has executed a Contract assigning their entire right, title and interest in and to such Patent Rights and the inventions embodied, described and/or claimed therein, to the owner thereof, and each such Contract assigning each inventor’s right in such Patent Right has been duly recorded at the United States Patent and Trademark Office.

(d) To the Knowledge of the Company, no issued Patent Right included in the Collateral has lapsed, expired or otherwise been terminated, other than by operation of law and other than such Patent Rights the Company has abandoned or permitted to lapse or expire in its reasonable business judgement.

(e) To the Knowledge of the Company, there are no past-due maintenance fees, annuities or other like payments with respect to the Patent Rights included in the Collateral.

(f) Each of the Patent Rights correctly identifies each and every inventor of the claims thereof as determined in accordance with the laws of the jurisdiction in which such Patent Right was issued or is pending. To the Knowledge of the Company, there is not any Person who is or claims to be an inventor of any of the Patent Rights included in the Collateral who is not a named inventor thereof. No Company Party has received any written notice from any Person who is or claims to be an inventor of any of the Patent Rights included in the Collateral who is not a named inventor thereof.

(g) There is at least one claim in each of the Patent Rights included in the Collateral that (i) to the Company’s Knowledge, is valid, and (ii) would be infringed by the Company’s or any Subsidiary’s Commercialization or proposed Commercialization of Mycapssa or the TPE Technology but for the Company’s and the Subsidiaries’ rights in the Patent Rights. To the Knowledge of the Company, each claim that has been issued or granted by the appropriate Patent Office and included in the Patent Rights included in the Collateral and that would be infringed by the manufacture, use or sale of Mycapssa is valid and enforceable. The Company has not received any opinion of counsel that any of the Patent Rights included in the Collateral is invalid or unenforceable. The Company has not received any written notice of any claim by any Third Party challenging the validity or enforceability of any of the Patent Rights included in the Collateral. To the Knowledge of the Company, except for information disclosed to the applicable Patent Office during prosecution of the Patent Rights, there are no patents, published patent applications, articles, abstracts or other prior art deemed material to patentability of any of the inventions claimed in such Patent Rights, or that would otherwise reasonably be expected to materially adversely affect the validity or enforceability of any of the claims of such Patent Rights.

 

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(h) To the Knowledge of the Company, each individual associated with the filing and prosecution of the Patent Rights included in the Collateral, including the named inventors of such Patent Rights included in the Collateral, has complied in all material respects with all applicable duties of candor and good faith in dealing with any Patent Office, including any duty to disclose to any Patent Office all information known by such individual to be material to the patentability of each such Patent Right, in those jurisdictions where such duties exist.

(i) There is no pending or, to the Knowledge of the Company, threatened in writing opposition, interference, reexamination, injunction, claim, suit, action, citation, summons, subpoena, hearing, inquiry, investigation (by the International Trade Commission or otherwise), complaint, arbitration, mediation, demand, decree or other dispute, disagreement, proceeding, claim or inter partes review (other than standard patent prosecution before a Patent Office) (collectively, “Disputes”) challenging the legality, validity, enforceability or the Company’s ownership of any of the Patent Rights included in the Collateral or that would result in any Set-off against the payments due to the Investor Representative under this Agreement. To the Knowledge of the Company, there are no Disputes by or with any Third Party against the Company involving the Included Product. The Patent Rights included in the Collateral are not subject to any outstanding injunction, judgment, order, decree, ruling, change, settlement or other disposition of a Dispute.

(j) Except as separately disclosed to Investor Representative, there is no pending or, to the Company’s Knowledge, threatened, and, to the Company’s Knowledge, no event has occurred or circumstance exists that (with or without notice or lapse of time, or both) would result in or serve as a basis for any, action, suit or proceeding, or any investigation or claim, and the Company has not received any written notice of the foregoing, that claims that the manufacture, use, marketing, sale, offer for sale, importation or distribution of the Included Product as currently contemplated infringes on any Patent or other intellectual property rights of any other Person or constitutes misappropriation of any other Person’s trade secrets or other intellectual property rights.

(k) To the Knowledge of the Company, none of the conception, development and reduction to practice of the inventions claimed in the Patent Rights included in the Collateral has constituted or involved the misappropriation of trade secrets or other rights or property of any Third Party.

(l) To the Knowledge of the Company, no Third Party Patent has been, or is, or would be infringed by the Company’s Commercialization, or proposed Commercialization, of the Included Products as currently contemplated. To the Knowledge of the Company, no Patent other than the Patent Rights would limit or prohibit in any material respect the Company’s Commercialization, or proposed Commercialization, of any Included Product. The Company has not received any written notice of any claim by any Third Party asserting that the Company’s Commercialization of any Included Product infringes such Third Party’s Patents. The Company has not received any opinion of counsel regarding infringement or non-infringement of any Third Party Patent by the Company’s Commercialization of any Included Product or the proposed Commercialization of any Included Product as currently contemplated..

 

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(m) To the Knowledge of the Company, there are no pending, published patent applications owned by any Third Party, which the Company Parties do not have the right to use, which if issued, would limit or prohibit in any material respect the Company’s Parties’ Commercialization of any Included Product.

(n) To the Knowledge of the Company, no Third Party is infringing any of the issued Patent Rights included in the Collateral such that a Material Adverse Effect would result.

(o) Except as set forth on Schedule 4.10(m), there are no Copyrights or Trademarks material to the Company Parties’ Commercialization of any Included Product.

Section 4.11 Margin Stock. The Company is not engaged in the business of extending credit for the purpose of buying or carrying margin stock, and no portion of the Investment Amount shall be used by the Company for a purpose that violates Regulation T, U or X promulgated by the Board of Governors of the Federal Reserve System from time to time.

Section 4.12 Material Contracts.

(a) Schedule 4.12(a) hereto contains a list of the Material Contracts as of the date hereof. As of the date hereof, the Company has provided a true and complete copy of each of the Material Contracts to the Investor Representative.

(b) Except as separately disclosed in writing to Investor Representative referencing this Section 4.12(b), neither the Company nor any Material Contract Counterparty is in breach or default of any Material Contract and no circumstances or grounds exist that would, upon the giving of notice, the passage of time or both, give rise (i) to a claim by the Company or any Material Contract Counterparty of a breach or default of any Material Contract, or (ii) to a right of rescission, termination, revision, setoff, or any other rights, by any Person, in, to or under any Material Contract. The Company has not received from, or delivered to, any Material Contract Counterparty, any written notice alleging a breach or default under any Material Contract, which breach or default has not been cured as of the Closing Date.

(c) Each Material Contract is a valid and binding obligation of the Company and, to the Knowledge of the Company, of the applicable Material Contract Counterparty, enforceable against each of the Company and, to the Knowledge of the Company, each applicable Material Contract Counterparty in accordance with its terms, except as may be limited by general principles of equity (regardless of whether considered in a proceeding at law or in equity) and by applicable bankruptcy, insolvency, moratorium and other similar laws of general application relating to or affecting creditors’ rights generally. The Company has not received any notice from any Material Contract Counterparty or any other Person challenging the validity or enforceability of any Material Contract. Neither the Company, nor to the Knowledge of the Company, any other Person, has delivered or intends to deliver any written notice to the Company or a Material Contract Counterparty challenging the validity or enforceability of any Material Contract.

Section 4.13 Bankruptcy. Neither the Company nor, to the Knowledge of the Company, any Material Contract Counterparty is contemplating or planning to commence any case, proceeding or other action relating to such Material Contract Counterparty’s bankruptcy, insolvency, liquidation or dissolution or reorganization.

 

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Section 4.14 Office Locations; Names.

(a) The chief place of business, the chief executive office and each office where each Grantor keeps its records regarding the Collateral are, as of the date hereof, each located at 140 Kendrick Street, Building C East, Needham, Massachusetts 02494.

(b) No Company Party (or any predecessor by merger or otherwise) has, within the five (5) year period preceding the date hereof, had a name that differs from its name as of the date hereof.

Section 4.15 Permitted Debt. There is no Indebtedness incurred by the Company or any of its Subsidiaries other than the Permitted Debt. Schedule 4.15(a) hereto lists all of the Permitted Debt Facility Documents as of the date hereof, and true, complete and correct copies of the Permitted Debt Facility Documents have been provided to the Investor Representative as of the date hereof. There is no default or event of default under the Permitted Debt Facility Documents.

Section 4.16 Financial Statements; No Material Adverse Effect.

(a) The Audited Financial Statements (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, (ii) fairly present in all material respects the financial condition of the Company and its Subsidiaries as of the date thereof and their results of operations for the period covered thereby in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, and (iii) show all material Indebtedness and other liabilities, direct or contingent, of the Company and its Subsidiaries as of the date thereof, including material liabilities for Taxes, commitments and Indebtedness to the extent required by GAAP.

(b) From the date of the Audited Financial Statements to and including the Initial Closing Date, there has been no Disposition by any Company Party or any Subsidiary, or any Involuntary Disposition, of any material part of the business or property of any Company Party or any Subsidiary, and no purchase or other acquisition by any of them of any business or property (including any Equity Interests of any other Person) material to any Company Party or any Subsidiary, in each case, which is not reflected in the foregoing financial statements or in the notes thereto and has not otherwise been disclosed in writing to the Investor on or prior to the Initial Closing Date. Since the date of the Audited Financial Statements, there has been no event or circumstance, either individually or in the aggregate, that has had or would result in a Material Adverse Effect. The Interim Financial Statements (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, (ii) fairly present in all material respects the financial condition of the Company and its Subsidiaries as of the date thereof and their results of operations for the period covered thereby, and (iii) show all material Indebtedness and other liabilities, direct or contingent, of the Company and its Subsidiaries as of the date thereof, including material liabilities for Taxes, material commitments and Indebtedness to the extent required by GAAP, subject, in the case of clauses (i), (ii) and (iii) of this sentence, to the absence of footnotes and to normal year-end audit adjustments.

 

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Section 4.17 No Default; No Special Termination Event.

(a) Neither any Company Party nor any Subsidiary is in default under or with respect to any Contractual Obligation that would result in a Material Adverse Effect.

(b) No Special Termination Event, Default or Event of Default has occurred and is continuing.

Section 4.18 Insurance. The properties of the Company and its Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of such Persons, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where the Company or the applicable Subsidiary operates.

Section 4.19 ERISA Compliance.

(a) Except as would not, individually or in the aggregate, result in a Material Adverse Effect, (i) each Plan is in compliance with the applicable provisions of ERISA, the Internal Revenue Code and other federal or state Laws, and (ii) each Pension Plan that is intended to be a qualified plan under Section 401(a) of the Internal Revenue Code has received a favorable determination letter from the Internal Revenue Service to the effect that the form of such Plan is qualified under Section 401(a) of the Internal Revenue Code, an application for such a letter is currently being processed by the Internal Revenue Service or is entitled to rely on the opinion or advisory letter issued by the Internal Revenue Service to the sponsor of a preapproved plan document and, to the Knowledge of the Company, nothing has occurred that would prevent, or cause the loss of, such tax-qualified status.

(b) There are no pending or, to the Knowledge of the Company, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan that would result in a Material Adverse Effect. The Company has not engaged in any prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan, in any case, that would result in a Material Adverse Effect.

(c) Except as would not result in a Material Adverse Effect, (i) no ERISA Event has occurred with respect to any Pension Plan, (ii) the Company and each ERISA Affiliate has met all applicable requirements under the Pension Funding Rules in respect of each Pension Plan, and no waiver of the minimum funding standards under the Pension Funding Rules has been applied for or obtained, and (iii) neither the Company nor any ERISA Affiliate has incurred any liability to the PBGC other than for the payment of premiums due but not delinquent under Section 4007 of ERISA.

Section 4.20 Subsidiaries. Set forth on Schedule 4.20 is a complete and accurate list as of the date hereof of each Subsidiary of the Company, together with (a) jurisdiction of organization and (b) the percentage of the Equity Interests in such Subsidiary owned by the Company.

 

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Section 4.21 Perfection of Security Interests in the Collateral. The Collateral Documents create valid security interests in, and Liens on, the Collateral purported to be covered thereby to the extent such security interests may be created pursuant to Article 9 of the UCC, which security interests and Liens will be, upon the timely and proper filings, deliveries, notations and other actions contemplated in the Collateral Documents perfected security interests and Liens (to the extent that such security interests and Liens can be perfected by such filings, deliveries, notations and other actions), prior to all other Liens other than Permitted Liens.

Section 4.22 Disclosure. The Company has disclosed to the Investor all agreements, instruments and corporate or other restrictions to which it or any of its Subsidiaries is subject, and all other matters known to it, that, either individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. No report, financial statement, certificate or other information furnished (whether written or oral) by or on behalf of any Company Party to the Investor in connection with the transactions contemplated hereby and the negotiation of this Agreement or delivered hereunder or under any other Transaction Document (in each case, as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any fact necessary to make the statements therein (taken as a whole), in the light of the circumstances under which they were made, not misleading; provided, that, with respect to financial projections, estimates, budgets or other forward-looking information, the Company Parties represent only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time such information was prepared (it being understood that such information is as to future events and is not to be viewed as facts, is subject to significant uncertainties and contingencies, many of which are beyond the control of the Company and its Subsidiaries, that no assurance can be given that any particular projection, estimate, budget or forecast will be realized and that actual results during the period or periods covered by any such projections, estimate, budgets or forecasts may differ significantly from the projected results and such differences may be material).

Section 4.23 Sanctions Concerns; Anti-Corruption Laws; PATRIOT Act.

(a) Sanctions Concerns. No Company nor any Subsidiary, nor, to the Knowledge of the Company, any director, officer, employee, agent, Affiliate or representative thereof, is an individual or entity that is, or is owned or controlled by, any individual or entity that is (i) currently the subject or target of any Sanctions, (ii) included on OFAC’s List of Specially Designated Nationals, HMT’s Consolidated List of Financial Sanctions Targets and the Investment Ban List, or any similar list enforced by any other relevant sanctions authority or (iii) located, organized or resident in a Designated Jurisdiction.

(b) Anti-Corruption Laws. The Company and its Subsidiaries have conducted their business in compliance with the United States Foreign Corrupt Practices Act of 1977, the UK Bribery Act 2010 and other similar anti-corruption legislation in other jurisdictions, and have instituted and maintained policies and procedures designed to promote and achieve compliance with such laws.

(c) PATRIOT Act. To the extent applicable, the Company and each Subsidiary is in compliance, with (i) the Trading with the Enemy Act, as amended, and each of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) and any other enabling legislation or executive order relating thereto and (ii) the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)), as amended from time to time.

 

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Section 4.24 Compliance of Included Products.

(a) The Company and its Subsidiaries possess all Permits, including Regulatory Approvals from the FDA and other Governmental Authorities required for the conduct of their business as currently conducted, except where the failure to so possess would not result in a Material Adverse Effect, and all such Permits are in full force and effect, except where the failure to be in full force and effect would not result in a Material Adverse Effect.

(b) Except as set forth on Schedule 4.24(a), the Company and its Subsidiaries have not received any written communication from any Governmental Authority regarding any failure to materially comply with any Laws, including any terms or requirements of any Regulatory Approval and, to the Knowledge of the Company, there are no facts or circumstances that are reasonably likely to give rise to any revocation, withdrawal, suspension, cancellation, material limitation, termination or adverse modification of any Regulatory Approval, in each case, except for any such event that, individually or in the aggregate, would not have a Material Adverse Effect.

(c) To the Company’s Knowledge, none of the officers, directors, employees or Affiliates of the Company or any Subsidiary or any agent or consultant involved in any Drug Application, has been convicted of any crime or engaged in any conduct for which debarment is authorized by 21 U.S.C. Section 335a nor, to the Company’s Knowledge, are any debarment proceedings or investigations pending or threatened against the Company or any Subsidiary or any of their respective officers, employees or agents.

(d) None of the officers or directors, or, to the Company’s Knowledge, employees or Affiliates of the Company or any Subsidiary or any agent or consultant has, in their capacity as such, (A) made an untrue statement of material fact or fraudulent statement to any Regulatory Agency or failed to disclose a material fact required to be disclosed to a Regulatory Agency; or (B) committed an act, made a statement, or failed to make a statement that would provide a basis for the FDA to invoke its policy respecting “Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities,” set forth in 56 Fed. Regulation 46191 (September 10, 1991).

(e) All applications, notifications, submissions, information, claims, reports and statistics and other data and conclusions derived therefrom, utilized as the basis for or submitted in connection with any and all requests for a Regulatory Approval from the FDA or other Governmental Authority relating to the Company or any Subsidiary, their business operations and Included Products, when submitted to the FDA or other Governmental Authority were true, complete and correct in all material respects as of the date of submission or any necessary or required updates, changes, corrections or modifications to such applications, submissions, information and data have been submitted to the FDA or other Governmental Authority.

 

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(f) Except as set forth on Schedule 4.24(a), all preclinical and clinical trials conducted by or, to the Knowledge of the Company, on behalf of the Company and its Subsidiaries, that have been submitted to any Governmental Authority, including the FDA and its counterparts worldwide, in connection with any request for a Regulatory Approval, are being or have been conducted in compliance in all material respects with the required experimental protocols and Applicable Laws.

(g) All Included Products have, since July 1, 2019, been manufactured, transported, stored and handled in all material respects in accordance with current good manufacturing practices applicable from time to time and Applicable Laws.

(h) Neither the Company nor any Subsidiary has received any written notice that any Governmental Authority, including without limitation the FDA, the Office of the Inspector General of HHS or the United States Department of Justice has commenced or threatened to initiate any action against the Company or a Subsidiary, any action to enjoin the Company or a Subsidiary, its officers, directors, employees, agents and Affiliates, from conducting its business at any facility owned or used by it or for any material civil penalty, injunction, seizure or criminal action that would result in a Material Adverse Effect.

(i) Neither the Company nor any Subsidiary has received from the FDA, since July 1, 2019, a Warning Letter, Form FDA-483, “Untitled Letter,” or similar written correspondence or notice alleging violations of Laws and regulations enforced by the FDA, or any comparable correspondence from any other Governmental Authority with regard to any Included Product or the manufacture, processing, packaging or holding thereof, the subject of which communication is unresolved and if determined adversely to the Company or such Subsidiary would result in a Material Adverse Effect.

(j) Since July 1, 2019, (A) there have been no Safety Notices, (B) to the Company’s Knowledge, there are no unresolved material product complaints with respect to Mycapssa, in each case would result in a Material Adverse Effect, and (C) to the Company’s knowledge, there are no facts that would result in (1) a material Safety Notice with respect to Mycapssa, (2) a material change in the labeling of Mycapssa, or (3) a termination or suspension of marketing of Mycapssa.

(k) The Company has provided to the Investor prior to the date hereof in a data room available to the Investor true, correct and complete copies of all copies of all material written correspondence and other material written communication from the FDA or any other regulatory body to the Company that relate to the Included Products.

 

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(l) (i) All of the Included Products that exist as of the date hereof are listed on Schedule 4.24(b).

(m) Since July 1, 2019, the operation of the Business of the Company and its Subsidiaries with respect to each Included Product, including the manufacture, import, marketing, promotion, sale, labeling, and distribution of the Included Products, has been in compliance with all Permits and Applicable Laws, except where a failure to so comply would not result in a Material Adverse Effect.

(n) Without limiting the generality of Section 4.24(a) above, with respect to any Included Product being tested or manufactured by the Company and its Subsidiaries, as of the date hereof, to the Company’s Knowledge, neither the Company nor any Subsidiary has received any written notice from any applicable Governmental Authority, including the FDA, that such Governmental Authority is conducting an investigation or review of (A) the Company and its Subsidiaries’ (or any third party contractors therefor) manufacturing facilities and processes for manufacturing such Included Product or the marketing and sales of such Included Product, in each case which have identified any material deficiencies or violations of Laws or the Permits related to the manufacture, marketing and/or sales of such Included Product that would result in a Material Adverse Effect, or (B) any such Regulatory Approval that would result in a revocation or withdrawal of such Regulatory Approval, nor has any such Governmental Authority issued any order or recommendation stating that the development, testing, manufacturing, marketing or sales of such Included Product by the Company and its Subsidiaries should cease or that such Included Product should be withdrawn from the marketplace.

(o) Neither the Company nor any Subsidiary of the Company has experienced any significant failures in the manufacturing of any Included Product for commercial sale that has had or would result in, if such failure occurred again, a Material Adverse Effect.

Section 4.25 Labor Matters. There are no existing or, to the Knowledge of the Company, threatened strikes, lockouts or other labor Disputes involving the Company or any Subsidiary that, individually or in the aggregate, would result in a Material Adverse Effect. Except as would not, individually or in the aggregate, result in a Material Adverse Effect, hours worked by and payments of compensation made by the Company and its Subsidiaries to their respective employees are not in violation of the Fair Labor Standards Act or any other Applicable Law, rule or regulation dealing with such matters.

Section 4.26 EEA Financial Institution. Neither the Company nor any of its Subsidiaries is an EEA Financial Institution.

Section 4.27 Taxes. The Company and each of its Subsidiaries has (A) filed all Tax returns and reports required by to have been filed by it (including in its capacity as a withholding agent), (B) paid all Taxes required to be paid by it (including in its capacity as a withholding agent), and (C) provided adequate accruals, charges and reserves in accordance with GAAP in their applicable financial statements in respect of all Taxes not yet due and payable, except, in each case, (i) any such Taxes that are being diligently contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP or (ii) any failure that would not result, individually or in the aggregate, in a Material Adverse Effect.

 

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Section 4.28 Data Privacy. The Company has not experienced any breach of security of unauthorized access by third parties of any Personal Information in its possession, custody, or control that could reasonably be expected to result in a Material Adverse Effect.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE INVESTOR

The Investor hereby represents and warrants to the Company as of the Effective Date and the date of each Closing as follows:

Section 5.1 Organization. Such entity is a Delaware limited partnership duly organized, validly existing and in good standing under the Laws of its state of formation and has all powers and authority, and all licenses, permits, franchises, authorizations, consents and approvals of all Governmental Authorities, required to own its property and conduct its business as now conducted.

Section 5.2 No Conflicts. None of the execution and delivery by such entity of any of the Transaction Documents to which it is party, the performance by it of the obligations contemplated hereby or thereby or the consummation of the transactions contemplated hereby or thereby will contravene, conflict with, result in a breach, violation, cancellation or termination of, constitute a default (with or without notice or lapse of time, or both) under, require prepayment under, give any Person the right to exercise any remedy (including termination, cancellation or acceleration) or obtain any additional rights under, or accelerate the maturity or performance of or payment under, in any respect, (i) any Applicable Law or any judgment, order, writ, decree, permit or license of any Governmental Authority to which such entity or any of its assets or properties may be subject or bound, (ii) any term or provision of any contract, agreement, indenture, lease, license, deed, commitment, obligation or instrument to which such entity is a party or by which such entity or any of its assets or properties is bound or committed or (iii) any term or provision of any of the organizational documents of such entity, except in the case of clause (i) where any such event would not result in a material adverse effect on the ability of such entity to consummate the transactions contemplated by the Transaction Documents.

