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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

 

For the fiscal year ended December 31, 2021

or

 

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

 

For the transition period from to

Commission file number 001-38112

 

ATHENEX, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

43-1985966

State or other jurisdiction of

incorporation or organization

 

(I.R.S. Employer

Identification No.)

1001 Main Street, Suite 600

Buffalo, NY

 

 

United States

 

14203

(Address of principal executive offices)

 

(Zip Code)

 

(716) 427-2950

Registrant’s telephone number, including area code

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

 

Title of Each Class

Trading Symbol

Name of Exchange on Which Registered

Common Stock, par value $0.001 per share

ATNX

The Nasdaq Global Select Market

 

Securities registered pursuant to section 12(g) of the Act: None

 

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically 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 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report

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

The aggregate market value of common equity held by non-affiliates of the registrant calculated based on the closing price of $4.62 of the registrant’s common stock as reported on The Nasdaq Global Market on June 30, 2021, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $380 million.

As of March 8, 2022, 110,397,818 shares of common stock of the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for its 2022 annual meeting of stockholders are incorporated by reference into Part III Items 10, 11, 12, 13 and 14 of this Form 10-K.

 

 


 

 

 

 

 

 

Page

PART I.

 

 

 

3

Item 1.

 

Business

 

3

Item 1A.

 

Risk Factors

 

44

Item 1B.

 

Unresolved Staff Comments

 

100

Item 2.

 

Properties

 

100

Item 3.

 

Legal Proceedings

 

100

Item 4.

 

Mine Safety Disclosures

 

101

 

 

 

 

 

PART II.

 

 

 

102

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

102

Item 6.

 

[Reserved]

 

102

Item 7.

 

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

 

104

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

124

Item 8.

 

Financial Statements and Supplementary Data

 

124

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

140

Item 9A.

 

Controls and Procedures

 

140

Item 9B.

 

Other Information

 

144

Item 9C.

 

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

 

144

 

 

 

 

 

PART III.

 

 

 

145

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

145

Item 11.

 

Executive Compensation

 

145

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

145

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

145

Item 14.

 

Principal Accounting Fees and Services

 

145

 

 

 

 

 

PART IV.

 

 

 

146

Item 15.

 

Exhibits and Financial Statement Schedules

 

146

Item 16.

 

Form 10-K Summary

 

147

 

 

Signatures

 

154

 

 

 


 

 

 

 

 


 

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (the “Annual Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are “forward-looking statements” for purposes of this Annual Report. These forward-looking statements may include, but are not limited to, statements regarding our future results of operations and financial position, business strategy, market size, potential growth opportunities, clinical development activities, the timing and results of clinical trials and potential regulatory approval and commercialization of product candidates. In some cases, forward-looking statements may be identified by terminology such as “believe,” “may,” “will,” “should,” “predict,” “goal,” “strategy,” “potential,” “estimate,” “continue,” “anticipate,” “intend,” “indicate,” “could,” “would,” “project,” “plan,” “expect,” “seek,” “strategy,” “mission,” “outlook” and similar expressions and variations thereof. These words are intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section and elsewhere in this Annual Report. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.

Unless the context indicates otherwise, as used in this Annual Report, the terms “Athenex,” the “Company,” “we,” “us,” and “our” refer to Athenex, Inc., a Delaware corporation, and its subsidiaries taken as a whole, unless otherwise noted.

 

Risk Factors Summary

The following factors are among the principal risks we face. For a more detailed description of the risks material to our business, see "Part I-Item 1A-Risk Factors" in this Annual Report on Form 10-K. The following summary should not be considered an exhaustive summary of the material risks we face and should be read in conjunction with the “Risk Factors” section and the other information in this Annual Report. Some of the factors that could cause our results to differ materially from our expectations or beliefs include, without limitation:

the impact of the COVID-19 pandemic and other macroeconomic factors, like the war in Ukraine, on our business, including our commercial operations and clinical development activities;
the substantial doubt about our ability to continue as a going concern and the volatility of our financial results;
our strategic pivot to focus on our cell therapy platform and our plan to dispose of non-core assets;
our ability to obtain additional financing to fund our operations and to refinance, extend or repay our substantial indebtedness owed to our senior secured lender;
the uncertainty of ongoing legal proceedings;
the early stage of development of the majority of our primary clinical candidates;
the novel approach to some of our drug candidates, which may delay or impede our ability to achieve regulatory approval or market acceptance;
costs and delays if our drug candidates fail to demonstrate safety and efficacy;
our failure to identify or discover additional drug candidates or to prioritize development of certain product candidates;