Section 5.3 Authorization. Such entity has all powers and authority to execute and deliver, and perform its obligations under, the Transaction Documents to which it is party and to consummate the transactions contemplated hereby and thereby. The execution and delivery of each of the Transaction Documents to which such entity is party, and the performance by it of its obligations hereunder and thereunder, have been duly authorized by it. Each of the Transaction Documents to which such entity is party has been duly executed and delivered by it. Each of the Transaction Documents to which such entity is party constitutes the legal, valid and binding obligation of it, enforceable against it in accordance with its respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting creditors’ rights generally, general equitable principles and principles of public policy.

 

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Section 5.4 Governmental and Third Party Authorizations. The execution and delivery by such entity of the Transaction Documents to which it is party, the performance by it of its obligations hereunder and thereunder and the consummation of any of the transactions contemplated hereunder and thereunder do not require any consent, approval, license, order, authorization or declaration from, notice to, action or registration by or filing with any Governmental Authority or any other Person, except as described in Section 4.5.

Section 5.5 No Litigation. There is no action, suit, arbitration proceeding, claim, citation, summons, subpoena, investigation or other proceeding (whether civil, criminal, administrative, regulatory, investigative or informal and including by or before a Governmental Authority) pending or, to the knowledge of such entity, threatened by or against such entity, at law or in equity, that challenges or seeks to prevent or delay or which, if adversely determined, would prevent or delay the consummation of any of the transactions contemplated by any of the Transaction Documents to which it is party.

Section 5.6 No Brokers Fees. Such entity has not taken any action that would entitle any person or entity to any commission or broker’s fee in connection with the transactions contemplated by this Agreement.

Section 5.7 Funds Available. As of the date hereof, such entity has sufficient funds on hand to satisfy its obligations to pay the Investment Amount due and payable on the Initial Closing Date and has sufficient funds under commitment to it to satisfy its obligations to pay the Investment Amount due and payable on each Subsequent Closing Date. Such entity acknowledges and agrees that its obligations under this Agreement are not contingent on obtaining financing.

Section 5.8 Access to Information. Such entity acknowledges that it has (a) reviewed such documents and information relating to the Revenue Interests, the Collateral and the Included Products and (b) had the opportunity to ask such questions of, and to receive answers from, representatives of the Company, in each case, as it deemed necessary to make an informed decision to purchase, acquire and accept the Revenue Interests in accordance with the terms of this Agreement. Such entity has such knowledge, sophistication and experience in financial and business matters that it is capable of evaluating the risks and merits of purchasing, acquiring and accepting the Revenue Interests in accordance with the terms of this Agreement.

Section 5.9 Tax Status. Such entity is a United States person as such term is defined in Section 7701(a)(30) of the Internal Revenue Code.

 

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ARTICLE VI

AFFIRMATIVE COVENANTS

The Parties hereto covenant and agree as follows:

Section 6.1 Collateral Matters; Guarantors.

(a) On or prior to the Initial Closing Date, each of the Company and the Guarantors shall enter into the Security Agreement, pursuant to which the Company and the Guarantors shall grant to the Investor Representative, a continuing security interest of first priority in all of their respective right, title and interest in, to and under the Collateral, whether now or hereafter existing, and any and all “proceeds” thereof (as such term is defined in the UCC), in each case, for the benefit of the Investor as security for the prompt and complete payment and performance of the Obligations. Pursuant to the Security Agreement, the Company shall pledge (x) all of its Equity Interests in the Guarantors, (y) to the extent that any Subsidiary organized as a Massachusetts Securities Corporation owns any portion of the assets listed in clause (ii) of the definition of “Collateral”, all of its Equity Interests in such Subsidiary organized as a Massachusetts Securities Corporation and (z) to the extent that any Excluded Subsidiary owns any portion of the assets listed in clause (ii) of the definition of “Collateral,” all of its equity interests in such Excluded Subsidiary (provided that no more than 100% of the non-voting Equity Interests of such Excluded Subsidiary (if any) and 65% (or such greater amount that would not reasonably be expected to result in any material adverse tax consequences to any Company Party) of the voting Equity Interests of such Excluded Subsidiary shall be required to be pledged) (such Subsidiaries referred to in clauses (y) and (z), the “Pledged Subsidiaries”), in each case, to the Investor Representative for the benefit of the Investor to secure the Obligations. In addition, each Guarantor shall enter into the Guaranty, pursuant to which each Guarantor shall guarantee the prompt performance of the Obligations. The Company shall cause any Subsidiary (other than any Excluded Subsidiary) that may acquire or own any portion of the Collateral after the Initial Closing Date to enter into a Joinder Agreement to become a party to the Guaranty as Guarantor and to the Security Agreement as Grantor.

(b) The Company authorizes and consents to the Investor filing, including with the Secretary of State of the State of Delaware, one or more UCC financing statements (and continuation statements with respect to such financing statements when applicable) or other instruments and notices, in such manner and in such jurisdictions as in the Investor’s determination may be necessary or appropriate to evidence the purchase, acquisition and acceptance by the Investor of the Revenue Interests hereunder and to perfect and maintain the perfection of the Investor’s ownership in the Revenue Interests and the security interest in the Revenue Interests granted by each Grantor to the Investor pursuant to the Security Agreement; provided that the Investor will provide the Company with a reasonable opportunity to review any such financing statements (or similar documents) prior to filing and the collateral identified in any such financing shall be limited to a legally sufficient description of the “Collateral” as defined herein and proceeds and products thereof. For greater certainty, the Investor will not file this Agreement in connection with the filing of any such financing statements (or similar documents) but may file a summary or memorandum of this Agreement if required under Applicable Laws providing for such filing. For sake of clarification, the foregoing statements in this Section 6.1 shall not bind either Party regarding the reporting of the transactions contemplated hereby for GAAP or SEC reporting purposes.

 

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Section 6.2 Update Meetings. During the Payment Term, but subject to Section 10.4, the Investor Representative shall be entitled to a quarterly update call or meeting (at the Investor Representative’s election, in person, via teleconference or videoconference or at a location reasonably designated by the Company) to discuss (i) the reports delivered by the Company pursuant to Section 3.4, (ii) certain topics or documents listed on Schedule 6.2, (iii) the progress of sales and product development and marketing efforts made by the Company pursuant to the Product Plans, (iv) the status and the historical and potential performance of the Included Product, (v) any regulatory developments and/or (vi) such other matters that the Investor Representative in good faith deems appropriate. Any information disclosed by either Party during such update meetings or calls or provided to the Investor Representative pursuant to its request shall be considered “Confidential Information” of the disclosing Party subject to the terms of Article IX. Notwithstanding the foregoing, after the occurrence and during the continuance of a Special Termination Event, Default or an Event of Default, the Investor Representative shall have the right, as often, at such times and with such prior notice, as the Investor Representative shall determine, in its reasonable discretion, to have such update meetings at the Company’s headquarters or inspect any records and operations of the Company and its Subsidiaries.

Section 6.3 Notices.

(a) To the extent permitted by Applicable Law, promptly after receipt by the Company of notice of any action, suit, claim, demand, Dispute, investigation, arbitration or other proceeding (commenced or threatened) involving the Included Product included in the Collateral or owned by any Pledged Subsidiary and relating to Mycapssa, the transactions contemplated by any Transaction Document, or to the Revenue Interests, the Company shall, subject to any confidentiality obligations to any Third Party, (i) inform the Investor Representative in writing of the receipt of such notice and the substance thereof and (ii) if such notice is in writing, furnish the Investor Representative with a copy of such notice and any related materials with respect thereto reasonably requested by the Investor Representative, and if such notice is not in writing, furnish to the Investor Representative a written summary describing in reasonable detail the contents thereof.

(b) To the extent permitted by Applicable Law, promptly following receipt by the Company of any written notice, claim or demand challenging the legality, validity, enforceability or ownership of any of the IP Rights included in the Collateral or owned by the Pledged Subsidiaries and relating to Mycapssa or pursuant to which any Third Party commences or threatens any action, suit or other proceeding against the Company and relating to the Included Product included in the Collateral or owned by the Pledged Subsidiaries and relating to Mycapssa, the Company shall subject to any confidentiality obligation to any Third Party, (i) inform the Investor Representative in writing of such receipt and (ii) furnish the Investor Representative with a copy of such notice, claim or demand, or if such notice is not in writing, furnish to the Investor Representative a written summary describing in reasonable detail the contents thereof.

 

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(c) The Company shall promptly (and in any event within ten (10) Business Days) provide Investor Representative with copies of any material information, reports and notices if the contents of such information, report or notice would, individually or in the aggregate, result in a Material Adverse Effect.

(d) The Company shall provide the Investor Representative with prompt written notice after the Company has Knowledge of any of the following: (i) the occurrence of a Bankruptcy Event in respect of the Company or any Material Contract Counterparty to any Mycapssa Material Contract (or to the extent it would result in a Material Adverse Effect, any Material Contract Counterparty to any other Material Contract); (ii) any material breach or default by the Company of or under any covenant, agreement or other provision of any Transaction Document; (iii) any representation or warranty made by the Company in any of the Transaction Documents or in any certificate delivered to the Investor pursuant to this Agreement shall prove to be untrue, inaccurate or incomplete in any material respect on the date as of which made, or (iv) any change, effect, event, occurrence, state of facts, development or condition that would result in a Material Adverse Effect.

(e) The Company shall promptly notify the Investor Representative of the occurrence of a Change of Control.

(f) The Company shall notify the Investor Representative in writing not less than ten (10) days prior to any change in, or amendment or alteration of, any Company Party’s (i) legal name, (ii) form of legal entity or (iii) jurisdiction of organization,

(g) The Company shall promptly (and in any event, within ten (10) Business Days) notify the Investor Representative of the Company’s Knowledge of any ERISA Event.

(h) The Company shall promptly (and in any event, within five (5) Business Days or within one (1) Business Day if any Indebtedness under any Permitted Debt Facility Document has been accelerated) notify the Investor of the occurrence of any material default or event of default under any Permitted Debt Facility Document.

(i) The Company shall promptly (and in any event, within ten (10) days) notify the Investor of (i) the termination of any Mycapssa Material Contract other than upon its scheduled termination date; (ii) the receipt by any Company Party or any of its Affiliates from a counterparty asserting a default by the Company or any of its Subsidiaries under any Mycapssa Material Contract where such alleged default, if accurate would permit such counterparty to terminate such Mycapssa Material Contract; (iii) the entering into of any new Mycapssa Material Contract by a Company Party or any Affiliate; or (iv) any material amendment to a Mycapssa Material Contract in any manner adverse to the Investor.

(j) The Company shall promptly notify the Investor Representative of the occurrence of a Special Termination Event, Default or Event of Default.

(k) The Company shall promptly notify the Investor Representative of the occurrence of any event with respect to the assets of the Company or any Affiliates of the Company that could reasonably be expected to result in a Material Adverse Effect.

 

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Each notice pursuant to this Section 6.1(a) through (k) shall be accompanied by a statement of a Responsible Officer of the Company setting forth details of the occurrence referred to therein and stating what action the applicable Company Party has taken and proposes to take with respect thereto. Such statement shall set forth what action the applicable Company Party has taken and proposes to take with respect thereto. Each notice pursuant to Section 6.3(h), Section 6.3(i) or Section 6.3(j) shall describe with particularity any and all provisions of this Agreement and any other Transaction Document that have been breached.

Section 6.4 Public Announcement.

(a) As soon as reasonably practicable following the date hereof, one or both of the Parties shall issue a mutually agreed to press release substantially in the applicable form attached hereto as Exhibit A. Except as required by Applicable Law (including disclosure requirements of the SEC, the Nasdaq Global Select Market or any other stock exchange on which securities issued by a Party or its Affiliates are traded) or for statements that are materially consistent with all or any portion of a previously approved public disclosure, neither Party shall make any other public announcement concerning this Agreement or the subject matter hereof without the prior written consent of the other, which shall not be unreasonably withheld, conditioned or delayed. In the event of a required public announcement, to the extent practicable under the circumstances, the Party making such announcement shall provide the other Party (which in the case of the Investor, shall be the Investor Representative) with a copy of the proposed text of such announcement sufficiently in advance of the scheduled release to afford such other Party a reasonable opportunity to review and comment upon the proposed text.

(b) The Parties shall coordinate in advance with each other in connection with the filing of this Agreement (including proposed redaction of certain provisions of this Agreement) with the SEC, the Nasdaq Global Select Market or any other stock exchange or Governmental Authority on which securities issued by a Party or its Affiliate are traded, and each Party shall use reasonable efforts to seek confidential treatment for the terms of this Agreement proposed to be redacted, if any; provided that each Party shall ultimately retain control over what information to disclose to the SEC, the Nasdaq Global Select Market or any other stock exchange or Governmental Authority, as the case may be, and provided further that the Parties shall use their reasonable efforts to file redacted versions with any Governmental Authorities which are consistent with redacted versions previously filed with any other Governmental Authorities. Other than such obligation, neither Party (nor its Affiliates) shall be obligated to consult with or obtain approval from the other Party with respect to any filings to the SEC, the Nasdaq Global Select Market or any other stock exchange or Governmental Authority. For clarity, once a public announcement or other disclosure is made by a Party in accordance with this Section 6.4, then no further consent or compliance with this Section 6.4 shall be required for any substantially similar disclosure thereafter.

Section 6.5 Further Assurances.

(a) The Company shall promptly, upon the reasonable request of the Investor, at the Company’s sole cost and expense, (a) execute, acknowledge and deliver, or cause the execution, acknowledgment and delivery of, and thereafter register, file or record, or cause to be registered, filed or recorded, in an appropriate governmental office, any document or instrument

 

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supplemental to or confirmatory of the Transaction Documents or otherwise deemed by the Investor reasonably necessary or desirable for the continued validity, perfection and priority of the Liens on the Collateral covered thereby subject to no other Liens except as permitted by the applicable Transaction Document, or obtain any consents or waivers as may be necessary or appropriate in connection therewith; (b) deliver or cause to be delivered to the Investor from time to time such other documentation, consents, authorizations, approvals and orders in form and substance reasonably satisfactory to the Investor and the Investor shall reasonably deem necessary to perfect or maintain the Liens on the Collateral pursuant to the Transaction Documents; and (c) upon the exercise by the Investor of any power, right, privilege or remedy pursuant to any Transaction Document which requires any consent, approval, registration, qualification or authorization of any Governmental Authority execute and deliver all applications, certifications, instruments and other documents and papers that the Investor may require. In addition, the Company shall promptly, at its sole cost and expense, execute and deliver to the Investor such further instruments and documents, and take such further action, as the Investor may, at any time and from time to time, reasonably request in order to carry out the intent and purpose of this Agreement and the other Transaction Documents to which it is a party and to establish and protect the rights, interests and remedies created, or intended to be created, in favor of the Investor hereby and thereby.

(b) The Company and the Investor shall cooperate and provide assistance as reasonably requested by the other Party hereto, at the expense of such other Party hereto (except as otherwise set forth herein), in connection with any litigation, arbitration, investigation or other proceeding (whether threatened, existing, initiated or contemplated prior to, on or after the date hereof) to which the other Party hereto, any of its Affiliates or controlling persons or any of their respective officers, directors, equityholders, controlling persons, managers, agents or employees is or may become a party or is or may become otherwise directly or indirectly affected or as to which any such Persons have a direct or indirect interest, in each case relating to any Transaction Document, the transactions contemplated herein or therein or the Revenue Interests but in all cases excluding any litigation brought by the Company (for itself or on behalf of any the Company Indemnified Party) against the Investor or brought by the Investor (for itself or on behalf of any Investor Indemnified Party) against the Company.

(c) Each Party shall comply with all Applicable Laws with respect to the Transaction Documents and the Revenue Interests except where any non-compliance would not result in a Material Adverse Effect.

Section 6.6 IP Rights.

(a) The Company and its Subsidiaries shall, at their sole expense, prepare, execute, deliver and file any and all agreements, documents or instruments which are reasonably necessary and/or desirable to (i) use commercially reasonable efforts to prosecute and maintain the Patent Rights and Trademarks, in each case solely to the extent included in the Collateral, relating to an Included Product for which the Company has obtained Regulatory Approval (the “Approved Patent Rights” and “Approved Trademarks”, respectively), in the United States, Europe and Japan; and (ii) use commercially reasonable efforts to defend or assert such Approved Patent Rights and Approved Trademarks included in the Collateral against commercially significant infringement or interference by any other Persons, and against any

 

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claims of invalidity or unenforceability, in the United States, Europe and Japan (including, without limitation, by bringing any legal action for infringement or defending any claim or counterclaim of invalidity or action of a Third Party for declaratory judgment of non-infringement or non-interference). The Company shall keep the Investor informed of all of such actions as well as actions in other countries and jurisdictions, and the Investor shall have the opportunity to consult with the Company with respect thereto, and the Company shall consider all of the Investor’s comments in good faith. This subsection (a) shall apply only with respect to material Intellectual Property owned by the Company or its Subsidiaries or, to the extent that the Company or any Subsidiary has prosecution, maintenance and/or enforcement rights with respect thereto, licensed by the Company or its Subsidiaries.

(b) The Company and its Subsidiaries shall use commercially reasonable efforts to prosecute all pending Patent applications within the material Approved Patent Rights included in the Collateral for which it is an owner (or otherwise has rights to prosecute such Patent applications) consistent with standards in the pharmaceutical industry (as applicable) for similarly situated entities.

(c) The Company shall, and shall cause each Subsidiary to:

(i) take reasonable measures to protect the proprietary nature of material and confidential IP Rights included in the Collateral or owned by any Pledged Subsidiary and relating to Mycapssa and to maintain in confidence all Trade Secrets and confidential information compromising a part thereof;

(ii) not disclose and use commercially reasonable efforts to prevent any distribution or disclosure by others (including their employees and contractors) of any item that contains or embodies material and confidential IP Rights included in the Collateral or owned by any Pledged Subsidiary and relating to Mycapssa; and

(iii) take reasonable physical and electronic security measures to prevent disclosure of any item that contains or embodies material and confidential IP Rights included in the Collateral or owned by any Pledged Subsidiary and relating to Mycapssa;

provided, however, that the Company shall be permitted to disclose the information and materials described in clauses (i) through (iii) above to its Affiliates, its actual and potential Licensees, suppliers and distributors and their respective Affiliates, and its and their employees, directors, agents, consultants, advisors, and Third Party contractors, in each case who are obligated to keep such information and materials confidential on commercially reasonable terms.

(d) The Company and its Subsidiaries shall use commercially reasonable efforts to cause each individual associated with the filing and prosecution of the Patent Rights included in the Collateral and material to the conduct of the Business of the Company and its Subsidiaries to comply in all material respects with all applicable duties of candor and good faith in dealing with any Patent Office, including any duty to disclose to any Patent Office all information known by such individual to be material to patentability of each such Patent, in those jurisdictions where such duties exist.

 

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Section 6.7 Existence. The Company shall (a) preserve and maintain its existence, (b) preserve and maintain its rights, franchises and privileges unless failure to do any of the foregoing would not result in a Material Adverse Effect, (c) qualify and remain qualified in good standing in each jurisdiction where the failure to preserve and maintain such qualifications would result in a Material Adverse Effect, including appointing and employing such agents or attorneys in each jurisdiction where it shall be necessary to take action under this Agreement, and (d) comply with its organizational documents.

Section 6.8 Commercialization of the Included Product.

(a) The Company shall use Commercially Reasonable and Diligent Efforts to prepare, execute, deliver and file any and all agreements, documents or instruments that are necessary or desirable to secure and maintain Marketing Authorization in the United States for Mycapssa. The Company shall not withdraw or abandon, or fail to take any action necessary to prevent the withdrawal or abandonment of, Marketing Authorization in the United States for Mycapssa once obtained. The Company shall use Commercially Reasonable and Diligent Efforts, itself or through one or more Subsidiaries or Licensees, to Commercialize the Included Product included in the Collateral for which Marketing Authorization is obtained.

(b) The Company shall not enter into any Mycapssa Material Contract unless the Company shall have used Commercially Reasonable and Diligent Efforts in selecting the applicable Material Contract Counterparty to such Mycapssa Material Contract and negotiating and agreeing to the terms of such Mycapssa Material Contract (or any amendment, modification, restatement, cancellation, supplement, termination or waiver of any of the material terms thereof). In addition, if any Existing Mycapssa Material Contract terminates for any reason whatsoever, the Company shall use Commercially Reasonable and Diligent Efforts to enter into a replacement Mycapssa Material Contract.

(c) The Company shall, and shall cause its Subsidiaries to, comply with all material terms and conditions of and fulfill all material obligations under each Mycapssa Material Contract (including, without limitation, each License Agreement) to which any of them is party. Upon the occurrence of a breach of any such Mycapssa Material Contract by any other party thereto, which would result in a Material Adverse Effect, the Company shall use Commercially Reasonable and Diligent Efforts to seek to enforce all of its (or its Subsidiary’s) rights and remedies thereunder.

(d) Upon the occurrence of a breach of any Mycapssa Material Contract by any other party thereto, which would result in a Material Adverse Effect on Mycapssa, the Company shall use Commercially Reasonable and Diligent Efforts to seek to enforce all of its (and cause its Affiliates to seek to enforce all of their) rights and remedies thereunder. In the case of Mycapssa Material Contracts consisting of licenses or other arrangements under which the counterparty is to make payments to the Company in respect of such Commercialization, such counterparties shall be instructed to make all payments to the Collection Account for receipt and disbursement in accordance with the terms hereof.

 

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Section 6.9 Financial Statements.

(a) The Company shall deliver to the Investor Representative, in such form as filed with the SEC (or, if the Company is not required to file with the SEC, in form and detail consistent in form and detail as would be required to be filed with the SEC if the Company were a public reporting company or otherwise reasonably satisfactory to the Investor Representative), as soon as available, and in any event within ninety (90) days after the end of each fiscal year of the Company (or, if earlier, when required to be filed with the SEC), a consolidated balance sheet of the Company and its Subsidiaries as at the end of such fiscal year, and the related consolidated statements of income or operations, changes in shareholders’ equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and prepared in accordance with GAAP, audited and accompanied by a report and opinion of an independent certified public accountant of nationally recognized standing, which report and opinion shall be prepared in accordance with generally accepted auditing standards and shall not be subject to any qualification or exception or any qualification or exception as to the scope of such audit (except for a qualification or an exception to the extent related to the maturity or refinancing of borrowings under Permitted Debt or this Agreement); provided, that to the extent the components of such financial statements relating to a prior fiscal period are separately audited by different independent public accounting firms, the audit report of any such accounting firm may contain a qualification or exception as to scope of such financial statements as they relate to such components; and

(b) The Company shall deliver to the Investor Representative, as soon as available, and in any event within forty-five (45) days after the end of each of the first three (3) fiscal quarters of each fiscal year of the Company (or, if earlier, when required to be filed with the SEC), a consolidated balance sheet of the Company and its Subsidiaries as at the end of such fiscal quarter, and the related consolidated statements of income or operations, changes in shareholders’ equity and cash flows for such fiscal quarter and for the portion of the Company’s fiscal year then ended, setting forth in each case in comparative form the figures for the corresponding fiscal quarter of the previous fiscal year and the corresponding portion of the previous fiscal year, all in reasonable detail.

Section 6.10 Certificates; Other Information. The Company shall (a) deliver to the Investor Representative, in form and detail reasonably satisfactory to the Investor Representative:

(i) concurrently with the delivery of the financial statements referred to in Section 6.9(a) and (b), a duly completed Compliance Certificate signed by the chief executive officer, president, chief financial officer, vice president of finance, treasurer or controller of the Company, setting forth (i) the amount of gross sales of the Included Product in each country, (ii) the amount of Other Royalty Payments in each country, (iii) the amount of the Net Revenues and a calculation thereof, (iv) a calculation of the Included Product Payment Amount for each Quarterly Payment Date, showing the Applicable Tiered Percentage applied thereto and a calculation of Under Performance Payments (if applicable), in each case, for each fiscal quarter period covered by such Compliance Certificate;

(ii) as soon as practicable, and in any event within two (2) Business Days, upon the reasonable request of the Investor Representative, copies of the most recent monthly statements for each Deposit Account, Securities Account and other bank account or securities account of the Company and each other Grantor in the event such monthly statements are not provided to the Investor Representative directly by the applicable Depositary Bank;

 

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(iii) concurrently with the delivery of the annual financial statements referred to in Section 6.9(a), a certificate of a Responsible Officer of the Company listing (A) all applications by any Company Party, if any, for Copyrights, Patents or Trademarks made since the date of the prior certificate (or, in the case of the first such certificate, the Initial Closing Date), (B) all issuances of registrations or letters on existing applications by any Company Party for Copyrights, Patents and Trademarks received since the date of the prior certificate (or, in the case of the first such certificate, the Initial Closing Date), (C) all material Trademark Licenses, Copyright Licenses and Patent Licenses entered into by any Company Party since the date of the prior certificate (or, in the case of the first such certificate, the Initial Closing Date), and (D) such supplements to Schedule 4.10 as are necessary to cause such schedule to be true and complete in all material respects as of the date of such certificate.

Documents required to be delivered pursuant to Section 6.9 or Section 6.10 may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Company posts such documents, or provides a link thereto on the Company’s website on the Internet, or (ii) on which such documents are posted on the Company’s behalf on an Internet or intranet website, if any, to which the Investor Representative has access (whether a commercial, third-party website or whether sponsored by the Investor); provided, that: the Company shall notify the Investor Representative (by facsimile or electronic mail) of the posting of any such documents and provide to the Investor Representative by electronic mail electronic versions (i.e., soft copies) of such documents. The Investor Representative shall have no obligation to request the delivery of or to maintain paper copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Company with any such request for delivery by the Investor or the Investor Representative, and the Investor or the Investor Representative shall be solely responsible for requesting delivery to it or maintaining its copies of such documents.

Section 6.11 Payment of Obligations. Each of the Company and its Subsidiaries shall pay and discharge all its obligations and liabilities (a) prior to the date on which penalties attach thereto, with respect to all federal, state and other Taxes imposed upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings diligently conducted and adequate reserves in accordance with GAAP are being maintained by the Company Party or its Subsidiaries, (b) as the same shall become due and payable, all lawful claims which, if unpaid, would by Law become a Lien upon any Collateral or any assets of the Pledged Subsidiaries relating to Mycapssa (other than Permitted Liens), and (c) prior to the date on which such Indebtedness shall become delinquent or in default, all material Indebtedness, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness.

 

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Section 6.12 Maintenance of Properties. Each of the Company and its Subsidiaries shall maintain, preserve and protect all of its material properties and equipment necessary in the operation of its business in good working order and condition (ordinary wear and tear and casualty and condemnation events excepted) except where the failure to do so would not, individually or in the aggregate, result in a Material Adverse Effect, and shall make all necessary repairs thereto and renewals and replacements thereof, except where the failure to do so would not result in a Material Adverse Effect.

Section 6.13 Maintenance of Insurance.

(a) Except as would not result in a Material Adverse Effect, each of the Company and its Subsidiaries shall maintain with financially sound and reputable insurance companies that are not Affiliates of the Company, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business as the Company, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons.

(b) Within thirty (30) days of the Initial Closing Date, (i) the Company shall provide the Investor Representative a schedule of the insurance coverage of the Company and its Subsidiaries as is then in effect, outlined as to carrier, policy number, expiration date, type, amount and deductibles, and (ii) each of the Company and its Subsidiaries shall cause the Investor and its successors and/or assigns to be named as lender’s loss payee or mortgagee as its interest may appear, and/or additional insured with respect to any such insurance providing liability coverage or coverage in respect of any Collateral or assets of the Pledged Subsidiaries relating to Mycapssa.

Section 6.14 Books and Records. Each of the Company and its Subsidiaries shall maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of such Company Party or such Subsidiary, as the case may be. Each of the Company and its Subsidiaries shall maintain such books of record and account in material conformity with all applicable requirements of any Governmental Authority having regulatory jurisdiction over such Company Party or such Subsidiary, as the case may be.

Section 6.15 Use of Proceeds. The Company and its Subsidiaries, taken as a whole, shall use the Investment Amount (a) to support the commercial launch of Mycapssa and (b) for other general corporate purposes, provided, that, in no event shall the Investment Amount be used to fund any activities of or business with any Person, or in any Designated Jurisdiction, that, at the time of such funding, is the subject of Sanctions, or in any other manner that will result in a violation by any Person (including any Person participating in the transaction, whether as Investor or otherwise) of Sanctions or otherwise in contravention of any Law or of any Transaction Document.

Section 6.16 ERISA Compliance. Each of the Company and its Subsidiaries shall do each of the following: (a) maintain each Plan in compliance with the applicable provisions of ERISA, the Internal Revenue Code and other federal or state Law, (b) cause each Pension Plan that is qualified under Section 401(a) of the Internal Revenue Code to maintain such qualification, and (c) make all contributions required to be made by the Company and its Subsidiaries to any Pension Plan subject to Section 412 or Section 430 of the Internal Revenue Code, in each case, except as would not result in a Material Adverse Effect.

 

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Section 6.17 Compliance with Contractual Obligations. Each of the Company and its Subsidiaries shall comply in all respects with each Contractual Obligation of such Person, except as would not, individually or in the aggregate, result in a Material Adverse Effect.

Section 6.18 Included Products. Without limiting the generality of Section 4.9, in connection with the development, testing, manufacture, marketing or sale of each and any Included Product by the Company or any Subsidiary, the Company or such Subsidiary shall comply in all material respects with all Permits.

Section 6.19 Anti-Corruption Laws. Neither the Company nor, to the Company’s Knowledge, any of the Company’s directors, officers, employees or agents have, directly or indirectly, made, offered, promised or authorized any payment or gift of any money or anything of value to or for the benefit of any “foreign official” (as such term is defined in the U.S. Foreign Corrupt Practices Act (the “FCPA”)), foreign political party or official thereof or candidate for foreign political office for the purpose of (i) influencing any official act or decision of such official, party or candidate, (ii) inducing such official, party or candidate to use his, her or its influence to affect any act or decision of a foreign governmental authority or (iii) securing any improper advantage, in the case of (i), (ii) and (iii) above in order to assist the Company or any of its Affiliate in obtaining or retaining business for or with, or directing business to, any person. Neither the Company nor, to the Company’s Knowledge, any of its directors, officers, employees or agents have made or authorized any bribe, rebate, payoff, influence payment, kickback or other unlawful payment of funds or received or retained any funds in violation of any Law, rule or regulation. The Company further represents that it has maintained, and has caused each of its subsidiaries and Affiliates to maintain, systems of internal controls (including accounting systems, purchasing systems and billing systems) to ensure compliance with the FCPA or any other applicable anti-bribery or anti-corruption Law.

Section 6.20 Data Privacy. In connection with its collection, storage, transfer (including, without limitation, any transfer across national borders) and/or use of any personally identifiable information from any individuals, including, without limitation, any customers, prospective customers employees and/or other Third Parties (collectively “Personal Information”), the Company is and has been, to the Knowledge of Company, in compliance in all material respects with all Applicable Laws in all relevant jurisdictions, including the General Data Protection Regulation, the Company’s privacy policies and the requirements of any contracts or codes of conduct to which the Company is a party, except for any such event that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. The Company has commercially reasonable physical, technical, organizational and administrative security measures and policies in place to protect all Personal Information collected by it or on its behalf from and against unauthorized access, use and/or disclosure. The Company is and has been, to the Company’s Knowledge, in compliance in all material respects with all Laws relating to data loss, theft and breach of security notification obligations, except for any such event that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect.

 

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Section 6.21 Tax.

(a) The Parties (i) agree that for U.S. federal and applicable state and local income Tax purposes, the transactions contemplated by this Agreement are intended to constitute one or more debt instruments subject to U.S. Treasury Regulation Section 1.1275-4(b) governing contingent payment debt instruments. The Parties shall cooperate in good faith to determine the comparable yield (as such term is described in the U.S. Treasury Regulations governing contingent payment debt instruments) for the debt instrument(s) within ninety (90) days following the date of this Agreement and (ii) intend that the provisions of Treasury Regulation 1.1275-2(a)(1) would apply, subject to the exceptions in Treasury Regulation 1.1275-2(a)(2), to treat any non-contingent payments on the debt instrument(s) and the projected amount of any contingent payments as first, a payment of any accrued and any unpaid original issue discount at such time and second, a payment of principal (including for purposes of the rules applicable to “applicable high yield discount obligations”). The Parties agree not to take and to not cause or permit their Affiliates to take, any position that is inconsistent with the provisions of this Section 6.21(a) on any Tax return or for any other Tax purpose, unless required by Law or the good faith resolution of a Tax audit or other Tax proceeding.

(b) On or prior to the Initial Closing Date, each entity constituting collectively the Investor shall provide the Company with a duly completed and executed IRS Form W-9 certifying that such entity is a United States person, as such term is defined in Section 7701(a)(30) of the Internal Revenue Code, that is exempt from U.S. federal backup withholding with respect to all payments pursuant to this Agreement.

(c) Payments by or on account of any obligation of the Company under this Agreement shall be made without deduction or withholding for any Taxes, except as required by Applicable Law. If the Company is required by Law to withhold any Tax in respect of any amounts payable to the Investor pursuant to this agreement, (1) the Company shall make such withholding and timely pay such amount to the applicable Governmental Authority, (2) the Company shall provide the Investor with a receipt evidencing such payment or other evidence of such payment reasonably satisfactory to the Investor and (3) if the Tax withheld was an Indemnified Tax, the sum payable by the Company shall be increased so that after making all required deductions for Indemnified Taxes (including deductions applicable to additional sums payable under this clause (c)), the Investor receives an amount equal to the sum it would have received had no such deductions been made. The Company will promptly notify the Investor if it becomes required to withhold any Tax in respect of any payment to the Investor pursuant to this Agreement.

 

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ARTICLE VII

NEGATIVE COVENANTS

During the Payment Term, no Company Party shall, nor shall it permit any Subsidiary to, directly or indirectly:

Section 7.1 Liens. Create, incur, assume or suffer to exist any Lien upon any Collateral or any assets of the Pledged Subsidiaries relating to Mycapssa, whether now owned or hereafter acquired, other than the Permitted Liens.

Section 7.2 Indebtedness. Create, incur, assume or suffer to exist any Indebtedness without the prior written consent of the Investor Representative, except the Permitted Debt.

Section 7.3 Dispositions. Make any Disposition (other than, for the avoidance of doubt, Permitted Transfers) unless (a) the consideration paid in connection therewith shall be in an amount not less than the fair market value of the property disposed of, (b) no Special Termination Event, Default or Event of Default shall have occurred and be continuing both immediately prior to and after giving effect to such Disposition, (c) such transaction does not involve the sale or other disposition of a minority Equity Interest in any Subsidiary (other than to another Grantor), (d) such transaction does not involve a sale, transfer, license or other disposition of Included Product included in the Collateral or owned by any Pledged Subsidiary relating to Mycapssa (or any IP Rights associated therewith) in the United States or any state or political subdivision thereof and (e) the aggregate net book value of all of the assets sold or otherwise disposed of (including, for the avoidance of doubt, the assets sold or otherwise disposed of in such Disposition) does not exceed $[***] in any fiscal year.

Section 7.4 Change in Nature of Business. Engage in any material line of business other than the discovery, development, manufacture or commercialization of biopharmaceutical products.

Section 7.5 Prepayment of Other Indebtedness. Make (or give any notice with respect thereto) any voluntary or optional payment or prepayment or redemption, cash settlement or acquisition for value of (including without limitation, by way of depositing money or securities with the trustee with respect thereto before due for the purpose of paying when due), refund, refinance or exchange of any Indebtedness of any Company Party or any Subsidiary (other than with respect to the Indebtedness arising under the Transaction Documents, and, in the case of any Permitted Convertible Notes, other than from (x) using the proceeds from the sale of Permitted Convertible Notes, (y) exchanging any such Indebtedness for Permitted Convertible Notes and/or (z) exchanging any such Indebtedness for Capital Stock (other than Disqualified Capital Stock) or the proceeds from the sale of Capital Stock (other than Disqualified Capital Stock)).

 

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Section 7.6 Organization Documents; Fiscal Year; Legal Name, State of Formation and Form of Entity; Certain Amendments.

(a) Amend, modify or change its Organization Documents in a manner materially adverse to the rights or remedies of the Investor under the Transaction Documents.

(b) Change its fiscal year.

(c) Without providing notice to the Investor Representative in accordance with clause (f) of Section 6.3, change its name, state of organization or form of organization or its Federal Taxpayer Indemnification Number or its organizational identification number.

(d) Amend, modify or change any of the terms or provisions of any Permitted Debt Facility Documents in a manner inconsistent with the terms of the Transaction Documents.

(e) Amend, modify or change the Product Plans without the prior written consent of the Investor Representative.

Section 7.7 Restricted Payments. Declare or make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, except that (i) prior to the Third Closing Date, the Company and its Subsidiaries, as applicable, may make the Restricted Payments described in clauses (a) through (e), (i) and (j) below, and (ii) following the Third Closing Date:

(a) each Subsidiary may make Restricted Payments to any other Company Party;

(b) each Company Party may make Restricted Payments to any other Company Party;

(c) each Subsidiary may make Restricted Payments to the holders of its Equity Interests on a pro rata basis;

(d) each Subsidiary that is not a Company Party may make Restricted Payments to any other Subsidiary;

(e) the Company and each Subsidiary may declare and make dividend payments or other distributions payable solely in the Qualified Capital Stock of such Person;

(f) the Company may make scheduled payments to the Permitted Debt Creditors so long as (i) no default or event of default exits under the Permitted Debt Facility Documents and (ii) such payments are made in accordance with the terms of the Permitted Debt Facility Documents;

(g) the Company may make payments to the Permitted Convertible Notes Creditors in connection with any refinancing thereof permitted hereunder;

(h) the Company may make any Restricted Payment in exchange for, or out of the net cash proceeds of a contribution to the common equity of the Company or a substantially concurrent sale (other than to a Subsidiary of the Company) of, Equity Interests (other than Disqualified Capital Stock) of the Company;

 

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(i) the repurchase of Equity Interests (i) deemed to occur upon the exercise of options, warrants or other convertible securities to the extent that such Equity Interests represent all or a portion of the exercise price thereof or (ii) deemed to occur upon the withholding of a portion of Equity Interests granted or awarded to any current or former officer, director, manager, employee or consultant (or permitted transferees, assigns, estates, trusts or heirs of any of the foregoing) to pay for taxes payable by such Person in connection with such grant or award (or the vesting thereof);

(j) the payment of cash in lieu of fractional Equity Interests pursuant to the exchange or conversion of any exchangeable or convertible securities;

(k) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or any of the Company’s Subsidiaries held by any current or former employee, director, manager, consultant or director (or permitted transferees, assigns, estates, trusts or heirs of any of the foregoing) of the Company or any of the Company’s Subsidiaries pursuant to the terms of any employee stock bonus, stock purchase, stock option, restricted stock, stock appreciation right or other equity or equity-based plan, policy, program, contract, arrangement or agreement; provided, that the aggregate price paid under this clause (k) in any Calendar Year, commencing with the Calendar Year ended December 31, 2020, will not exceed $[***] (with unused amounts in any such Calendar Year being referred to as “Unused Amounts”); provided, further, that such amount may be increased by an amount not to exceed:

(A) the net cash proceeds from the sale of Equity Interests (other than Disqualified Capital Stock) of the Company to any current or former employee, director, manager, consultant or director of the Company or any of its Subsidiaries that occurs after the date of this Agreement; and

(B) the cash proceeds of key man life insurance policies received by the Company or the Subsidiaries after the date of this Agreement; and

(C) the aggregate Unused Amounts (which aggregate amount will be reduced to the extent used after the date of this Agreement to repurchase, redeem or otherwise acquire or retire for value of any Equity Interests pursuant to this clause (k));

(l) payments or distributions to dissenting stockholders pursuant to Applicable Law in connection with any merger, amalgamation or consolidation with, or other acquisition of, another Person;

(m) to the extent constituting Restricted Payments, the payment of contingent liabilities in respect of any adjustment of purchase price, earn outs, deferred compensation and similar obligations of the Company and its Subsidiaries; and

(n) other Restricted Payments in an aggregate amount not to exceed $[***].

 

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Section 7.8 Minimum Cash. Permit aggregate cash and Cash Equivalents, in each case, of the Company or any Company Party (other than any Pledged Subsidiary) held in Deposit Accounts and Securities Accounts, in each case, for which the Investor Representative shall have received an effective Deposit Agreement (collectively, the “Minimum Cash Accounts” and each, a “Minimum Cash Account”), at any time to be less than $20,000,000; provided, that, if the financial statements delivered by the Company pursuant to Section 6.9(a) or Section 6.9(b) for any fiscal quarter and the related Compliance Certificate demonstrate that aggregate Mycapssa Net Revenues for such fiscal quarter and each of the three prior fiscal quarters were, collectively, greater than $150,000,000, the minimum cash and Cash Equivalents requirement set forth above shall be $0 for each day that follows the delivery of such financial statements and Compliance Certificate until delivery of the financial statements and Compliance Certificate for the next succeeding fiscal quarter pursuant to Section 6.9(a) or Section 6.9(b), as applicable (it being understood and agreed that upon receipt of the Compliance Certificate for the next succeeding fiscal quarter the application of this proviso shall be retested); provided, further, that, in the event the financial statements and Compliance Certificate required to be delivered for any period pursuant to Section 6.9(a) or Section 6.9(b), as applicable, are not delivered when due, this Section 7.8 shall be determined without giving effect to the first proviso hereto until such date as such financial statements and Compliance Certificate are delivered.

Section 7.9 Burdensome Actions.

(a) The Company and its Subsidiaries shall not enter into any contract, agreement or other legally binding arrangement (whether written or oral), or grant any right to any other Person, in any case that would conflict with the Transaction Documents or serve or operate to limit or circumscribe any of the Investor’s rights under the Transaction Documents (or the Investor’s ability to exercise any such rights) or create, incur, assume or suffer to exist any Lien upon any Collateral or any assets of the Pledged Subsidiaries relating to Mycapssa (other than Permitted Liens), or agree to do or suffer to exist any of the foregoing. Without limiting the generality of the foregoing, the Company shall not enter into, or permit to exist, any Contractual Obligation that encumbers or restricts the ability of any Company Party to (i) pledge its property pursuant to the Transaction Documents or (ii) perform any of its obligations under the Transaction Documents or any Mycapssa Material Contract in any material respect. Notwithstanding anything to the contrary in this Agreement, the Company shall not take any action or abstain from taking any action, directly or indirectly, which action or abstinence would have the effect of altering the terms and conditions of this Agreement or the other Transaction Documents (or any ancillary documents thereto) in a manner that could reasonably be expected to result in a Material Adverse Effect.

(b) The Company and its Subsidiaries shall not enter into any contract, agreement or other legally binding arrangement (whether written or oral), grant any right to any other Person with respect to any Included Product included in the Collateral or amend or waive any requirements under any agreement with respect to any Included Product included in the Collateral that could reasonably be expected to result in a Material Adverse Effect.

Section 7.10 Affiliates. The Company shall not (a) permit any Affiliate that is not a Subsidiary to own any portion of the Collateral (or assets owned by any Pledged Subsidiary relating to Mycapssa) or (b) permit any Affiliate that is not a Subsidiary to own any assets that generate Net Revenues.

 

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ARTICLE VIII

THE CLOSINGS

Section 8.1 Closing. Subject to the terms of this Agreement, the closings of the transactions contemplated hereby (each, a “Closing”) shall take place on:

(a) for the initial Closing (the “Initial Closing”), on April 14, 2020 (the “Initial Closing Date) following the satisfaction of the conditions set forth in Section 8.3(a), or such other time and place as the parties hereto mutually agree; and

(b) for each subsequent Closing (each, a “Subsequent Closing”), subject to the satisfaction or waiver of the conditions set forth in Section 8.2, on the fifteenth (15th) Business Day (in each case, the “Subsequent Closing Date”) following the Investor Representative’s receipt of the written notification from the Company of satisfaction of the applicable conditions set forth on Exhibit B with respect to such Subsequent Closing.

Section 8.2 Conditions to Subsequent Closing. The obligations of the Investor relating to each Subsequent Closing shall be subject to (i) no Bankruptcy Event with respect to the Company or any of its Subsidiaries and no Special Termination Event, Default or Event of Default shall have occurred and be continuing (and the Investor Representative’s receipt of the certification from the Company to that effect), (ii) the representations and warranties set forth in Article IV shall be true and correct on and as of such Subsequent Closing Date, and (iii) the satisfaction or waiver of the applicable conditions set forth on Exhibit B with respect to such Subsequent Closing. The Company shall notify the Investor Representative within ten (10) Business Days after each of the conditions set forth on Exhibit B with respect to a particular Subsequent Closing are satisfied.

Section 8.3 Closing Deliverables of the Company.

(a) At the Initial Closing, the Company shall deliver or cause to be delivered to the Investor Representative the following:

(i) Transaction Documents. Receipt by the Investor Representative of executed counterparts (include by electronic means) of this Agreement and the other Transaction Documents (other than the applicable Deposit Agreements with respect to each Minimum Cash Account required to be delivered in accordance with Section 7.8 (which shall be delivered on or prior to the date that is thirty (30) Business Days following the Effective Date) and the Collection Account Deposit Agreement, which shall be delivered in accordance with Section 3.2(a)), executed by the parties thereto (in a manner reasonably acceptable to the Investor Representative), in each case in form and substance satisfactory to the Investor Representative.

 

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(ii) Organization Documents, Resolutions, Etc. Receipt by the Investor Representative of the following, each of which shall be originals or facsimiles, in form and substance satisfactory to the Investor Representative and its legal counsel:

(A) copies of the Organization Documents of each Grantor certified to be true and complete as of a recent date by the appropriate Governmental Authority of the state or other jurisdiction of its incorporation or organization, where applicable, and certified by a secretary or assistant secretary (or, if such entity does not have a secretary or assistant secretary, a Responsible Officer) of such Grantor to be true and correct as of the Initial Closing Date;

(B) such certificates of resolutions or other action, incumbency certificates and/or other certificates of Responsible Officers of each Grantor as the Investor Representative may require evidencing the identity, authority and capacity of each Responsible Officer thereof authorized to act as a Responsible Officer in connection with this Agreement and the other Transaction Documents to which such Grantor is a party; and

(C) such documents and certifications as the Investor Representative may reasonably require to evidence that each Grantor is duly organized or formed, and is validly existing, in good standing and qualified to engage in business in its state of organization or formation.

(iii) Opinions of Counsel. Receipt by the Investor Representative of a written legal opinion of (1) Goodwin Procter LLP and (2) the general counsel of the Company, in each case, addressed to the Investor Representative, dated the Initial Closing Date and in form and substance previously agreed between the Company and the Investor Representative.

(iv) Perfection and Priority of Liens. Receipt by the Investor of the following:

(A) searches of Uniform Commercial Code filings in the jurisdictions where a filing would need to be made in order to perfect the Investor’s security interest in the Collateral, copies of the financing statements on file in such jurisdictions and evidence that no Liens exist on the Collateral other than Permitted Liens;

(B) UCC financing statements for each appropriate jurisdiction as is necessary, in the Investor’s sole discretion, to perfect the Investor’s security interest in the Collateral;

(C) all certificates evidencing any certificated Equity Interests pledged to the Investor, together with duly executed in blank and undated stock powers attached thereto; and

(D) searches of ownership of, and Liens on, the Patent Rights of each Grantor in the appropriate U.S. governmental offices.

(v) Responsible Officer’s Certificate. Receipt by the Investor Representative of a certificate of a Responsible Officer of the Company certifying that the representations and warranties set forth in Article IV are true and correct on and as of the Initial Closing Date.

 

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(vi) Attorney Costs; Due Diligence Expenses. The Company shall have paid all reasonable and documented fees, charges and disbursements of counsel to the Investor and all reasonable and documented due diligence expenses of the Investor, in each case, incurred prior to or in connection with the Initial Closing in accordance with Exhibit G; provided that the condition set forth in this clause (vi) will be satisfied by the transfer by the Investor of an amount equal to the First Investment Amount minus the amount owed by the Company under this clause (vi); provided further, that the Company will reimburse Investor following the Initial Closing Date for any additional amounts in respect of such reasonable and documented expenses incurred in connection with the Initial Closing in accordance with Exhibit G to the extent that such expenses were not deducted from the First Investment Amount on the Initial Closing as described in this clause (vi).

(vii) Other. Such other documents, instruments, agreements, reports, statements, due diligence items and information as may be reasonably requested by the Investor Representative.

(b) At each Subsequent Closing, the Company shall deliver or cause to be delivered to the Investor Representative the following:

(i) A certificate of a Responsible Officer of the Company (the statements made in which shall be true and correct on and as of the applicable Closing Date): (A) attaching copies, certified by such officer as true and complete, of (x) the organizational documents of the Company and (y) confirming that resolutions of the governing body of the Company authorizing and approving the execution, delivery and performance by the Company of the Transaction Documents and the transactions contemplated herein and therein remain in full force and effect; and (B) attaching a copy, certified by such officer as true and complete, of a good standing certificate of the appropriate Governmental Authority of the Company’s jurisdiction of organization, stating that the Company is in good standing under the Applicable Laws of such jurisdiction.

(ii) a certificate of a Responsible Officer of the Company certifying the satisfaction of the condition set forth on Exhibit B and such documents evidencing the satisfaction of such conditions as may be requested by the Investor Representative.

(iii) a certificate of a Responsible Officer of the Company certifying that the representations and warranties set forth in Article IV are true and correct on and as of such Subsequent Closing Date.

(iv) in the case of the Second Closing, the Company shall have paid or reimbursed Investor for all reasonable and documented fees, charges and disbursements of counsel to the Investor and all reasonable and documented due diligence expenses of the Investor, in each case, to the extent provided on Exhibit G and incurred prior to or in connection with the Initial Closing but not deducted from the amount funded by Investor in respect of the Initial Investment Amount at the Initial Closing in accordance with clause (vi) of Section 8.3(a) or as otherwise paid by the Company prior to the Second Closing; provided that the condition set forth in this clause (iv) will be satisfied by the transfer by the Investor of an amount equal to the Second Investment Amount minus such outstanding amounts owed by the Company.

 

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ARTICLE IX

CONFIDENTIALITY

Section 9.1 Confidentiality; Permitted Use. During the Payment Term and for a period of five (5) years thereafter, each Party shall maintain in strict confidence all Confidential Information and materials disclosed or provided to it by the other Party, except as approved in writing in advance by the disclosing Party, and shall not use or reproduce the disclosing Party’s Confidential Information for any purpose other than as required to carry out its obligations and exercise its rights pursuant to this Agreement (the “Purpose”). The Party receiving such Confidential Information (the “Recipient”) agrees to institute measures to protect the Confidential Information in a manner consistent with the measures it uses to protect its own most sensitive proprietary and confidential information, which must not be less than a reasonable standard of care. Notwithstanding the foregoing, the Recipient may permit access to the disclosing Party’s Confidential Information to those of its employees or authorized representatives having a need to know such information for the Purpose and who have signed confidentiality agreements or are otherwise bound by confidentiality obligations at least as restrictive as those contained herein. Each Party shall be responsible for the breach of this Agreement by its employees or authorized representatives. Each Party shall immediately notify the other Party upon discovery of any loss or unauthorized disclosure of the other Party’s Confidential Information.

Section 9.2 Exceptions. The obligations of confidentiality and non-use set forth in Section 9.1 shall not apply to any portion of Confidential Information that the Recipient or its Affiliates can demonstrate was: (a) known to the general public at the time of its disclosure to the Recipient or its Affiliates, or thereafter became generally known to the general public, other than as a result of actions or omissions of the Recipient, its Affiliates, or anyone to whom the Recipient or its Affiliates disclosed such portion; (b) known by the Recipient or its Affiliates prior to the date of disclosure by the disclosing Party; (c) disclosed to the Recipient or its Affiliates on an unrestricted basis from a source unrelated to the disclosing Party and not known by the Recipient or its Affiliates to be under a duty of confidentiality to the disclosing Party; or (d) independently developed by the Recipient or its Affiliates by personnel that did not use the Confidential Information of the disclosing Party in connection with such development.

Section 9.3 Permitted Disclosures. The obligations of confidentiality and non-use set forth in Section 9.1 shall not apply to the extent that the receiving Party or its Affiliates: (a) is required to disclose Confidential Information pursuant to: (i) an order of a court of competent jurisdiction; (ii) Applicable Laws; (iii) regulations or rules of a securities exchange; (iv) requirement of a Governmental Authority for purposes related to development or commercialization of an Included Product, or (v) the exercise by each Party of its rights granted to it under this Agreement or its retained rights or as required to perfect Investor’s rights under the Transaction Documents; or (b) discloses such Confidential Information solely on a “need to know basis” to Affiliates, potential or actual: acquirers, merger partners, licensees, permitted assignees, collaborators (including Licensees), subcontractors, investment bankers, investors,

 

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limited partners, partners, lenders, or other financial partners, and their respective directors, employees, contractors and agents, or (c) provides a copy of this Agreement or any of the other Transaction Documents to the extent requested by an authorized representative of a U.S. or foreign tax authority, (d) discloses Confidential Information in response to a routine audit or examination by, or a blanket document request from, a Governmental Authority; provided that (A) such Third Party or person or entity in subsection (b) agrees to confidentiality and non-use obligations with respect thereto at least as stringent as those specified for in this Article IX; and (B) in the case of (a)(i) through (iv), to the extent permitted by Applicable Law, the Recipient shall provide prior written notice thereof to the disclosing Party and provide the opportunity for the disclosing Party to review and comment on such required disclosure and request confidential treatment thereof or a protective order therefor.

Section 9.4 Return of Confidential Information. Each Party shall return or destroy, at the other Party’s instruction, all Confidential Information of the other Party in its possession upon termination or expiration of this Agreement, or destroy such Confidential Information; provided, however, that each Party shall be entitled to retain one (1) copy of such Confidential Information of the other Party for legal archival purposes and/or as may be required by Applicable Law and neither Party shall be required to return, delete or destroy Confidential Information or any electronic files or any information prepared by such Party that have been backed-up or archived in the ordinary course of business consistent with past practice.

ARTICLE X

INDEMNIFICATION

Section 10.1 Indemnification by the Company. The Company agrees to indemnify and hold each of the Investor and its Affiliates and any and all of their respective partners, directors, managers, members, officers, employees, agents and controlling persons (each, an “Investor Indemnified Party”) harmless from and against, and will pay to each Investor Indemnified Party the amount of, any and all Losses awarded against or incurred or suffered by such Investor Indemnified Party arising out of (a) any breach of any representation, warranty or certification made by the Company in any of the Transaction Documents or certificates given by the Company to the Investor in writing pursuant to this Agreement or any other Transaction Document, (b) any breach of or default under any covenant or agreement by the Company to the Investor pursuant to any Transaction Document, (c) any Excluded Liabilities and Obligations and (d) any fees, expenses, costs, liabilities or other amounts incurred or owed by the Company to any brokers, financial advisors or comparable other Persons retained or employed by it in connection with the transactions contemplated by this Agreement (collectively, the “Company Indemnification Obligations”); provided, however, that the foregoing shall exclude any indemnification to any Investor Indemnified Party (i) that results from the bad faith or willful misconduct of such Investor Indemnified Party, (ii) to the extent resulting from acts or omissions of the Company based upon the written instructions from any Investor Indemnified Party or (iii) for any matter to the extent of, and in respect of, which any Company Indemnified Party would be entitled to indemnification under Section 10.2.

 

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Section 10.2 Indemnification by the Investor. The Investor agrees to indemnify and hold each of the Company and its Affiliates and any and all of their respective partners, directors, managers, members, officers, employees, agents and controlling Persons (each, a “Company Indemnified Party”) harmless from and against, and will pay to each Company Indemnified Party the amount of, any and all Losses awarded against or incurred or suffered by such the Company Indemnified Party arising out of (a) any breach of any representation, warranty or certification made by the Investor in any of the Transaction Documents or certificates given by the Investor in writing pursuant hereto or thereto, (b) any breach of or default under any covenant or agreement by the Investor pursuant to any Transaction Document and (c) any fees, expenses, costs, liabilities or other amounts incurred or owed by the Investor to any brokers, financial advisors or comparable other Persons retained or employed by it in connection with the transactions contemplated by this Agreement (collectively, the “Investor Indemnification Obligations”); provided, however, that the foregoing shall exclude any indemnification to any Company Indemnified Party (i) that results from the bad faith or willful misconduct of such the Company Indemnified Party, (ii) to the extent resulting from acts or omissions of the Investor based upon the written instructions from any Company Indemnified Party or (iii) for any matter to the extent of, and in respect of, which any Investor Indemnified Party would be entitled to indemnification under Section 10.1.

Section 10.3 Procedures. If any Third Party Claim shall be brought or alleged against an indemnified party in respect of which indemnity is to be sought against an indemnifying party pursuant to Section 10.1 or Section 10.2, the indemnified party shall, promptly after receipt of notice of the commencement of any such Third Party Claim, notify the indemnifying party in writing of the commencement thereof, enclosing a copy of all papers served, if any; provided, that the omission to so notify such indemnifying party will not relieve the indemnifying party from any liability that it may have to any indemnified party under Section 10.1 or Section 10.2 unless, and only to the extent that, the indemnifying party is actually prejudiced by such omission. In the event that any Third Party Claim is brought against an indemnified party and it notifies the indemnifying party of the commencement thereof in accordance with this Section 10.3, the indemnifying party will be entitled, at the indemnifying party’s sole cost and expense, to participate therein. In any such Third Party Claim, an indemnified party shall have the right to retain its own counsel, but the reasonable fees and expenses of such counsel shall be at the sole cost and expense of such indemnified party unless (a) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (b) the indemnifying party has failed within a reasonable time to retain counsel reasonably satisfactory to such indemnified party or (c) the named parties to any such Third Party Claim (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential conflicts of interests between them based on the advice of counsel to the indemnifying party. It is agreed that the indemnifying party shall not, in connection with any Third Party Claim or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate law firm (in addition to local counsel where necessary) for all such indemnified parties. The indemnifying party shall not be liable for any settlement of any Third Party Claim effected without its written consent, but, if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any Loss by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the

 

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indemnified party, effect any settlement, compromise or discharge of any pending or threatened Third Party Claim in respect of which any indemnified party is or would have been a party and indemnity would have been sought hereunder by such indemnified party, unless such settlement, compromise or discharge, as the case may be, (i) includes an unconditional written release of such indemnified party, in form and substance reasonably satisfactory to the indemnified party, from all liability on claims that are the subject matter of such claim or proceeding, (ii) does not include any statement as to an admission of fault, culpability or failure to act by or on behalf of any indemnified party and (iii) does not impose any continuing material obligation or restrictions on such indemnified party.

Section 10.4 Other Claims. A claim by an indemnified party under this Article X for any matter not involving a Third Party Claim and in respect of which such indemnified party seeks indemnification hereunder may be made by delivering, in good faith, a written notice of demand to the indemnifying party, which notice shall contain (a) a description and the amount of any Losses incurred or suffered by the indemnified party, (b) a statement that the indemnified party is entitled to indemnification under this Article X for such Losses and a reasonable explanation of the basis therefor, and (c) a demand for payment in the amount of such Losses. For all purposes of this Section 10.4, the Company shall be entitled to deliver such notice of demand to the Investor Representative on behalf of the Company Indemnified Parties, and the Investor Representative shall be entitled to deliver such notice of demand to the Company on behalf of the Investor Indemnified Parties. Within thirty (30) days after receipt by the indemnifying party of any such notice, the indemnifying party may deliver to the indemnified party that delivered the notice a written response in which the indemnifying party (a) agrees that the indemnified party is entitled to the full amount of the Losses claimed in the notice from the indemnified party; (b) agrees that the indemnified party is entitled to part, but not all, of the amount of the Losses claimed in the notice from the indemnified party; or (c) indicates that the indemnifying party disputes the entire amount of the Losses claimed in the notice from the indemnified party. If the indemnified party does not receive such a response from the indemnifying party within such thirty (30)-day period, then the indemnifying party shall be conclusively deemed to have agreed that the indemnified party is entitled to the full amount. If the indemnifying party and the indemnified party are unable to resolve any Dispute relating to any amount of the Losses claimed in the notice from the indemnified party within thirty (30) days after the delivery of the response to such notice from the indemnifying party, then the parties shall be entitled to resort to any legal remedy available to such party to resolve such Dispute that is provided for in this Agreement, subject to all the terms, conditions and limitations of this Agreement.

Section 10.5 Exclusive Remedies. The indemnification afforded by this Article X shall be the sole and exclusive remedy for any and all Losses awarded against or incurred or suffered by the Investor Indemnified Parties against the Company in connection with the Company Indemnification Obligations and the Company Indemnified Parties against the Investor Representative in connection with the Investor Indemnification Obligations under Section 10.1(a) or Section 10.2, as applicable, in each case other than any Company Indemnification Obligations or Investor Indemnification Obligations, as applicable, resulting from (A) the gross negligence, the bad faith or willful misconduct of the other Party or (B) acts or omissions based upon the written instructions from the other Party; provided that nothing in this Section 10.5 shall alter or affect the rights of the Investor to specific performance by the Company Parties under the Transaction Documents or the rights of the Investor to exercise remedies under the Transaction Documents after an Event of Default or other rights of creditors under the UCC or any other Applicable Law.

 

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Section 10.6 Certain Limitations. The indemnification afforded by this Article X shall be subject to the following limitations:

(a) With respect to indemnification by the Company pursuant to Section 10.1(a), the Company’s maximum liability for any Loss suffered by an Investor Indemnified Party (other than any Loss resulting from a Third Party Claim) shall not exceed an amount (the “Company Indemnification Cap”) equal to (1) the Hard Cap and the amount of all of the other Obligations owed by the Company to the Investor hereunder (other than the indemnification amounts payable under Section 10.1(a)) as of the date of determination, minus (2) the aggregate amount of all of the payments collected or received by the Investor Representative (and any direct or indirect transferee of the Investor Representative to whom any interest in the Revenue Interests is transferred) hereunder as of such date of determination (other than (i) any payments collected or received as a reimbursement of expenses incurred by any Investor Indemnified Party (including attorney’s fees) and (ii) any indemnification payments collected or received pursuant to Section 10.1(a)), minus (3) the aggregate amount collected or received by the Investor Representative (and any direct or indirect transferee of the Investor Representative to whom any interest in the Revenue Interests is transferred) pursuant to the exercise of its rights under Section 10.1(a) (without duplication of any amounts collected or received pursuant to clause (2)) prior to such date of determination to the extent such amount was not collected or received in connection with a Third Party Claim. Notwithstanding the foregoing, the Company Indemnification Cap shall not apply to any Loss suffered by any Investor Indemnified Party in connection with a Third Party Claim.

(b) With respect to indemnification by the Investor pursuant to Section 10.2, the Investor’s maximum liability shall not exceed an amount equal to the excess (if any) of (A) the aggregate amount of all of the payments collected or received by the Investors from the Company prior to the date of determination (excluding any amounts collected or received as a reimbursement of expenses incurred by the Investor or any indemnification amounts collected or received in connection with a Third Party Claim) over (B) the Investment Amount.

ARTICLE XI

EVENTS OF DEFAULT AND REMEDIES

Section 11.1 Events of Default.

Any of the following shall constitute an Event of Default:

(a) Non-Payment. The Company or any Guarantor fails to pay any amounts to the Investor when and as required to be paid herein, including, without limitation, the Company’s failure to (i) pay the Revenue Interests in an amount equal to the Included Product Payment Amount for any Quarterly Payment Date (unless such failure was solely as a result of accounting errors made by the Company or a Licensee in good faith without gross negligence in

 

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calculating the Quarterly Net Revenues and the Included Product Payment Amount for such Quarterly Payment Date) or pay any late or unpaid Revenue Interests and any interest accrued thereto, (ii) reimburse the Investor Representative for audit expenses pursuant to Section 3.5(b), if and when due, (iii) pay the Under Performance Payments pursuant to Section 3.1(b), pay the Special Termination Amount pursuant to Section 3.1(e), (iv) pay the Regulatory Non-Approval Amount pursuant to Section 3.1(a) or pay the Final Payment Amount pursuant to Section 3.1(c), or (v) pay any other amounts owed by the Company hereunder (including pursuant to Section 3.1(i)); in each case, if and when due, and if such failure continues for more than two (2) Business Days); or

(b) Specific Covenants. Any Company Party fails to perform or observe any term, covenant or agreement contained in Section 3.1(c) (Change of Control), Section 6.6 (IP Rights), Section 6.7 (Existence), Section 6.8 (Commercialization of the Included Product), Section 6.9 (Financial Statements), Section 6.19 (Anti-Corruption Laws) and Article VII (Negative Covenants); provided that in the case of any such default is susceptible to cure and can be cured within five (5) Business Days after the earlier of the date on which (i) a Responsible Officer of any Company Party has Knowledge of such failure and (ii) written notice thereof shall have been given to the Company by the Investor Representative, the Company shall have such five (5) Business Day period to cure such default; or

(c) Other Defaults. Any Company Party fails to perform or observe any other covenant or agreement (not specified in subsection (a) or (b) above) contained in any Transaction Document on its part to be performed or observed and such failure continues for thirty (30) days after the earlier of the date on which (i) a Responsible Officer of any Company Party has a Knowledge of such default and (ii) written notice thereof shall have been given to the Company by the Investor Representative; or

(d) Insolvency Proceedings, Etc. The Company or any Company Party institutes or consents to the institution of any proceeding under any Debtor Relief Law, or makes an assignment for the benefit of creditors; or applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its property; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of such Person and the appointment continues undischarged or unstayed for sixty (60) calendar days; or any proceeding under any Debtor Relief Law relating to any such Person or to all or any material part of its property is instituted without the consent of such Person and continues undismissed or unstayed for sixty (60) calendar days, or an order for relief is entered in any such proceeding; or

(e) Inability to Pay Debts; Attachment. (i) The Company or any other Company Party becomes unable or admits in writing its inability or fails generally to pay its debts as they become due, or (ii) any writ or warrant of attachment or execution or similar process is issued or levied against all or any material part of the property of any such Person and is not released, vacated or fully bonded within thirty (30) days after its issue or levy; or

 

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(f) Judgments. There is entered against the Company or any Company Party one or more final judgments or orders for the payment of money in an aggregate amount exceeding $[***] (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage) or any one or more non-monetary final judgments that result in a Material Adverse Effect and, in either case, (i) enforcement proceedings are commenced by any creditor upon such judgment or order or (ii) there is a period of thirty (30) consecutive days during which a stay of enforcement of such judgment, by reason of a pending appeal or otherwise, is not in effect; or

(g) Indebtedness. The Company or any other Company Party (i) fails to pay when due beyond any grace period provided with respect thereto (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) any Indebtedness for money borrowed in excess of $[***] (or its foreign currency equivalent) or, (ii) fails to perform or observe any covenant or agreement to be performed or observed by it contained in any Permitted Debt Facility Documents or any documents relating to any other Indebtedness and, as a result of such failure, any other party to that agreement or instrument has accelerated the maturity of any Indebtedness thereunder; or

(h) ERISA. (i) An ERISA Event occurs with respect to a Pension Plan or Multiemployer Plan which has resulted or would result in liability of any Company Party under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of $[***], or (ii) the Company or any ERISA Affiliate fails to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan that has resulted or would result in liability of any Company Party in an aggregate amount in excess of $[***]; or

(i) Invalidity of Transaction Documents. Any Transaction Document, at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or thereunder or satisfaction in full of all Obligations, ceases to be in full force and effect; or any Company Party or any other Person contests in any manner the validity or enforceability of any Transaction Document; or any Company Party denies that it has any or further liability or obligation under any Transaction Document, or purports to revoke, terminate or rescind any Transaction Document; or

(j) Security Interest. Any security interest purported to be created by the Security Agreement or shall cease to be in full force and effect, or shall cease to give the rights, powers and privileges purported to be created and granted hereunder or thereunder (including a perfected first priority security interest in and Lien on substantially all of the Collateral (except as otherwise expressly provided herein and therein)) in favor of the Investor pursuant hereto or thereto (other than as a result of the failure by Investor of taking any action required to maintain the perfection of such security interests), or shall be asserted by the Company not to be a valid, perfected, first priority (except as otherwise expressly provided in this Agreement or such Security Agreement) security interest in the Collateral.

(k) Mycapssa. There occurs any revocation, withdrawal, suspension or cancellation of any Regulatory Approval in the United States with respect to Mycapssa which results in the Company or its Subsidiaries being prevented from marketing or selling Mycapssa in the United States and such revocation, withdrawal, suspension or cancellation continues for [***] days.

 

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Section 11.2 Remedies Upon Event of Default. If any Event of Default occurs and is continuing, the Company shall immediately pay the Final Payment Amount to the Investor Representative. In addition, the Investor Representative may exercise on behalf of itself and the Investor all rights and remedies available to it and the Investor under the Transaction Documents and Applicable Law; provided, however, that upon the occurrence of an actual or deemed entry of an order for relief with respect to the Company under the Bankruptcy Code of the United States or under any other Debtor Relief Law, the obligation of the Investor to pay or advance any funds shall automatically terminate, and the amounts of the Hard Cap (less amounts of Revenue Interest theretofore received) and all other Obligations of the Company Parties shall automatically become due and payable, in each case without further act of the Investor.

ARTICLE XII

MISCELLANEOUS

Section 12.1 Survival. All representations, warranties and covenants made herein and in any other Transaction Document or any certificate delivered pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing. The rights hereunder to indemnification and payment of Losses under Article X or to seek specific performance under Section 12.2 based on such representations, warranties and covenants shall not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time (whether before or after the execution and delivery of this Agreement or the Closing) in respect of the accuracy or inaccuracy of or compliance with, any such representation, warranty or covenant.

Section 12.2 Specific Performance. Each of the Parties hereto acknowledges that the other Party hereto will have no adequate remedy at law if the other Party fails to perform any of its obligations under any of the Transaction Documents. In such event, each of the Parties hereto agrees that the other Party hereto shall have the right, in addition to any other rights it may have (whether at law or in equity), to specific performance of this Agreement without the necessity of posting a bond or proving the inadequacy of monetary damages as a remedy and to obtain injunctive relief against any breach or threatened breach of the Transaction Documents. The Parties further agree not to assert that a remedy of specific performance is unenforceable, invalid, contrary to Applicable Law or inequitable for any reason.

Section 12.3 Notices. All notices, consents, waivers and other communications hereunder shall be in writing and shall be effective (a) upon receipt when sent through the mails, registered or certified mail, return receipt requested, postage prepaid, with such receipt to be effective the date of delivery indicated on the return receipt, (b) upon receipt when sent by an overnight courier (costs prepaid and receipt requested), (c) on the date personally delivered to an authorized officer of the party to which sent or (d) on the date transmitted by electronic transmission (other than facsimile transmission) with a confirmation of receipt, in all cases, with a copy emailed to the recipient at the applicable address, addressed to the recipient as follows:

 

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if to the Company, to:

Chiasma, Inc.

140 Kendrick Street

Building C East

Needham, MA 02494

Attn: Mark Fitzpatrick, President

Email: [***]

with a copy to (which shall not constitute notice):

Chiasma, Inc.

140 Kendrick Street

Building C East

Needham, MA 02494

Attn: Lee Giguere, General Counsel

Email: [***]

with a copy to (which shall not constitute notice):

Goodwin Procter LLP

100 Northern Avenue

Boston, Massachusetts 02210

Attn: Michael H. Bison

Email: [***]

if to the Investor, to:

HealthCare Royalty Management, LLC

on behalf of each entity constituting the Investor

300 Atlantic Street, Suite 600

Stamford, CT 06901

Attention: Clarke B. Futch

Managing Partner

Email: [***]

with a copy (which shall not constitute notice) to:

HealthCare Royalty Management, LLC

on behalf of each entity constituting the Investor

300 Atlantic Street, Suite 600

Stamford, CT 06901

Attention: John A. Urquhart

Email: [***]

 

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with a copy (which shall not constitute notice) to:

HealthCare Royalty Management, LLC

on behalf of each entity constituting the Investor

300 Atlantic Street, Suite 600

Stamford, CT 06901

Attention: Chief Legal Officer

Email: [***]

with a copy (which shall not constitute notice) to:

Cadwalader, Wickersham & Taft LLP

200 Liberty Street New York,

New York 10281

Attn: Ira J. Schacter

E-mail: [***]

Each Party hereto may, by notice given in accordance herewith to the other Party hereto, designate any further or different address to which subsequent notices, consents, waivers and other communications shall be sent.

Section 12.4 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and permitted assigns. The Company shall not be entitled to assign any of its obligations and rights under this Agreement without the prior written consent of the Investor. The Investor may assign any of its obligations and rights hereunder to any other Person without the consent of the Company; provided that, if no Special Termination Event, Default or Event of Default shall have occurred and be continuing, the Investor may not assign any of its obligations and rights hereunder to any Person set forth on Schedule 12.4 without the prior written consent of the Company, which shall not be unreasonably withheld, conditioned or delayed. The Investor shall give notice of any such assignment to the Company promptly after the occurrence thereof. The Company shall maintain a “register” for the recordation of the names and addresses of, and the amounts owing to, each Investor from time to time. Notwithstanding anything to the contrary contained in this Agreement, no assignment of any interest of any Investor shall be effective until such assignment is recorded in the register and, consistent with the foregoing, the Company shall treat any Investor recorded in the register as an Investor under this Agreement, notwithstanding notice to the contrary. The Company shall be under no obligation to reaffirm any representations, warranties or covenants made in this Agreement or any of the other Transaction Documents. Any purported assignment of rights or obligations in violation of this Section 12.4 will be void.

Section 12.5 Independent Nature of Relationship. The relationship between the Company and the Investor is solely that of lender and borrower, and neither the Company nor the Investor has any fiduciary or other special relationship with the other Party hereto or any of its Affiliates. Nothing contained herein or in any other Transaction Document shall be deemed to constitute the Company and the Investor as a partnership, an association, a joint venture or any other kind of entity or legal form. The Parties agree that they shall not take any inconsistent position with respect to such treatment in a filing with any Governmental Authority.

 

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Section 12.6 Entire Agreement. This Agreement, together with the Exhibits hereto (which are incorporated herein by reference) and the other Transaction Documents, constitute the entire agreement between the Parties hereto with respect to the subject matter hereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the Parties hereto with respect to the subject matter of this Agreement. No representation, inducement, promise, understanding, condition or warranty not set forth herein (or in the Exhibits hereto or the other Transaction Documents) has been made or relied upon by either Party hereto.

Section 12.7 Governing Law.

(a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO THE RULES THEREOF RELATING TO CONFLICTS OF LAW OR CHOICE OF FORUM OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.

(b) Each of the Parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the Parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by Applicable Law, in such federal court. Each of the Parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Applicable Law.

(c) Each of the Parties hereto hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in Section 12.7(b). Each of the Parties hereto hereby irrevocably waives, to the fullest extent permitted by Applicable Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

(d) Each of the Parties hereto irrevocably consents to service of process in the manner provided for notices in Section 12.3. Nothing in this Agreement will affect the right of any Party hereto to serve process in any other manner permitted by Applicable Law. Each of the Parties hereto waives personal service of any summons, complaint or other process, which may be made by any other means permitted by New York law.

 

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Section 12.8 Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE OTHER PARTY HERETO WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTY HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 12.8.

Section 12.9 Severability. If one or more provisions of this Agreement are held to be invalid, illegal or unenforceable by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, which shall remain in full force and effect, and the Parties hereto shall replace such invalid, illegal or unenforceable provision with a new provision permitted by Applicable Law and having an economic effect as close as possible to the invalid, illegal or unenforceable provision. Any provision of this Agreement held invalid, illegal or unenforceable only in part or degree by a court of competent jurisdiction shall remain in full force and effect to the extent not held invalid, illegal or unenforceable.

Section 12.10 Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each Party hereto shall have received a counterpart hereof signed by the other Party hereto. Any counterpart may be executed by facsimile or other electronic transmission, and such facsimile or other electronic transmission shall be deemed an original.

Section 12.11 Amendments; No Waivers. Neither this Agreement nor any term or provision hereof may be amended, supplemented, restated, waived, changed or modified except with the written consent of the Company and the Investor Representative. No failure or delay by either Party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. No notice to or demand on either Party hereto in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval hereunder shall, except as may otherwise be stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by Applicable Law.

 

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Section 12.12 No Third Party Rights. Other than the Parties, no Person will have any legal or equitable right, remedy or claim under or with respect to this Agreement. This Agreement may be amended or terminated, and any provision of this Agreement may be waived, without the consent of any Person who is not a Party. The Company shall enforce any legal or equitable right, remedy or claim under or with respect to this Agreement for the benefit of the Company Indemnified Parties and the Investor shall enforce any legal or equitable right, remedy or claim under or with respect to this Agreement for the benefit of the Investor Indemnified Parties.

Section 12.13 Table of Contents and Headings. The Table of Contents and headings of the Articles and Sections of this Agreement have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof.

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above.

 

CHIASMA, INC.
By:   /s/ Mark Fitzpatrick
  Name: Mark J. Fitzpatrick
  Title: President

 

HEALTHCARE ROYALTY PARTNERS IV, L.P.
By:   HealthCare Royalty GP IV, LLC,
its general partner

 

By:   /s/ Clarke B. Futch
  Name: Clarke B. Futch
  Title: Founding Managing Partner


SCHEDULES

[***]


EXHIBIT A

FORM OF PRESS RELEASE

 

A-1


EXHIBIT B

SUBSEQUENT CLOSING CONDITIONS

1. The Investor’s obligations to fund the Second Investment Amount shall be conditioned upon FDA approval of Mycapssa for maintenance treatment of adults with acromegaly prior to the first anniversary of the Initial Closing Date.

2. The Investor’s obligations to fund the Third Investment Amount shall be conditioned upon the initial commercial launch of Mycapssa as evidenced by: (i) the first commercial sale of Mycapssa and (ii) delivery of [***] commercial batches of Mycapssa to the Company’s third party logistics provider or wholesaler.

3. The Investor’s obligations to fund the Fourth Investment Amount shall be conditioned upon cumulative U.S. Net Sales of Mycapssa exceeding $[***] prior to December 31, 2021.

 

B-1


EXHIBIT C

FORM OF COMPLIANCE CERTIFICATE

[***]

 

C-1


EXHIBIT D

EXAMPLE OF CALCULATION OF INCLUDED PRODUCT PAYMENT AMOUNT

[***]

 

D-1


EXHIBIT E

SPECIAL TERMINATION AMOUNT

“Special Termination Event” means any of the following events:

(i) Material Adverse Effect. There occurs any circumstance or circumstances that could reasonably be expected, either individually or in the aggregate, to have a Material Adverse Effect; or

(ii) Representations and Warranties. Any representation, warranty, certification or statement of fact made or deemed made by or on behalf of the Company or any other Company Party in [***] of this Agreement shall be materially incorrect or materially misleading when made or deemed made.

Special Termination Amount” means as of any date of payment, the sum of (A) the Investment Amount minus the aggregate of all of the payments received by the Investor in respect of the Revenue Interests and (B) the amount that Investor would need to receive to achieve a per annum rate of return on the Investment Amount equal to [***] determined after taking into account all of the amounts received by the Investor prior to such date of payment under the Transaction Documents (other than any payments made as a reimbursement of expenses (including legal fees) incurred by the Investor and any indemnification amounts paid as reimbursement to any Investor Indemnified Party to extent such amounts were previously or contemporaneously paid to a third party in connection with any Third Party Claim) and the time at which such payments were received.

 

E-1


EXHIBIT F

FORM OF JOINDER AGREEMENT

[***]

 

F-1


EXHIBIT G

EXPENSES

[***]

 

G-1


EXHIBIT H

PRODUCT PLANS

[***]

 

Annex H-1


EXHIBIT I

SPECIAL MATURITY PAYMENT AMOUNT

[***]

 

Annex I-1


EXHIBIT J

FORM OF GUARANTY

[***]

 

Annex J-1

EX-10.2

Exhibit 10.2

Chiasma, Inc.

140 Kendrick Street

Building C East

Needham, MA 02494

April 8, 2020

Anand Varadan

Re: Executive Employment Letter

Dear Anand:

This letter agreement (the “Agreement”) confirms the terms and conditions of your employment with Chiasma, Inc. (the “Company”) effective on April 22, 2020 or a later date mutually agreed (the “Start Date”).

1. Position. As of the Start Date you will serve as the Company’s Executive Vice President, Chief Commercial Officer (the “CCO”) and report to the Company’s Chief Executive Officer. This is a full-time exempt position. It is understood and agreed that, while you render services to the Company, you will not engage in any other employment, consulting or other business activities (whether full-time or part-time), unless you first obtain the Company’s approval. You also may engage in religious, charitable, non-profit board and other community activities so long as such activities do not interfere or conflict with your obligations to the Company. You will be entitled to indemnification for actions taken or omitted to be taken on behalf of the Company in your capacity as an officer and director as provided in the Indemnification Agreement made as of April 8, 2020 (the “Indemnification Agreement”). Upon the ending of your employment, you shall immediately resign from any other position(s) to which you were elected or appointed in connection with your position as CCO or Executive Vice President.

2. Salary and Hiring Bonus. Your base salary rate will be $420,000 per year, prorated for 2020 based on the Start Date, payable in accordance with the Company’s standard payroll schedule and subject to applicable deductions and withholdings. Your base salary will be subject to periodic (and no less than annual if practicable) review and adjustment at the Company’s discretion. The Company will pay you a Hiring Bonus of $20,000 less applicable payroll deductions and all required withholdings within thirty (30) days of your Start Date. In the event that you voluntarily terminate your employment or are terminated by the Company for Cause (as defined below), in either event within the first twelve (12) months after the Start Date, you will be required to repay the Hiring Bonus to the Company in full within thirty (30) days after the Date of Termination (as defined below).

3. Annual Bonus. You will be eligible to receive an annual performance bonus. The Company will target the bonus at 40% of your annual salary for the applicable bonus year (the “Bonus Target”). The actual bonus amount and percentage are discretionary and will be subject to the Board’s assessment of your performance, as well as business conditions at the Company. The bonus also will be subject to your employment for the full period covered by the bonus, approval by and adjustment at the discretion of the Board, and the terms of any applicable bonus plan issued by the Board. The Chief Executive Officer will review your job performance on an annual basis and will discuss with you the criteria which the Board will use to assess your performance for bonus purposes. The Board may also make adjustments in the targeted amount of your annual performance bonus. Any bonus for the 2020 year will be prorated based on the Start Date. The Company will pay any earned bonus at the time that bonuses are paid to other senior executives, which in any event will be paid in the calendar year following the year in which any such bonus is earned.

 

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4. Business Travel/Expenses. The Company will reimburse you for travel and other business expenses consistent with the terms and conditions of the Company’s expense reimbursement policies.

5. Benefits/Vacation. You will be eligible to participate in the employee benefits and insurance programs generally made available to the Company’s full-time employees, as well as all benefit programs available to the senior executive employees of the Company, subject in each case to the terms and conditions of the Company’s benefit plans and programs. You will be eligible for up to 4 (four) weeks of vacation per year, which shall accrue on a prorated basis. Other provisions of the Company’s vacation policy are set forth in the policy itself.

6. Stock Options.

a. Your three existing options to purchase up to an aggregate 162,202 shares of the Company’s common stock (the “Existing Options”) granted to you in accordance with the Consulting Services Agreement between the Company and Ignition Insights, LLC, dated February 23, 2018, as amended, shall, to the extent unvested, continue to vest so long as you remained employed by the Company, pursuant and subject to the Company’s 2015 Stock Incentive Plan (the “Plan”) and the applicable stock option agreements governing the Existing Options (along with the Plan the “Existing Options Documents”).

b. In addition to the Existing Options, you will be eligible to participate in the Company’s stock option program, subject to approval by the Board. We will recommend to the Board that you be granted an option as soon as practicable on or following the Start Date (the actual grant date, the “Grant Date”) for the purchase of 425,000 shares of common stock of the Company, at an exercise price per share equal to the stock’s fair market value on the date of the grant (the “Option”). The Option will vest over four (4) years with 25% of the shares vesting on the first anniversary of the Start Date and the remaining 75% of the shares vesting in equal monthly installments for the following thirty-six (36) months, subject to your continuing engagement with the Company on each such vesting date. The stock option will be granted pursuant to the inducement grant exception under NASDAQ Rule 5635(c)(4) (and not pursuant to the Plan or any other equity incentive plan of the Company) as an inducement that is material to your entering into employment with the Company. The stock option grant shall also be subject to such other terms and conditions of any associated stock option agreement required to be entered into by you and the Company (along with the Existing Options Documents, the “Equity Documents”). Subject to approval by the Board, you may from time to time be granted additional equity-based compensation awards in respect of shares of common stock of the Company, pursuant to the Plan or any subsequently adopted incentive compensation plan.

7. At-Will Employment. Your employment is “at will,” meaning you or the Company may terminate it at any time for any or no reason.

8. Termination Benefits.

a. In the event of the termination of your employment for any reason, the Company shall pay you your base salary through your last day of employment (the “Date of Termination”), for any accrued but unused vacation and the amount of any documented expenses properly incurred by you on behalf of the Company prior to any such termination and not yet reimbursed, and any other wages required to be paid by applicable law (the “Accrued Obligations”).

b. “Cause” means: (i) conduct by you in connection with your service to the Company that is fraudulent, unlawful or grossly negligent; (ii) your material breach of your material responsibilities to the Company or your willful failure to comply with lawful directives of the Board or written policies of the

 

2


Company; (iii) breach by you of your representations, warranties, covenants and/or obligations under this Agreement (including the Restrictive Covenant Agreement as defined in Section 10); (iv) material misconduct by you which seriously discredits or damages the Company or any of its affiliates; and/or (v) repeated nonperformance (except where due to Disability, as defined in Section 9 below) of your duties or responsibilities to the Company as determined in good faith by the Company after written notice to you and a reasonable opportunity to cure that shall not exceed thirty (30) days.

c. A “Change in Control” means the sale of all or substantially all of the outstanding shares of capital stock, assets or business of the Company, by merger, consolidation, sale of assets or otherwise (other than a merger or consolidation in which all or substantially all of the individuals and entities who were beneficial owners of the Company’s voting securities immediately prior to such transaction beneficially own, directly or indirectly, more than 50% (determined on an as-converted basis) of the outstanding securities entitled to vote generally in the election of directors of the resulting, surviving or acquiring corporation in such transaction). Notwithstanding the foregoing, where required to avoid extra taxation under Section 409A of the Internal Revenue Code, a Change in Control must also satisfy the requirements of Treas. Reg. Section 1.409A-3(a)(5).

d. “Good Reason” means that you have complied with the “Good Reason Process” (hereinafter defined) following the occurrence of any of the following events: (i) a material diminution in your responsibilities, authority or duties; (ii) a material diminution in your base salary except for across-the-board salary reductions based on the Company’s financial performance similarly affecting all or substantially all senior management employees of the Company; or (iii) change of more than 60 miles in the geographic location at which you provide services to the Company, excluding any change in geographic location approved by you (each a “Good Reason Condition”). Notwithstanding the foregoing, a suspension of your responsibilities, authority and/or duties for the Company during any portion of a bona fide internal investigation or an investigation by regulatory or law enforcement authorities shall not be a Good Reason Condition. Good Reason Process shall mean that (i) you reasonably determine in good faith that a Good Reason Condition has occurred; (ii) you notify the Company in writing of the occurrence of the Good Reason Condition within 30 days of the occurrence of such condition; (iii) you cooperate in good faith with the Company’s efforts, for a period not less than 30 days following such notice (the “Cure Period”), to remedy the Good Reason Condition; (iv) notwithstanding such efforts, the Good Reason condition continues to exist; and (v) you terminate employment within 30 days after the end of the Cure Period. If the Company cures the Good Reason Condition during the Cure Period, Good Reason shall be deemed not to have occurred.

e. In the event the Company terminates your employment without Cause or you terminate your employment for Good Reason, in either case within 12 months after the occurrence of the first event constituting a Change in Control (a “Change in Control Termination”) and provided you (i) enter into, do not revoke and comply with the terms of a Release of Claims in the form attached to this Agreement as Exhibit A, which includes a general release of claims against the Company and related persons and entities (the “Release”) within the time period required therein but in no event later than 60 days after the Date of Termination; (ii) resign from any and all positions, including, without implication of limitation, as a director, trustee or officer, that you then hold with the Company and any affiliate of the Company; and (iii) return all Company property and comply with any instructions related to deleting and purging duplicates of such Company property, the Company will provide you with the following “Termination Benefits”: (a) continuation of your then current base salary for the twelve (12) month period that immediately follows the Date of Termination; (b) payment of the amount of bonus equal to your Bonus Target for the year in which the Change in Control occurs; (c) payment of your accrued bonus (if any) with respect to the calendar year in which the Date of Termination occurs, subject to the Board’s assessment of applicable bonus criteria and prorated from the beginning of such year to the Date of Termination ((a) and (b) and (c), the “Severance Payments”); (d) all of the unvested shares subject to the

 

3


Option and all other equity awards granted to you pursuant to the Plan shall immediately vest and become exercisable as of the later of (i) the Date of Termination and (ii) the effective date of the Release; and (e) if elected, continuation of group health plan benefits to the extent authorized by and consistent with 29 U.S.C. § 1161 et seq. (commonly known as “COBRA”), with the cost of the regular premium for such benefits shared in the same relative proportion by the Company and you as in effect on the Date of Termination until the earlier of (i) the date that is twelve (12) months after the Date of Termination; and (ii) the date you become eligible for health benefits through another employer or otherwise become ineligible for COBRA. This Section 8(e) shall terminate and be of no further force or effect beginning 12 months after the occurrence of a Change in Control.

f. In the event the Company terminates your employment without Cause or you terminate your employment for Good Reason, in either case other than a Change in Control Termination, and in either case provided you (i) enter into, do not revoke and comply with the terms of the Release within the time period required therein but in no event later than 60 days after the Date of Termination; (ii) resign from any and all positions, including, without implication of limitation, as a director, trustee or officer, that you then hold with the Company and any affiliate of the Company; and (iii) return all Company property and comply with any instructions related to deleting and purging duplicates of such Company property, the Company will provide you with the following “Termination Benefits”: (a) continuation of your then current base salary for the twelve (12) month period that immediately follows the Date of Termination (the “Severance Payments”); and (b) if elected, continuation of group health plan benefits to the extent authorized by and consistent with 29 U.S.C. § 1161 et seq. (commonly known as “COBRA”), with the cost of the regular premium for such benefits shared in the same relative proportion by the Company and you as in effect on the Date of Termination until the earlier of (i) the date that is twelve (12) months after the Date of Termination; and (ii) the date you become eligible for health benefits through another employer or otherwise become ineligible for COBRA.

g. The Severance Payments shall commence within 60 days after the Date of Termination and shall be made on the Company’s regular payroll dates; provided, however, that if the 60-day period begins in one calendar year and ends in a second calendar year, the Severance Payments shall begin to be paid in the second calendar year. In the event you miss a regular payroll period between the Date of Termination and first Severance Payment date, the first Severance Payment shall include a “catch up” payment. Solely for purposes of Section 409A of the Internal Revenue Code of 1986, as amended, each Severance Payment is considered a separate payment. Notwithstanding anything herein to the contrary, any Severance Payments that you receive or to which you are entitled in any calendar year shall be reduced by the amount of Garden Leave Pay (as defined in the Restrictive Covenant Agreement) you receive in the same such calendar year under the Restrictive Covenant Agreement.

9. Termination of Employment as a Result of Death, Disability, Your Resignation without Good Reason or a Termination by the Company for Cause. In the event your employment is terminated as a result of your (a) death, (b) Disability, (c) resignation without Good Reason, (d) termination for Cause by the Company, or (e) any other termination of your employment that is not defined in Section 8(e) or Section 8(f) of this Agreement, you will be entitled to the Accrued Obligations but you will not be entitled to Termination Benefits. “Disability” means (i) a disability as defined by the group long-term disability insurance policy maintained by the Company for the benefit of its employees or (ii) in the absence of such a policy, your mental or physical illness resulting in you being unable to perform (with or without reasonable accommodation in accordance with the Americans with Disabilities Act) the duties of your position pursuant to this Agreement for a period of a minimum of ninety (90) consecutive days.

10. Confidential Information and Restricted Activities. By signing this Agreement, you represent that you have carefully read and considered all the terms and conditions of this Agreement, including the restraints imposed on you pursuant to the Employee Confidentiality, Assignment and Noncompetition

 

4


Agreement (the “Restrictive Covenant Agreement”) attached as Exhibit B, the terms of which are incorporated by reference herein. You acknowledge and agree that the Restrictive Covenant Agreement was provided to you with this Agreement and at least 10 business days prior to the Start Date. You agree without reservation that the restraints in the Restrictive Covenant Agreement are necessary for the reasonable and proper protection of the Company and its affiliates, and that each and every one of the restraints is reasonable in respect to subject matter, length of time and geographic area. You further agree that, if you were to breach any of the covenants contained in this Agreement or the Restrictive Covenant Agreement, in addition to the Company’s other legal and equitable remedies, the Company may suspend or cease any Termination Benefits to which you might otherwise be entitled. Any such suspension or termination of the Termination Benefits by the Company in the event of a breach by you shall not affect your ongoing obligations to the Company, including under the Restrictive Covenant Agreement.

11. Taxes; Section 409A; Section 280G; Section 4099.

a. All forms of compensation referred to in this Agreement (which includes the Restrictive Covenant Agreement) are subject to reduction to reflect applicable withholding and payroll taxes and other deductions required by law. You hereby acknowledge that the Company does not have a duty to design its compensation policies in a manner that minimizes your tax liabilities, and you will not make any claim against the Company or its board of directors related to tax liabilities arising from your compensation.

b. Anything in this Agreement to the contrary notwithstanding, if at the time of your separation from service within the meaning of Section 409A of the Code, the Company determines that you are a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code, then to the extent any payment or benefit that you become entitled to under this Agreement on account of your separation from service would be considered deferred compensation subject to the 20 percent additional tax imposed pursuant to Section 409A(a) of the Code as a result of the application of Section 409A(a)(2)(B)(i) of the Code, such payment shall not be payable and such benefit shall not be provided until the date that is the earlier of (A) six months and one day after your separation from service, or (B) your death. If any such delayed cash payment is otherwise payable on an installment basis, the first payment shall include a catch-up payment covering amounts that would otherwise have been paid during the six-month period but for the application of this provision, and the balance of the installments shall be payable in accordance with their original schedule. All in-kind benefits provided and expenses eligible for reimbursement under this Agreement shall be provided by the Company or incurred by you during the time periods set forth in this Agreement. All reimbursements shall be paid as soon as administratively practicable, but in no event shall any reimbursement be paid after the last day of the taxable year following the taxable year in which the expense was incurred. The amount of in-kind benefits provided or reimbursable expenses incurred in one taxable year shall not affect the in-kind benefits to be provided or the expenses eligible for reimbursement in any other taxable year. Such right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit. To the extent that any payment or benefit described in this Agreement constitutes “non-qualified deferred compensation” under Section 409A of the Code, and to the extent that such payment or benefit is payable upon your termination of employment, then such payments or benefits shall be payable only upon your “separation from service.” The determination of whether and when a separation from service has occurred shall be made in accordance with the presumptions set forth in Treasury Regulation Section 1.409A-1(h). The Company and you intend that this Agreement will be administered in accordance with Section 409A of the Code. To the extent that any provision of this Agreement is ambiguous as to its compliance with Section 409A of the Code, the provision shall be read in such a manner so that all payments hereunder comply with Section 409A of the Code. The Company makes no representation or warranty and shall have no liability to you or any other person if any provisions of this Agreement are determined to constitute deferred compensation subject to Section 409A of the Code but do not satisfy an exemption from, or the conditions of, such Section.

 

5


c. Anything in this Agreement to the contrary notwithstanding, in the event that the amount of any compensation, payment or distribution by the Company to or for your benefit, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, calculated in a manner consistent with Section 280G of the Code and the applicable regulations thereunder (the “Aggregate Payments”), would be subject to the excise tax imposed by Section 4999 of the Code, then the Aggregate Payments shall be reduced (but not below zero) so that the sum of all of the Aggregate Payments shall be $1.00 less than the amount at which you become subject to the excise tax imposed by Section 4999 of the Code; provided that such reduction shall only occur if it would result in you receiving a higher After Tax Amount (as defined below) than you would receive if the Aggregate Payments were not subject to such reduction. In such event, the Aggregate Payments shall be reduced in the following order, in each case, in reverse chronological order beginning with the Aggregate Payments that are to be paid the furthest in time from consummation of the transaction that is subject to Section 280G of the Code: (1) cash payments not subject to Section 409A of the Code; (2) cash payments subject to Section 409A of the Code; (3) equity-based payments and acceleration; and (4) non-cash forms of benefits; provided that in the case of all the foregoing Aggregate Payments all amounts or payments that are not subject to calculation under Treas. Reg. §1.280G-1, Q&A-24(b) or (c) shall be reduced before any amounts that are subject to calculation under Treas. Reg. §1.280G-1, Q&A-24(b) or (c).

(i) For purposes of this Section 11(c), the “After Tax Amount” means the amount of the Aggregate Payments less all federal, state, and local income, excise and employment taxes imposed on you as a result of your receipt of the Aggregate Payments. For purposes of determining the After Tax Amount, you shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation applicable to individuals for the calendar year in which the determination is to be made, and state and local income taxes at the highest marginal rates of individual taxation in each applicable state and locality, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.

(ii) The determination as to whether a reduction in the Aggregate Payments shall be made pursuant to Section 11(c) shall be made, at the Company’s expense, by a nationally recognized accounting firm selected by the Company (the “Accounting Firm”), which shall provide detailed supporting calculations both to the Company and you within 15 business days of the Date of Termination, if applicable, or at such earlier time as is reasonably requested by the Company or you. Any determination by the Accounting Firm shall be binding upon the Company and you.

12. Interpretation, Amendment and Enforcement. This Agreement, the Restrictive Covenant Agreement, the Indemnification Agreement and the Equity Documents constitute the complete agreement between you and the Company, contain all of the terms of your employment with the Company and supersede any prior agreements, representations or understandings (whether written, oral or implied) between you and the Company. The terms of this Agreement and the resolution of any disputes as to the meaning, effect, performance or validity of this Agreement or arising out of, related to, or in any way connected with this Agreement, your employment with the Company or any other relationship between you and the Company (the “Disputes”) will be governed by Massachusetts law, excluding laws relating to conflicts or choice of law. You and the Company submit to the exclusive personal jurisdiction of the federal and state courts located in the Commonwealth of Massachusetts in connection with any Dispute or any claim related to any Dispute.

13. Assignment. Neither you nor the Company may make any assignment of this Agreement or any interest in it, by operation of law or otherwise, without the prior written consent of the other; provided, however, that the Company may assign its rights and obligations under this Agreement (including the Restrictive Covenant Agreement) without your consent to any affiliate at any time, or to any person or entity with whom the Company shall hereafter effect a reorganization, consolidate with, or merge into or to whom it transfers all or substantially all of its properties or assets. This Agreement shall inure to the benefit of and be binding upon you and the Company, and each of your and its respective successors, executors, administrators, heirs and permitted assigns.

 

6


14. Miscellaneous. This Agreement may not be modified or amended, and no breach shall be deemed to be waived, unless agreed to in writing by you and a Board member of the Company. The headings and captions in this Agreement are for convenience only and in no way define or describe the scope or content of any provision of this Agreement. The words “include,” “includes” and “including” when used herein shall be deemed in each case to be followed by the words “without limitation.” This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument, and each of which may be delivered by facsimile transmission or in Portable Document Format (PDF) by email.

15. Obligations to Former Employers. You agree that you shall not disclose any confidential information of any prior employer at any time and will otherwise fully comply with your contractual and other legal obligations to any prior employer. By signing this Agreement, you represent to the Company that you have no contractual commitments or other legal obligations that would or may prohibit you from performing your duties for the Company.

[Signature Page Follows]

 

7


Please acknowledge, by signing below, that you have accepted this Agreement.

 

Very truly yours,
By:  

/s/ Raj Kannan

 

Raj Kannan

Chief Executive Officer

Chiasma, Inc.

I have read and accept this Agreement:

 

/s/ Anand Varadan

Anand Varadan

Dated: April 15, 2020

Enclosures: Exhibit A: Release

 

[Signature Page – Executive Employment Letter – A. Varadan]


Exhibit A

RELEASE OF CLAIMS

This Release of Claims (the “Release”) is entered into by and between Anand Varadan (the “Executive”) and Chiasma, Inc. (with all affiliates, the “Company”) in connection with the Executive Employment Letter Agreement between the Executive and the Company dated April 8, 2020 (the “Agreement”). Terms with initial capitalization that are not otherwise defined in this Release have the meanings set forth in the Agreement. The consideration for the Executive’s agreement to this Release consists of the Termination Benefits, the receipt of which is conditioned on the Executive’s timely execution and nonrevocation of this Release pursuant to the Agreement.

1. Tender of Release. This Release is automatically tendered to the Executive upon the date of the termination of the Executive’s employment if the Executive is eligible for the Termination Benefits.

2. Release of Claims. Except as provided below, the Executive voluntarily releases and forever discharges the Company, its affiliated and related entities, its and their respective predecessors, successors and assigns, its and their respective employee benefit plans and fiduciaries of such plans, and the current and former members, partners, directors, officers, shareholders, employees, attorneys, accountants and agents of each of the foregoing in their official and personal capacities (collectively referred to as the “Releasees”) generally from all claims, demands, debts, damages and liabilities of every name and nature, known or unknown (collectively, “Claims”) that, as of the date when the Executive signs this Release, he has, ever had, now claims to have or ever claimed to have had against any or all of the Releasees. This general release of Claims includes, without implication of limitation, the release of all Claims:

 

   

relating to the Executive’s employment by and termination from employment with the Company or any related entity;

 

   

of wrongful discharge or violation of public policy;

 

   

of breach of contract;

 

   

of discrimination or retaliation under federal, state or local law (including, without limitation, Claims of age discrimination or retaliation under the Age Discrimination in Employment Act, Claims of disability discrimination or retaliation under the Americans with Disabilities Act, and Claims of discrimination or retaliation under Title VII of the Civil Rights Act of 1964;

 

   

under any other federal or state statute or constitution or local ordinance;

 

   

of defamation or other torts;

 

   

for wages, bonuses, incentive compensation, stock, stock options, vacation pay or any other compensation or benefits, whether under the Massachusetts Wage Act or otherwise; and

 

   

for damages or other remedies of any sort, including, without limitation, compensatory damages, punitive damages, injunctive relief and attorney’s fees.

Notwithstanding anything to the contrary contained in this Release, Section 2 of this Release does not include and will not preclude: (a) Executive’s rights or claims under the Agreement to receive Termination Benefits and Accrued Obligations; (b) claims for worker’s compensation benefits under applicable law; (c) any claims arising solely after the execution of this Release; (d) any claims or rights Executive may have to any vested benefits or vested rights under any employee benefit, welfare,

 

1


retirement and/or pension plans (the “Plans”), subject to the terms of the Plans, including, but not limited to, the Company’s 2015 Stock Incentive Plan and/or the Equity Documents, or any subsequently adopted incentive compensation plan, and applicable equity Award agreements; (e) any rights and/or claims Executive may have under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”); (f) claims for unemployment compensation benefits under state law; (g) claims for reimbursement of business expenses approved by the Company and incurred by the Executive prior to the Date of Termination; (h) rights, if any, to defense and indemnification from the Company or its insurers for actions taken by Executive in the course and scope of Executive’s employment with the Company, including, but not limited to, any claims or rights under the Indemnification Agreement; or (i) any rights and/or claims Executive may have as a shareholder of the Company.

3. Ongoing Obligations of the Executive. The Executive hereby reaffirms that the Restrictive Covenant Agreement remains in full effect, except that the Executive hereby waives any right to Garden Leave (as defined in the Restrictive Covenant Agreement) and agrees that Section 8(c) of the Restrictive Covenant Agreement is hereby deleted in its entirety and replaced with the following text taken from the original Section 8(c): “I shall not directly or indirectly, whether as owner, partner, shareholder, director, manager, consultant, agent, employee, co-venturer or otherwise, anywhere in the United States or in any other country in which the Company does business, engage or otherwise participate in any business that develops, manufactures or markets any products, or performs any services, that are competitive with the products or services of the Company, or products or services that the Company or its affiliates, has under development or that are the subject of active planning at any time during my employment.” The first sentence of Section 17 (“Waiver”) of the Restrictive Covenant Agreement is hereby deleted. The Restrictive Covenant Agreement, as amended herein, is incorporated herein by reference. The Restrictive Covenant Agreement, and any other ongoing obligations the Executive has under the Agreement, are the “Ongoing Obligations”, which Obligations are incorporated herein by reference.

4. Nondisparagement. Executive agrees not to make any disparaging, critical or otherwise detrimental statements to any person or entity concerning any Releasee or the products or services of any Releasee. This nondisparagement obligation shall not in any way affect the Executive’s obligation to testify truthfully in any legal proceeding.

5. Protected Disclosures and Other Protected Actions. Nothing contained in this Agreement limits Executive’s ability to file a charge or complaint with any federal, state or local governmental agency or commission (a “Government Agency”). In addition, nothing contained in this Agreement limits Executive’s ability to communicate with any Government Agency or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including Executive’s ability to provide documents or other information, without notice to the Company, nor does anything contained in this Agreement apply to, restrict or prohibit truthful testimony in litigation, arbitration or other legal proceeding. If Executive files any charge or complaint with any Government Agency and if the Government Agency pursues any claim on Executive’s behalf, or if any other third party pursues any claim on Executive’s behalf, except for Termination Benefits to which the Executive is otherwise entitled, Executive waives any right to monetary or other individualized relief (either individually, or as part of any collective or class action); provided that nothing in this Agreement limits any right Executive may have to receive a whistleblower award or bounty for information provided to the Securities and Exchange Commission.

6. No Assignment. The Executive represents that he has not assigned to any other person or entity any Claims against any Releasee.

 

2


7. Right to Consider and Revoke Release. The Executive acknowledges that he has been given the opportunity to consider this Release for a period of at least 21 days (the “Consideration Period”)1. In the event the Executive executes this Release before the end of the Consideration Period, he acknowledges that such decision was entirely voluntary and that he had the opportunity to consider this Release until the end of the Consideration Period. To accept this Release, the Executive shall deliver a signed Release to the Company within twenty-one (21) days after the Date of Termination. For a period of seven (7) business days from the date when the Executive executes this Release (the “Revocation Period”), he shall retain the right to revoke this Release by written notice that is received by the undersigned Chiasma representative on or before the last day of the Revocation Period. If it is not revoked pursuant to the preceding sentence, this Release shall become effective and enforceable on the date immediately following the last day of the Revocation Period (the “Effective Date”).

8. Other Terms.

a. Legal Representation; Review of Release. The Executive acknowledges that he has been advised by the Company to discuss all aspects of this Release with his attorney, that he has carefully read and fully understands all of the provisions of this Release and that he is voluntarily entering into this Release.

b. Binding Nature of Release. This Release shall be binding upon the Executive and upon his heirs, administrators, representatives and executors.

c. Modification of Release; Waiver. This Release may be amended, only upon a written agreement executed by the Executive and the Company.

d. Severability. In the event that at any future time it is determined by a court of competent jurisdiction that any covenant, clause, provision or term of this Release is illegal, invalid or unenforceable, the remaining provisions and terms of this Release shall not be affected thereby and the illegal, invalid or unenforceable term or provision shall be severed from the remainder of this Release. In the event of such severance, the remaining covenants shall be binding and enforceable; provided, however, and for the avoidance of doubt, in no event shall the Company be required to provide Termination Benefits if all or part of Section 2 of this Release is held to be invalid or unenforceable.

e. Governing Law and Interpretation. This Release shall be deemed to be made and entered into in the Commonwealth of Massachusetts, and shall in all respects be interpreted, enforced and governed under the laws of the Commonwealth of Massachusetts, without giving effect to its conflict of laws provisions. The language of all parts of this Release shall in all cases be construed as a whole, according to its fair meaning, and not strictly for or against either of the parties.

f. Entire Agreement; Absence of Reliance. This Release constitutes the entire agreement between the Executive and the Company and supersedes any previous agreements or understandings between the Executive and the Company, except the Equity Documents, the Ongoing Obligations and any other obligations specifically preserved in this Release. The Executive acknowledges that he is not relying on any promises or representations by the Company or the agents, representatives or attorneys of any of the entities within the definition of Company regarding any subject matter addressed in this Release.

IN WITNESS WHEREOF, the parties have executed this Release effective on the date and year first above written.

 

 

1 

To be increased to 45 days in the event of a group termination under the Older Workers’ Benefits Protection Act.

 

3


CHIASMA, INC.
By:  

 

 

[NAME]

[TITLE]

 

Date

 

Anand Varadan

 

Date  

 

4

EX-31.1

Exhibit 31.1

Certification

I, Raj Kannan, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2020 of Chiasma, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 7, 2020           

/s/ Raj Kannan

      Raj Kannan
     

Chief Executive Officer and Director

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification

I, Mark J. Fitzpatrick, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2020 of Chiasma, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 7, 2020           

/s/ Mark J. Fitzpatrick

      Mark J. Fitzpatrick
     

President

(Principal Financial Officer)

 

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of Chiasma, Inc. (the “Company”) for the period ended March 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers herby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to his knowledge:

 

1)

the Report which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated in the Report.

 

Date: May 7, 2020           

/s/ Raj Kannan

      Raj Kannan
     

Chief Executive Officer and Director

(Principal Executive Officer)

 

Date: May 7, 2020           

/s/ Mark J. Fitzpatrick

      Mark J. Fitzpatrick
     

President

(Principal Financial Officer)

v3.20.1
Leases
3 Months Ended
Mar. 31, 2020
Leases [Abstract]  
Leases
10. Leases
We determine if an arrangement is a lease at inception. We have operating leases for our office spaces and certain automobiles.
R
ight-of-use
assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The
right-of-use
asset also includes direct costs incurred and is reduced by lease incentives. Lease agreements with lease and
non-lease
components are accounted for separately. As our leases do not provide an implicit rate, we use an estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. We recognize operating lease expense on a straight-line basis over the lease term.
 
   
Three Months Ended March 31,
 
   
2020
   
2019
 
   
($ in thousands)
 
The components of lease expense were as follows:
    
Operating lease expense
  $167   $47 
  
 
 
   
 
 
 
Supplemental cash flow information related to leases was as follows:
    
Cash paid for amounts included in the measurement of lease liabilities:
    
Operating cash flows from operating leases
  $72   $45 
Right-of-use
assets obtained in exchange for lease obligations:
    
Operating leases
  $94   $27 
 
   
March 31, 2020
 
   
($ in thousands)
 
Supplemental balance sheet information related to leases was as follows:
  
R
ight-of-use
assets
  $1,346 
 
 
 
 
 
Other current liabilities
  $628 
Long-term liabilities
   938 
  
 
 
 
Total lease liabilities
  $1,566 
  
 
 
 
Weighted average remaining lease term
-
operating leases
   28 Months 
Weighted average discount rate
-
operating leases
   10.7
Our lease
right-of-use
assets are recorded within other assets on our condensed consolidated balance sheets.
Future lease payments under noncancelable leases as of March 31, 2020 are as follows:
 
   
($ in thousands)
 
Remainder of 2020
  $587 
2021
   715 
2022
   487 
  
 
 
 
Total future minimum lease payments
   1,789 
Less: imputed interest
   (223
  
 
 
 
Total
  $1,566 
  
 
 
v3.20.1
Deferred Royalty Obligation
3 Months Ended
Mar. 31, 2020
Text Block [Abstract]  
Deferred Royalty Obligation
6. Deferred Royalty Obligation
In April 2020, we entered into the Revenue Interest
Financing
 
Agreement with HCR whereby HCR will receive payments from us at a tiered percentage (the “Applicable Tiered Percentage”) of future net revenues of MYCAPSSA and any of our other future products, including worldwide net product sales and upfront payments,
and
milestones (the “Revenue Interests”). Under the terms of the agreement, we received $25.0 million, less certain transaction expenses, from HCR in April 2020 and are entitled to receive an additional $25.0 million
subject to the
 
FDA approval of MYCAPSSA
for the maintenance treatment of adults with acromegaly before the first anniversary of the initial closing (the “FDA Condition”) and customary closing conditions
and an additional $15.0 million upon the
certain conditions related to
commercial drug supply
availability
and first commercial sale of MYCAPSSA
 subject to customary closing conditions
. We are also entitled to receive an additional $10.0 million in early 2022 subject to the achievement of a commercial milestone
 and customary closing conditions
. In exchange for the total investment amount (“Investment Amount”) received, HCR will receive a tiered royalty
starting
in the low double digits on worldwide annual net revenues of MYCAPSSA and any other future products, subject to step-downs upon the achievement of certain annual revenues.
 
HCR’s rights to receive the Revenue Interests shall terminate on the date on which HCR has received payments equal to 195% of the funded portion of the Investment Amount including the aggregate of all payments made to HCR as of such date, unless the Revenue Interest
Financing
Agreement is terminated
 earlier
. If the FDA Condition is not met (and is not waived by HCR),
we
shall pay HCR an amount equal to 113.5% of the funded portion of the Investment Amount and the Revenue Interest
Financing
Agreement will then terminate. If HCR has not received payments equal to the 195% of the funded portion of the Investment Amount by the
ten-year
anniversary of the initial closing date and no event of default has occurred or is ongoing, among other things,
we
shall pay HCR an amount equal to the funded portion of the Investment Amount plus a specific annual rate of return less payments previously received. If a change of control of the Company occurs,
we
must immediately repay HCR the total amount actually funded plus a change of control premium, the amount of which is variable up to 95% based on timing and circumstances of such change of control and the amount funded and conditionally eligible to be funded by HCR as of the date of the change of control.
If HCR has not received 60% of the Investment Amount by September 30, 2023 or 100% of the Investment Amount by September 30, 2024, we must make cash payment
s
sufficient to gross HCR up to such minimum amounts. Further, the Revenue Interest
Financing
Agreement requires us to maintain a minimum of $20.0 million in
securitized
cash and
investment accounts
during any quarter that the trailing four quarters of net revenue of MYCAPSSA is below a certain threshold
.
 
Our obligations under the Royalty Interest Financing Agreement are secured by a first priority perfected security interest in all of our Chiasma, Inc. cash and cash equivalents (as defined in the Royalty Interest Financing Agreement), all present and future net revenues of MYCAPSSA and all MYCAPSSA-related assets
.
v3.20.1
Deferred Royalty Obligation - Additional Information (Detail) - USD ($)
$ in Millions
1 Months Ended
Sep. 30, 2024
Sep. 30, 2023
Apr. 30, 2020
Healthcare Royalty Partners IV, L.P. ("HCR") [Member]      
Deferred Royalty Obligation [Line Items]      
Proceeds from first investment amount     $ 25.0
Royalty payments applicable tiered percentage     195.00%
Royalty guarantees commitments percentage 100.00% 60.00%  
Variable rate of total return     95.00%
Minimum Cash Covenant     $ 20.0
Food and Drug Administration [Member]      
Deferred Royalty Obligation [Line Items]      
Proceeds from second investment amount     $ 25.0
Food and Drug Administration [Member] | Healthcare Royalty Partners IV, L.P. ("HCR") [Member]      
Deferred Royalty Obligation [Line Items]      
Royalty payments applicable tiered percentage     113.50%
Commercial Drug Supply And First Commercial Sale [Member]      
Deferred Royalty Obligation [Line Items]      
Proceeds from third investment amount     $ 15.0
Commercial Milestone [Member]      
Deferred Royalty Obligation [Line Items]      
Proceeds from fourth investment amount     $ 10.0
v3.20.1
Stock Incentive Plans - Schedule of Fair Value Calculation of Option Granted (Detail)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]    
Expected volatility 85.00% 101.00%
Expected term (years) 6 years 3 months 18 days 6 years
Risk-free interest rate 1.44% 2.52%
Expected dividend yield 0.00% 0.00%
v3.20.1
Description of Business and Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2020
Accounting Policies [Abstract]  
Description of Business and Summary of Significant Accounting Policies
1.
Description of Business and Summary of Significant Accounting Policies
Chiasma, Inc. is a clinical
, late
 
stage biopharmaceutical company incorporated in 2001 under the laws of the State of Delaware. Chiasma, Inc. is headquartered in Massachusetts and has two wholly owned subsidiaries; Chiasma (Israel) Ltd., and Chiasma Securities Corp, collectively referred to as “the Company,” “we,” “us,” “our” or “Chiasma”. We are focused on improving the lives of patients who face challenges associated with their existing treatments for rare and serious chronic disease. Employing our proprietary Transient Permeability Enhancer (“TPE”) technology platform, we seek to develop oral medications that are currently available only as injections. We are currently developing oral octreotide capsules, conditionally trade-named “MYCAPSSA”, our TPE platform-based clinical product candidate, for the treatment of acromegaly. In July 2019, we reported positive
top-line
data from our second completed Phase 3 clinical trial of octreotide capsules in adult patients for the treatment of acromegaly. The trial, referred to as CHIASMA OPTIMAL, was a randomized, double-blind, placebo-controlled, nine-month trial that enrolled 56 adult acromegaly patients. We initiated this trial following our agreement with the United States Food and Drug Administration (“FDA”) on the design of the trial, reached through a Special Protocol Assessment in August 2017. In December 2019, we resubmitted our New Drug Application (“NDA”) and in early January 2020 the FDA accepted it for review and assigned a Prescription Drug User Fee Act, (“PDUFA”) target action date of June 26, 2020.
Acromegaly is a rare and debilitating condition that
is caused by
the body’s production of excess growth hormone. Octreotide is an analog of somatostatin, a natural inhibitor of growth hormone secretion. Octreotide capsules have been granted orphan designation in the United States and the European Union for the treatment of acromegaly. We retain worldwide rights to develop and commercialize octreotide capsules.
We are also currently conducting an international Phase 3 clinical trial, referred to as MPOWERED, of oral octreotide capsules for the maintenance treatment of adult patients with acromegaly to support regulatory approval in the European Union by the European Medicines Agency (“EMA”). The MPOWERED trial is a global, randomized, open-label and active-controlled
15-month
trial initially designed to enroll up to 150 patients. The EMA requested that a minimum of 80 patients who are responders to octreotide capsules per the protocol following the
six-month
run-in
phase be randomized to either remain on octreotide capsules or return to injectable somatostatin receptor ligands (octreotide or lanreotide), and then followed for an additional nine months. In June 2019, we completed the enrollment of 146 total patients in MPOWERED and in January 2020 completed the randomization in that trial.
In April 2019, we completed a
follow-on
public offering of common stock in which we sold 7,263,158 shares of common stock at $4.75 per share for aggregate net proceeds of approximately $32.2 million after underwriting fees and offering expenses.
In August 2019, we completed a
follow-on
public offering of common stock in which we sold 10,166,427 shares of common stock at $5.50 per share for aggregate net proceeds of approximately $52.3 million after underwriting fees and offering expenses.
In April 2020, we entered into an Open Market Sales Agreement (“ATM Agreement”) for “at the market offerings” with
Jefferies
LLC (“
Jefferies
”), which allows us to offer and sell up to $60.0 million in gross proceeds of common stock from time to time, through Jefferies, acting as our sales agent or principal. To date, we have not sold any common stock under the ATM Agreement.
In April 2020, we entered into a Revenue Interest Financing Agreement (the “Revenue Interest
Financing
Agreement”) with Healthcare Royalty Partners IV, L.P. (“HCR”) for up to $75.0 million. The initial funding of $25.0 million, less certain transaction expenses, was completed in April 2020 (see Note 6).
Consideration of Going Concern and Management’s Plans
Under
the existing accounting guidance, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the condensed consolidated financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the condensed consolidated financial statements are issued. When substantial doubt is determined to exist, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans; however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date the condensed consolidated financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the condensed consolidated financial statements are issued
.
We have incurred substantial operating losses since inception, and we expect our operating losses and negative operating cash flows to continue for the foreseeable future. For the three months ended March 31, 2020, we had a net loss of $15.4 million and used $12.6 million of cash in operations. For the year ended December 31, 2019, we had a net loss of $36.3 million and used $35.0 million of cash in operations. At March 31, 2020, we had cash, cash equivalents and marketable securities of $79.3 million and an accumulated deficit of $288.3 million. We expect to continue to incur significant costs in the upcoming year as we prepare for the potential approval and commercial launch of octreotide capsules in the United States. The FDA has assigned a PDUFA target
action
date of June 26, 2020 to our NDA resubmission. We also plan to continue to fund our international Phase 3 MPOWERED clinical trial of octreotide capsules in acromegaly to support potential regulatory approval in the European Union. Our current combined cash, cash equivalents and marketable securities are not sufficient to fund these activities, as currently planned, for one year after the date thes
e condensed c
onsolidated financial statements are issued. Accordingly, we believe these conditions, in the aggregate, raise substantial doubt regarding our ability to continue as a going concern for a period of one year from the date th
e
 
condensed
c
onsolidated financial statements are issued.
In
order to fund these efforts, in part, we entered into a $75.0 million Revenue Interest Financing Agreement with HCR, $50.0 million of which funding remains contingent upon the achievement of certain milestones. We expect to further finance our cash needs through equity financings, and we will also opportunistically consider license and collaboration agreements with potential partners or convertible debt financing to the extent such sources are identified and available. If FDA approval is obtained, we also plan to use revenues, if any, generated from the sale of octreotide capsules in the U.S. to fund our operations. While we believe our plans to achieve the Revenue Interest Financing Agreement funding milestones, to raise additional funds and generate product sales will alleviate the conditions that raise substantial doubt, these plans are not entirely within our control and cannot be assessed as being probable of occurring. Further, while we have received a PDUFA target action date from the FDA, there can be no assurances that FDA approval of octreotide capsules will be received
.
Basis of Presentation
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the SEC regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by accounting principles generally accepted in the United States (“U.S. GAAP”) for annual financial statements have been condensed or omitted. The information included in this quarterly report on Form
10-Q
should be read in conjunction with our Annual Report on Form
10-K
for the year ended December 31, 2019. The
year-end
condensed consolidated balance sheet data presented for comparative purposes was derived from our audited financial statements but does not include all disclosures required by U.S. GAAP. In the opinion of management, we have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as our audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. Interim results are not necessarily indicative of results for a full year or for any other subsequent interim period.
Cash Equivalents
Cash equivalents consist of highly liquid instruments that mature within three months or less from the date of purchase.
Marketable Securities
Our investments primarily consist of commercial paper and corporate and government debt securities. These marketable securities are classified as
available-for-sale,
and as such, are reported at fair value on our condensed consolidated balance sheets. Unrealized holding gains and losses are reported within accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, together with interest on securities, are included in other income, net, on our condensed consolidated statements of operations.
If a decline in the fair value of a marketable security below our cost basis is determined to be other than temporary, such marketable security is written down to its estimated fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. The cost of securities sold is based on the specific identification method.
 
Concentrations of credit risk
Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash, cash equivalents and marketable securities. We routinely maintain deposits in financial institutions in excess of government insured limits. Management believes that we are not exposed to significant credit risk as our deposits are held at financial institutions that management believes to be of high credit quality and we have not experienced any significant losses in these deposits. We regularly invest excess operating cash in deposits with major financial institutions and money market funds and in notes issued by the U.S. government, as well as in fixed income investments and U.S. bond funds, both of which can be readily purchased and sold using established markets. We believe that the market risk arising from our holdings of these financial instruments is mitigated based on the fact that many of these securities are either government backed or of high credit rating.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes during the reporting period. We base these estimates and assumptions on historical experience when available, and on various factors that we believe to be reasonable under the specific circumstances. Significant estimates relied upon in preparing the accompanying condensed consolidated financial statements include, but are not limited to, accounting for stock-based compensation, income taxes, and accounting for certain accruals. We assess the above estimates on an ongoing basis; however, actual results could materially differ from those estimates.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued new guidance which will require more timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The new guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The new guidance also requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. On January 1, 2020, we adopted this standard. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
v3.20.1
Condensed Consolidated Statements of Operations - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Operating expenses:    
General and administrative $ 7,582 $ 2,450
Research and development 8,125 6,471
Total operating expenses 15,707 8,921
Loss from operations (15,707) (8,921)
Other income, net (398) (184)
Loss before income taxes (15,309) (8,737)
Provision for income taxes 77 13
Net loss $ (15,386) $ (8,750)
Earnings per share    
Basic $ (0.36) $ (0.36)
Diluted $ (0.36) $ (0.36)
Weighted-average shares outstanding:    
Basic 42,187,694 24,466,617
Diluted 42,187,694 24,466,617
v3.20.1
Investments - Schedule of Investments (Detail) - USD ($)
$ in Thousands
3 Months Ended 12 Months Ended
Mar. 31, 2020
Dec. 31, 2019
Gain (Loss) on Securities [Line Items]    
Amortized Cost $ 78,016 $ 89,495
Gross Unrealized Gains 20 37
Gross Unrealized Losses (17)  
Estimated Fair Value 78,019 89,532
Money Market Funds [Member]    
Gain (Loss) on Securities [Line Items]    
Amortized Cost 41,312 23,012
Estimated Fair Value 41,312 23,012
Corporate Notes [Member]    
Gain (Loss) on Securities [Line Items]    
Amortized Cost 21,527 45,584
Gross Unrealized Gains 1 20
Gross Unrealized Losses (17)  
Estimated Fair Value 21,511 45,604
Commercial Paper [Member]    
Gain (Loss) on Securities [Line Items]    
Amortized Cost 15,177 20,899
Gross Unrealized Gains 19 17
Estimated Fair Value $ 15,196 $ 20,916
v3.20.1
Accrued Expenses (Tables)
3 Months Ended
Mar. 31, 2020
Payables and Accruals [Abstract]  
Schedule of Accrued Expenses
As of March 31, 2020 and December 31, 2019, accrued expenses consisted of the following:
 
   
March 31, 2020
   
December 31, 2019
 
   
($ in thousands)
 
Accrued general and administrative expenses
  $1,488   $647 
Accrued research and development expenses
   3,964    4,219 
Accrued payroll and employee benefits
   1,451    1,872 
Short-term borrowing
   335    838 
  
 
 
   
 
 
 
Total accrued expenses
  $7,238   $7,576 
  
 
 
   
 
 
 
v3.20.1
Accrued Expenses - Schedule of Accrued Expenses (Detail) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Payables and Accruals [Abstract]    
Accrued general and administrative expenses $ 1,488 $ 647
Accrued research and development expenses 3,964 4,219
Accrued payroll and employee benefits 1,451 1,872
Short-term borrowing 335 838
Total accrued expenses $ 7,238 $ 7,576
v3.20.1
Cover Page - shares
3 Months Ended
Mar. 31, 2020
May 04, 2020
Cover [Abstract]    
Document Type 10-Q  
Entity Interactive Data Current Yes  
Amendment Flag false  
Document Period End Date Mar. 31, 2020  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Entity Registrant Name CHIASMA, INC  
Entity Central Index Key 0001339469  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Shell Company false  
Entity Filer Category Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company true  
Entity Ex Transition Period true  
Entity Common Stock, Shares Outstanding   42,265,341
Trading Symbol CHMA  
Security Exchange Name NASDAQ  
Title of 12(b) Security Common Stock  
Entity Address, State or Province MA  
v3.20.1
Condensed Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Statement of Comprehensive Income [Abstract]    
Net loss $ (15,386) $ (8,750)
Other comprehensive income (loss):    
Unrealized gain (loss) on available for sale securities, net (34) 18
Total other comprehensive income (loss): (34) 18
Comprehensive loss $ (15,420) $ (8,732)
v3.20.1
Investments
3 Months Ended
Mar. 31, 2020
Investments, All Other Investments [Abstract]  
Investments
2. Investments
Our investments consisted of the following as of March 31, 2020 and December 31, 2019:
 
   
As of March 31, 2020
 
   
Amortized Cost
   
Gross Unrealized

Gains
   
Gross Unrealized

Losses
  
Estimated Fair

Value
 
   
($ in thousands)
 
Money market funds
  $41,312   $—     $—    $41,312 
Corporate notes
   21,527    1    (17  21,511 
Commercial paper
   15,177    19    —     15,196 
  
 
 
   
 
 
   
 
 
  
 
 
 
Total
  $78,016   $20   $(17 $78,019 
  
 
 
   
 
 
   
 
 
  
 
 
 
 
   
As of December 31, 2019
 
   
Amortized Cost
   
Gross Unrealized

Gains
   
Gross Unrealized

Losses
   
Estimated Fair

Value
 
   
($ in thousands)
 
Money market funds
  $23,012   $—     $—     $23,012 
Corporate notes
   45,584    20    —      45,604 
Commercial paper
   20,899    17    —      20,916 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $89,495   $37   $—     $89,532 
  
 
 
   
 
 
   
 
 
   
 
 
 
As of March 31, 2020, we consider those securities that are in an unrealized loss position
are temporary and are not due to credit losses.
We
 
have the ability to hold such investments until recovery of the fair value. We utilize the specific identification method in computing realized gains and losses. We had no realized gains and losses on our
available-for-sale
securities for the three months ended March 31, 2020 or 2019.
 
The fair values of our investments by classification in our condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019 were as follows:
 
   
March 31, 2020
   
December 31, 2019
 
   
($ in thousands)
 
Cash and cash equivalents
  $41,312   $25,012 
Marketable securities
   36,707    64,520 
  
 
 
   
 
 
 
Total
  $78,019   $89,532 
  
 
 
   
 
 
 
Cash and cash equivalents in the table above exclude cash of $1.2 million and $2.8 million as of March 31, 2020 and December 31, 2019, respectively. The contractual maturity dates of all of our investments are less than one year.
v3.20.1
Fair Value Measurements of Financial Instruments - Fair Value Measurements of Company's Financial Instruments (Detail) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Cash equivalents:    
Total cash equivalents $ 41,312 $ 25,012
Marketable securities:    
Total marketable securities 78,019 89,532
Total 78,019 89,532
Corporate Notes [Member]    
Cash equivalents:    
Total cash equivalents 21,511 2,000
Marketable securities:    
Total marketable securities   43,604
Commercial Paper [Member]    
Marketable securities:    
Total marketable securities 15,196 20,916
Marketable Securities [Member]    
Marketable securities:    
Total marketable securities 36,707 64,520
Money Market Funds [Member]    
Cash equivalents:    
Total cash equivalents 41,312 23,012
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]    
Cash equivalents:    
Total cash equivalents 41,312 23,012
Marketable securities:    
Total 41,312 23,012
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Money Market Funds [Member]    
Cash equivalents:    
Total cash equivalents 41,312 23,012
Significant Other Observable Inputs (Level 2) [Member]    
Cash equivalents:    
Total cash equivalents   2,000
Marketable securities:    
Total 36,707 66,520
Significant Other Observable Inputs (Level 2) [Member] | Corporate Notes [Member]    
Cash equivalents:    
Total cash equivalents 21,511 2,000
Marketable securities:    
Total marketable securities   43,604
Significant Other Observable Inputs (Level 2) [Member] | Commercial Paper [Member]    
Marketable securities:    
Total marketable securities 15,196 20,916
Significant Other Observable Inputs (Level 2) [Member] | Marketable Securities [Member]    
Marketable securities:    
Total marketable securities $ 36,707 $ 64,520
v3.20.1
Description of Business and Summary of Significant Accounting Policies - Additional Information (Detail)
$ / shares in Units, $ in Thousands
1 Months Ended 3 Months Ended 12 Months Ended
Apr. 30, 2020
USD ($)
Aug. 31, 2019
USD ($)
$ / shares
shares
Jun. 30, 2019
Patient
Apr. 30, 2019
USD ($)
$ / shares
shares
Jul. 31, 2018
Patient
Mar. 31, 2020
USD ($)
Subsidiaries
Patient
Mar. 31, 2019
USD ($)
Dec. 31, 2019
USD ($)
Nature Of Operations And Summary Of Significant Accounting Policies [Line Items]                
Number of subsidiaries owned by the company | Subsidiaries           2    
Stock issued during period, shares, new issues | shares | shares   10,166,427   7,263,158        
Shares issued, price per share | $ / shares | $ / shares   $ 5.50   $ 4.75        
Net proceeds received after underwriting fees and offering expenses   $ 52,300   $ 32,200        
Net loss           $ (15,386) $ (8,750) $ (36,300)
Net cash used in operating activities           (12,590) $ (7,950) (35,000)
Cash, cash equivalents and marketable securities           79,300    
Accumulated deficit           (288,320)   $ (272,934)
Proceeds From Remaining After The Initial Funding           50,000    
Jeffries LLC ("Jeffries") [Member]                
Nature Of Operations And Summary Of Significant Accounting Policies [Line Items]                
Maximum Proceeds of Sales of Common Stock under Sales Agreement $ 60,000              
Healthcare Royalty Partners IV, L.P. ("HCR") [Member]                
Nature Of Operations And Summary Of Significant Accounting Policies [Line Items]                
Maximum Proceeds Under Investment Agreement 75,000         $ 75,000    
First Funding Of Proceeds Under Investment Agreement $ 25,000              
MPOWERED Trial [Member]                
Nature Of Operations And Summary Of Significant Accounting Policies [Line Items]                
Number of adult acromegaly patients completed to enroll in trial | Patient     146          
First trial period for adult acromegaly patients expected to randomize         6 months      
Additional trial period for adult acromegaly patients expected to randomize         9 months      
MPOWERED Trial [Member] | Minimum [Member]                
Nature Of Operations And Summary Of Significant Accounting Policies [Line Items]                
Number of adult acromegaly patients expect to randomize | Patient         80      
MPOWERED Trial [Member] | Maximum [Member]                
Nature Of Operations And Summary Of Significant Accounting Policies [Line Items]                
Number of adult acromegaly patients expected to enroll in trial | Patient           150    
Trial period for adult acromegaly patients expected to enroll           15 months    
CHIASMA OPTIMAL Trial [Member]                
Nature Of Operations And Summary Of Significant Accounting Policies [Line Items]                
Number of adult acromegaly patients completed to enroll in trial | Patient           56    
Trial period for adult acromegaly patients expected to enroll           9 months    
v3.20.1
Fair Value Measurements of Financial Instruments (Tables)
3 Months Ended
Mar. 31, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements of Company's Financial Instruments
The fair value measurements of our financial instruments are summarized in the table below:
 
   
Fair Value Measurements at March 31, 2020
 
   
Quoted Prices in

Active Markets for

Identical Assets

(Level 1)
   
Significant Other

Observable Inputs

(Level 2)
   
Significant

Unobservable

Inputs (Level 3)
   
Total
 
   
($ in thousands)
 
Cash equivalents:
        
Money market funds
  $41,312   $—     $—     $41,312 
Total cash equivalents
  $41,312   $—     $—     $41,312 
Marketable securities:
        
Corporate notes
  $—     $21,511   $—     $21,511 
Commercial paper
   —      15,196    —      15,196 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total marketable securities
   —      36,707    —      36,707 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $41,312   $36,707   $—     $78,019 
  
 
 
   
 
 
   
 
 
   
 
 
 
   
Fair Value Measurements at December 31, 2019
 
   
Quoted Prices in

Active Markets for

Identical Assets

(Level 1)
   
Significant Other

Observable Inputs

(Level 2)
   
Significant

Unobservable

Inputs (Level 3)
   
Total
 
   
($ in thousands)
 
Cash equivalents:
        
Money market funds
  $23,012   $—     $—     $23,012 
Corporate notes
   —      2,000    —      2,000 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total cash equivalents
  $23,012   $2,000   $—     $25,012 
Marketable securities:
        
Corporate notes
  $—     $43,604   $—     $43,604 
Commercial paper
   —      20,916    —      20,916 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total marketable securities
   —      64,520    —      64,520 
Total
  $23,012   $66,520   $—     $89,532 
  
 
 
   
 
 
   
 
 
   
 
 
 
v3.20.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 2020
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
9. Commitments and Contingencies
Manufacturing Commitments
As of March 31, 2020, we had outstanding purchase orders for the acquisition of API in the aggregate amount of $10.2 million. The payments on these orders will occur following the deliveries of the API which are anticipated during 2020.
v3.20.1
Accrued Expenses
3 Months Ended
Mar. 31, 2020
Payables and Accruals [Abstract]  
Accrued Expenses
5. Accrued Expenses
As of March 31, 2020 and December 31, 2019, accrued expenses consisted of the following:
 
   
March 31, 2020
   
December 31, 2019
 
   
($ in thousands)
 
Accrued general and administrative expenses
  $1,488   $647 
Accrued research and development expenses
   3,964    4,219 
Accrued payroll and employee benefits
   1,451    1,872 
Short-term borrowing
   335    838 
  
 
 
   
 
 
 
Total accrued expenses
  $7,238   $7,576 
  
 
 
   
 
 
 
v3.20.1
Warrants - Additional Information (Detail) - $ / shares
3 Months Ended 12 Months Ended
Mar. 31, 2020
Dec. 31, 2019
Class of Warrant or Right [Line Items]    
Warrants outstanding 3,567,015 3,567,015
Warrants issued 0  
Warrants exercised 0  
Minimum [Member]    
Class of Warrant or Right [Line Items]    
Warrants exercise price per share   $ 0.09
Warrants expiration date   Mar. 31, 2022
Maximum [Member]    
Class of Warrant or Right [Line Items]    
Warrants exercise price per share   $ 9.13
Warrants expiration date   Dec. 31, 2024
v3.20.1
Commitments and Contingencies - Additional Information (Detail)
$ in Millions
3 Months Ended
Mar. 31, 2020
USD ($)
Active Pharmaceutical Ingredient [Member]  
Loss Contingencies [Line Items]  
Outstanding purchase commitment amount $ 10.2
v3.20.1
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares
Mar. 31, 2020
Dec. 31, 2019
Statement of Financial Position [Abstract]    
Common stock, par value $ 0.01 $ 0.01
Common stock, shares authorized 125,000,000 125,000,000
Common stock, shares issued 42,265,341 42,078,416
Common stock, shares outstanding 42,265,341 42,078,416
Preferred stock, par value $ 0.01 $ 0.01
Preferred stock, shares authorized 5,000,000 5,000,000
Preferred stock, shares outstanding 0 0
v3.20.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Operating Activities:    
Net loss $ (15,386) $ (8,750)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Depreciation 26 16
Stock-based compensation 1,162 622
Accretion on marketable securities, net (65) (131)
Amortization of right-of-use asset 121 39
Benefit for deferred income taxes (24) (10)
Changes in operating assets and liabilities:    
Prepaid expenses and other current assets (1,298) 1,015
Accounts payable and accrued expenses 2,924 (751)
Other assets (19) 9
Other current and long-term liabilities (31) (9)
Net cash used in operating activities (12,590) (7,950)
Investing Activities:    
Purchases of marketable securities (8,927) (12,282)
Maturities of marketable securities 36,771 17,250
Purchases of property and equipment (282) (7)
Net cash provided by investing activities 27,562 4,961
Financing Activities:    
Exercise of stock options 232 3
Payments of short-term borrowing (504)  
Net cash provided by (used in) financing activities (272) 3
Net increase (decrease) in cash and cash equivalents 14,700 (2,986)
Cash and cash equivalents, beginning of period 27,855 13,060
Cash and cash equivalents, end of period $ 42,555 $ 10,074
v3.20.1
Investments - Additional Information (Detail) - USD ($)
3 Months Ended
Mar. 31, 2020
Dec. 31, 2019
Investments, All Other Investments [Abstract]    
Realized gains and losses on available-for-sale securities $ 0  
Cash excluded from cash and cash equivalents $ 1,200,000 $ 2,800,000
Contractual maturity period of investments 1 year  
v3.20.1
Stock Incentive Plans (Tables)
3 Months Ended
Mar. 31, 2020
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Schedule of Stock-based Compensation
Stock-based compensation for the three months ended March 31, 2020 and 2019 consisted of the following:
 
   
Three Months Ended March 31,
 
   
2020
   
2019
 
   
($ in thousands)
 
General and administrative
  $953   $311 
Research and development
   209    311 
  
 
 
   
 
 
 
Total
  $1,162   $622 
  
 
 
   
 
 
 
Schedule of Fair Value Calculation of Option Granted
The fair value of each stock option issued was estimated at the date of grant using the Black-Scholes option model with the following weighted-average assumptions:
 
   
Three Months Ended March 31,
 
   
2020
  
2019
 
Expected volatility
   85  101
Expected term (years)
   6.3   6.0 
Risk-free interest rate
   1.44  2.52
Expected dividend yield
   0  0
v3.20.1
Stock Incentive Plans - Schedule of Stock-based Compensation (Detail) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Stock-based compensation expense:    
Stock-based compensation expenses $ 1,162 $ 622
General and Administrative [Member]    
Stock-based compensation expense:    
Stock-based compensation expenses 953 311
Research and Development [Member]    
Stock-based compensation expense:    
Stock-based compensation expenses $ 209 $ 311
v3.20.1
Leases - Schedule of Future Minimum Rental Commitments for Operating Leases (Detail)
$ in Thousands
Mar. 31, 2020
USD ($)
Leases, Operating [Abstract]  
Remainder of 2020 $ 587
2021 715
2022 487
Total future minimum lease payments 1,789
Less: imputed interest (223)
Total $ 1,566
v3.20.1
Warrants
3 Months Ended
Mar. 31, 2020
Text Block [Abstract]  
Warrants
7. Warrants
As of December 31, 2019, there were 3,567,015 common stock warrants outstanding with exercise prices ranging from $0.09 per share to $9.13 per share. Such warrants were issued between October 2012 and February 2015 with expiration dates ranging from March 2022 through December 2024. There were no warrants issued or exercised during the three months ended March 31, 2020. There were 3,567,015 outstanding warrants as of March 31, 2020.
v3.20.1
Fair Value Measurements of Financial Instruments
3 Months Ended
Mar. 31, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements and Fair Value of Financial Instruments
3. Fair Value Measurements of Financial Instruments
Certain assets and liabilities are reported at fair value on a recurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The fair value accounting guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
 
 
 
Level
 1
— Quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
 
 
 
Level
 2
— Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly.
 
 
 
Level
 3
— Inputs that are unobservable for the asset or liability.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The fair value measurements of our financial instruments are summarized in the table below:
 
   
Fair Value Measurements at March 31, 2020
 
   
Quoted Prices in

Active Markets for

Identical Assets

(Level 1)
   
Significant Other

Observable Inputs

(Level 2)
   
Significant

Unobservable

Inputs (Level 3)
   
Total
 
   
($ in thousands)
 
Cash equivalents:
        
Money market funds
  $41,312   $—     $—     $41,312 
Total cash equivalents
  $41,312   $—     $—     $41,312 
Marketable securities:
        
Corporate notes
  $—     $21,511   $—     $21,511 
Commercial paper
   —      15,196    —      15,196 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total marketable securities
   —      36,707    —      36,707 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $41,312   $36,707   $—     $78,019 
  
 
 
   
 
 
   
 
 
   
 
 
 
 
   
Fair Value Measurements at December 31, 2019
 
   
Quoted Prices in

Active Markets for

Identical Assets

(Level 1)
   
Significant Other

Observable Inputs

(Level 2)
   
Significant

Unobservable

Inputs (Level 3)
   
Total
 
   
($ in thousands)
 
Cash equivalents:
        
Money market funds
  $23,012   $—     $—     $23,012 
Corporate notes
   —      2,000    —      2,000 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total cash equivalents
  $23,012   $2,000   $—     $25,012 
Marketable securities:
        
Corporate notes
  $—     $43,604   $—     $43,604 
Commercial paper
   —      20,916    —      20,916 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total marketable securities
   —      64,520    —      64,520 
Total
  $23,012   $66,520   $—     $89,532 
  
 
 
   
 
 
   
 
 
   
 
 
 
Our cash equivalents are classified as Level 1 assets under the fair value hierarchy as these assets have been valued using quoted market prices in active markets and do not have any restrictions on redemption. Our marketable securities are classified as Level 2 assets under the fair value hierarchy as these assets were primarily determined from independent pricing services, which normally derive security prices from recently reported trades for identical or similar securities, making adjustments based upon other significant observable market transactions. At the end of each reporting period, we perform quantitative and qualitative analysis of prices received from third parties to determine whether prices are reasonable estimates of fair value. After completing our analysis, we did not adjust or override any fair value measurements provided by our pricing services as of March 31, 2020 or December 31, 2019. We did not have any Level 3 assets being measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.
v3.20.1
Description of Business and Summary of Significant Accounting Policies (Policies)
3 Months Ended
Mar. 31, 2020
Accounting Policies [Abstract]  
Consideration of going concern and management's plans
Consideration of Going Concern and Management’s Plans
Under
the existing accounting guidance, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the condensed consolidated financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the condensed consolidated financial statements are issued. When substantial doubt is determined to exist, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans; however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date the condensed consolidated financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the condensed consolidated financial statements are issued
.
We have incurred substantial operating losses since inception, and we expect our operating losses and negative operating cash flows to continue for the foreseeable future. For the three months ended March 31, 2020, we had a net loss of $15.4 million and used $12.6 million of cash in operations. For the year ended December 31, 2019, we had a net loss of $36.3 million and used $35.0 million of cash in operations. At March 31, 2020, we had cash, cash equivalents and marketable securities of $79.3 million and an accumulated deficit of $288.3 million. We expect to continue to incur significant costs in the upcoming year as we prepare for the potential approval and commercial launch of octreotide capsules in the United States. The FDA has assigned a PDUFA target
action
date of June 26, 2020 to our NDA resubmission. We also plan to continue to fund our international Phase 3 MPOWERED clinical trial of octreotide capsules in acromegaly to support potential regulatory approval in the European Union. Our current combined cash, cash equivalents and marketable securities are not sufficient to fund these activities, as currently planned, for one year after the date thes
e condensed c
onsolidated financial statements are issued. Accordingly, we believe these conditions, in the aggregate, raise substantial doubt regarding our ability to continue as a going concern for a period of one year from the date th
e
 
condensed
c
onsolidated financial statements are issued.
In
order to fund these efforts, in part, we entered into a $75.0 million Revenue Interest Financing Agreement with HCR, $50.0 million of which funding remains contingent upon the achievement of certain milestones. We expect to further finance our cash needs through equity financings, and we will also opportunistically consider license and collaboration agreements with potential partners or convertible debt financing to the extent such sources are identified and available. If FDA approval is obtained, we also plan to use revenues, if any, generated from the sale of octreotide capsules in the U.S. to fund our operations. While we believe our plans to achieve the Revenue Interest Financing Agreement funding milestones, to raise additional funds and generate product sales will alleviate the conditions that raise substantial doubt, these plans are not entirely within our control and cannot be assessed as being probable of occurring. Further, while we have received a PDUFA target action date from the FDA, there can be no assurances that FDA approval of octreotide capsules will be received
.
Basis of Presentation
Basis of Presentation
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the SEC regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by accounting principles generally accepted in the United States (“U.S. GAAP”) for annual financial statements have been condensed or omitted. The information included in this quarterly report on Form
10-Q
should be read in conjunction with our Annual Report on Form
10-K
for the year ended December 31, 2019. The
year-end
condensed consolidated balance sheet data presented for comparative purposes was derived from our audited financial statements but does not include all disclosures required by U.S. GAAP. In the opinion of management, we have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as our audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. Interim results are not necessarily indicative of results for a full year or for any other subsequent interim period.
Cash Equivalents
Cash Equivalents
Cash equivalents consist of highly liquid instruments that mature within three months or less from the date of purchase.
Marketable Securities
Marketable Securities
Our investments primarily consist of commercial paper and corporate and government debt securities. These marketable securities are classified as
available-for-sale,
and as such, are reported at fair value on our condensed consolidated balance sheets. Unrealized holding gains and losses are reported within accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, together with interest on securities, are included in other income, net, on our condensed consolidated statements of operations.
If a decline in the fair value of a marketable security below our cost basis is determined to be other than temporary, such marketable security is written down to its estimated fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. The cost of securities sold is based on the specific identification method.
Concentrations of credit risk
Concentrations of credit risk
Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash, cash equivalents and marketable securities. We routinely maintain deposits in financial institutions in excess of government insured limits. Management believes that we are not exposed to significant credit risk as our deposits are held at financial institutions that management believes to be of high credit quality and we have not experienced any significant losses in these deposits. We regularly invest excess operating cash in deposits with major financial institutions and money market funds and in notes issued by the U.S. government, as well as in fixed income investments and U.S. bond funds, both of which can be readily purchased and sold using established markets. We believe that the market risk arising from our holdings of these financial instruments is mitigated based on the fact that many of these securities are either government backed or of high credit rating.
Use of Estimates
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes during the reporting period. We base these estimates and assumptions on historical experience when available, and on various factors that we believe to be reasonable under the specific circumstances. Significant estimates relied upon in preparing the accompanying condensed consolidated financial statements include, but are not limited to, accounting for stock-based compensation, income taxes, and accounting for certain accruals. We assess the above estimates on an ongoing basis; however, actual results could materially differ from those estimates.
Recently Issued Accounting Pronouncements
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued new guidance which will require more timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The new guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The new guidance also requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. On January 1, 2020, we adopted this standard. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
v3.20.1
Stock Incentive Plans - Additional Information (Detail) - $ / shares
3 Months Ended
Jan. 01, 2020
Jan. 01, 2016
Mar. 31, 2020
Mar. 31, 2019
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Shares of common stock authorized for issuance     9,775,418  
Shares of common stock available for grant     1,598,475  
Number of stock option outstanding     7,408,536  
Number of stock options granted     1,158,900 492,000
Weighted average grant date fair value of stock options per share     $ 3.35 $ 2.99
2008 Plan [Member]        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Shares of common stock authorized for issuance     3,547,741  
2008 Plan [Member] | Employee Stock Option [Member]        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Stock options expiration period     10 years  
Stock options vesting period     4 years  
2015 Plan [Member]        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Shares of common stock authorized for issuance     3,566,296  
Increase in number of shares reserved and available for issuance 1,683,136      
Percentage of shares issued and outstanding under plan   4.00%    
v3.20.1
Leases - Summary of Operations in Leased Facilities (Detail) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Leases, Operating [Abstract]    
Operating lease expense $ 167 $ 47
Operating cash flows from operating leases 72 45
Operating leases 94 $ 27
Right-of-use assets 1,346  
Other current liabilities 628  
Long-term liabilities 938  
Total lease liabilities $ 1,566  
Weighted average remaining lease term - operating leases 28 months  
Weighted average discount rate - operating leases 10.70%  
v3.20.1
Investments (Tables)
3 Months Ended
Mar. 31, 2020
Investments, All Other Investments [Abstract]  
Schedule of Investments
Our investments consisted of the following as of March 31, 2020 and December 31, 2019:
 
   
As of March 31, 2020
 
   
Amortized Cost
   
Gross Unrealized

Gains
   
Gross Unrealized

Losses
  
Estimated Fair

Value
 
   
($ in thousands)
 
Money market funds
  $41,312   $—     $—    $41,312 
Corporate notes
   21,527    1    (17  21,511 
Commercial paper
   15,177    19    —     15,196 
  
 
 
   
 
 
   
 
 
  
 
 
 
Total
  $78,016   $20   $(17 $78,019 
  
 
 
   
 
 
   
 
 
  
 
 
 
   
As of December 31, 2019
 
   
Amortized Cost
   
Gross Unrealized

Gains
   
Gross Unrealized

Losses
   
Estimated Fair

Value
 
   
($ in thousands)
 
Money market funds
  $23,012   $—     $—     $23,012 
Corporate notes
   45,584    20    —      45,604 
Commercial paper
   20,899    17    —      20,916 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $89,495   $37   $—     $89,532 
  
 
 
   
 
 
   
 
 
   
 
 
 
Schedule of Fair Value of Investments
The fair values of our investments by classification in our condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019 were as follows:
 
   
March 31, 2020
   
December 31, 2019
 
   
($ in thousands)
 
Cash and cash equivalents
  $41,312   $25,012 
Marketable securities
   36,707    64,520 
  
 
 
   
 
 
 
Total
  $78,019   $89,532 
  
 
 
   
 
 
 
v3.20.1
Stock Incentive Plans
3 Months Ended
Mar. 31, 2020
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock Incentive Plan
8. Stock Incentive Plans
In 2008, our board of directors adopted the 2008 Stock Incentive Plan (the “2008 Plan”), which provided for the grant of incentive stock options, nonqualified stock options, and restricted stock to employees, directors, and nonemployees of the Company up to 3,547,741 shares of common stock. Option awards expire 10 years from the grant date and generally vest over four years but vesting conditions can vary at the discretion of our board of directors.
In July 2015, the Company approved the 2015 Stock Option and Incentive Plan (the “2015 Plan”), which became effective upon our initial public offering. The 2015 Plan allow the grant of incentive stock options, nonqualified stock options, and restricted stock to employees, directors, and nonemployees of the Company initially up to 3,566,296 shares of common stock. In connection with the adoption of the 2015 Plan, no further option grants were permitted under the 2008 Plan and any expirations, cancellations, or terminations under the 2008 Plan are available for issuance under the 2015 Plan. On January 1, 2020, the number of shares reserved and available for issuance under the 2015 Plan increased by 1,683,136 shares of common stock pursuant to a provision in the 2015 Plan that provides that the number of shares reserved and available for issuance will automatically increase each January 1, beginning on January 1, 2016, by 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or such lesser number as determined by the compensation committee of the board of directors. As of March 31, 2020, the total number of shares authorized for stock award plans is 9,775,418 of which 1,598,475 remain available for grant. There are 7,408,536 stock options outstanding as of March 31, 2020.
Stock-based compensation for the three months ended March 31, 2020 and 2019 consisted of the following:
 
   
Three Months Ended March 31,
 
   
2020
   
2019
 
   
($ in thousands)
 
General and administrative
  $953   $311 
Research and development
   209    311 
  
 
 
   
 
 
 
Total
  $1,162   $622 
  
 
 
   
 
 
 
 
The fair value of each stock option issued was estimated at the date of grant using the Black-Scholes option model with the following weighted-average assumptions:
 
   
Three Months Ended March 31,
 
   
2020
  
2019
 
Expected volatility
   85  101
Expected term (years)
   6.3   6.0 
Risk-free interest rate
   1.44  2.52
Expected dividend yield
   0  0
We granted approximately 1,158,900 stock options in the three months ended March 31, 2020. The weighted-average grant date fair value per share of stock options granted during the three months ended March 31, 2020 was $3.35. We granted approximately 492,000 stock options in the three months ended March 31, 2019. The weighted-average grant date fair value per share of options granted during the three months ended March 31, 2019 was $2.99.
 
v3.20.1
Earnings per Share of Common Stock
3 Months Ended
Mar. 31, 2020
Earnings Per Share [Abstract]  
Earnings per Share of Common Stock
4. Earnings per Share of Common Stock
All common stock warrants and stock options have been excluded from the computation of diluted weighted-average shares outstanding because such securities would have an anti-dilutive impact due to net losses reported during the three months ended March 31, 2020 and 2019.
v3.20.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Current assets    
Cash and cash equivalents $ 42,555 $ 27,855
Marketable securities 36,707 64,520
Prepaid expenses and other current assets 4,877 3,881
Total current assets 84,139 96,256
Property and equipment, net 590 334
Other assets 1,993 2,236
Total assets 86,722 98,826
Current liabilities    
Accounts payable 5,450 3,253
Accrued expenses 7,238 7,576
Other current liabilities 716 546
Total current liabilities 13,404 11,375
Long-term liabilities 1,575 1,682
Total liabilities 14,979 13,057
Commitments and contingencies (Note 9)  
Stockholders' equity:    
Common stock, $0.01 par value; authorized 125,000,000 shares at March 31, 2020 and December 31, 2019; issued and outstanding 42,265,341 shares at March 31, 2020 and 42,078,416 shares at December 31, 2019 423 421
Preferred stock, $0.01 par value; authorized 5,000,000 shares; none outstanding  
Additional paid-in capital 359,637 358,245
Accumulated other comprehensive income 3 37
Accumulated deficit (288,320) (272,934)
Total stockholders' equity 71,743 85,769
Total liabilities and stockholders' equity $ 86,722 $ 98,826
v3.20.1
Condensed Consolidated Statements of Stockholders' Equity - USD ($)
$ in Thousands
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Accumulated Deficit [Member]
Beginning balance at Dec. 31, 2018 $ 34,124 $ 245 $ 270,509 $ (16) $ (236,614)
Beginning balance, shares at Dec. 31, 2018   24,456,120      
Stock-based compensation 622   622    
Exercise of stock options 3   3    
Exercise of stock options, shares   33,839      
Additional paid in capital on account of vested portion of restricted stock 16   16    
Other comprehensive income (loss) 18     18  
Net loss (8,750)       (8,750)
Ending balance at Mar. 31, 2019 26,033 $ 245 271,150 2 (245,364)
Ending balance, shares at Mar. 31, 2019   24,489,959      
Beginning balance at Dec. 31, 2018 34,124 $ 245 270,509 (16) (236,614)
Beginning balance, shares at Dec. 31, 2018   24,456,120      
Net loss (36,300)        
Ending balance at Dec. 31, 2019 85,769 $ 421 358,245 37 (272,934)
Ending balance, shares at Dec. 31, 2019   42,078,416      
Stock-based compensation 1,162   1,162    
Exercise of stock options 232 $ 2 230    
Exercise of stock options, shares   186,925      
Other comprehensive income (loss) (34)     (34)  
Net loss (15,386)       (15,386)
Ending balance at Mar. 31, 2020 $ 71,743 $ 423 $ 359,637 $ 3 $ (288,320)
Ending balance, shares at Mar. 31, 2020   42,265,341      
v3.20.1
Investments - Schedule of Fair Value of Investments (Detail) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Net Investment Income [Line Items]    
Total $ 78,019 $ 89,532
Cash and Cash Equivalents [Member]    
Net Investment Income [Line Items]    
Total 41,312 25,012
Marketable Securities [Member]    
Net Investment Income [Line Items]    
Total $ 36,707 $ 64,520
v3.20.1
Leases (Tables)
3 Months Ended
Mar. 31, 2020
Leases [Abstract]  
Summary of Operations in Leased Facilities
   
Three Months Ended March 31,
 
   
2020
   
2019
 
   
($ in thousands)
 
The components of lease expense were as follows:
    
Operating lease expense
  $167   $47 
  
 
 
   
 
 
 
Supplemental cash flow information related to leases was as follows:
    
Cash paid for amounts included in the measurement of lease liabilities:
    
Operating cash flows from operating leases
  $72   $45 
Right-of-use
assets obtained in exchange for lease obligations:
    
Operating leases
  $94   $27 
 
   
March 31, 2020
 
   
($ in thousands)
 
Supplemental balance sheet information related to leases was as follows:
  
R
ight-of-use
assets
  $1,346 
 
 
 
 
 
Other current liabilities
  $628 
Long-term liabilities
   938 
  
 
 
 
Total lease liabilities
  $1,566 
  
 
 
 
Weighted average remaining lease term
-
operating leases
   28 Months 
Weighted average discount rate
-
operating leases
   10.7
Schedule of Future Lease Payments Under Noncancelable Leases
Future lease payments under noncancelable leases as of March 31, 2020 are as follows:
 
   
($ in thousands)
 
Remainder of 2020
  $587 
2021
   715 
2022
   487 
  
 
 
 
Total future minimum lease payments
   1,789 
Less: imputed interest
   (223
  
 
 
 
Total
  $1,566