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the unpredictable and lengthy regulatory approval processes of the FDA, NMPA and other regulatory authorities, including whether the FDA accepts data from clinical trials outside of the United States;
ongoing regulatory obligations, which may result in significant additional expenses, for Klisyri® and other product candidates;
the delay or prevention of regulatory approval or limitation of the commercial profile of an approved label due to undesirable adverse events caused or that may be caused by our approved drugs and drug candidates;
our dependence on the efforts of Almirall S.A. for the commercialization of Klisyri;
our limited experience in manufacturing and marketing proprietary drug products;
the limited market for orphan drugs;
if Klisyri or any other drug candidates become subject to unfavorable pricing regulations, third-party reimbursement practices, or healthcare reform initiatives;
competition from brand and generic drug products;
the impact of legal, regulatory or legislative strategies that limit our ability to generate revenue;
the material weakness in our internal control over financial reporting;
regulatory and customer scrutiny of compounded preparations and the pharmacy compounding industry;
our ability to successfully protect our intellectual property rights, a significant portion of which are pending patent applications, and defend against claims of infringement by others;
our ability to protect the confidentiality of our trade secrets;
our ability to comply with obligations in license agreements and maintain the rights that are important to our business;
our reliance on third parties to conduct preclinical studies and clinical trials and manufacture some of our drug candidate supplies;
our dependence on a limited number of pharmaceutical wholesalers to generate revenue;
our dependence on our key personnel;
our dependence on public-private partnerships and reliance on counterparties to meet their obligations;
the impact of conflicts of interest and transactions with affiliates and related parties that were not negotiated at arms’ length;
if we or our third party service providers suffer security breaches;
the impact of claims in excess of our insurance coverage, including product liability lawsuits;
the interruption of our business or production at our manufacturing facilities;
changes in political and economic policies of the Chinese government, or changes in the interpretation and enforcement of laws, rules and regulations in China; and
compliance with tax laws, including whether we may be subject to Chinese income tax on our global income.

 

 

 

 

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PART I

Item 1. Business.

Overview

Athenex, Inc., together with its subsidiaries (“Athenex,” the “Company,” “we,” “us” or “our”), is a global biopharmaceutical company dedicated to becoming a leader in the discovery, development and commercialization of next generation drugs for the treatment of cancer. Our mission is to improve the lives of cancer patients by creating more effective, safer and tolerable treatments. We are organized around three platforms, an Oncology Innovation Platform, a Commercial Platform and a Global Supply Chain Platform. Our current clinical pipeline in the Oncology Innovation Platform is derived from the following core technologies: (1) Cell Therapy, (2) Orascovery, based on a P-glycoprotein (“P-gp”) pump inhibitor, and (3) Src Kinase inhibition. We have assembled a strong and experienced leadership team and have established global operations across the pharmaceutical value chain to execute our goal of becoming a global leader in bringing innovative cancer treatments to the market and improving health outcomes.

Significant Developments in the Oncology Innovation Platform

Cell Therapy

Through our acquisition of Kuur Therapeutics, Inc. (formerly known as Cell Medica, “Kuur”) in 2021, we acquired rights to intellectual property to further the development of autologous and allogeneic, or “off-the-shelf”, natural killer T (“NKT”) cell immunotherapies for the treatment of solid and hematological malignancies. We are advancing the following product candidates: KUR-501, KUR-502, and KUR-503.

KUR-501 is an autologous product in which NKT cells are engineered with a chimeric antigen receptor (“CAR”) targeting GD2 (“GINAKIT” cells). GD2 is expressed on almost all neuroblastoma tumors and certain other malignancies. KUR-501 is currently being evaluated in a phase 1 clinical trial (GINAKIT2) treating children with relapsed-refractory (“R/R”) high risk neuroblastoma. In May 2021, we presented an interim data update from the first eleven evaluable patients at the American Society of Gene & Cell Therapy (“ASGCT”). During this initial evaluation, the safety profile of KUR-501 was manageable, and there was no dose limiting toxicity (“DLT”). No patients experienced grade 2 or higher toxicities related to KUR-501. There were no grades 3-5 cytokine release syndrome (“CRS”) and no evidence of immune effector cell-associated neurotoxicity syndrome (“ICANS”) in any of the patients. Grades 3-4 adverse events (“AEs”), reported regardless of relationship to KUR-501, have included anemia, leukopenia, lymphopenia, neutropenia, thrombocytopenia, abdominal distension, acute gastroenteritis, liver enzyme increase, vomiting, bone pain, headache, neck pain, fever, urinary tract infection, altered mental status, and hypoxia. As this clinical development program is still in the early stages, we do not yet have meaningful statistics on safety, including AEs, to report. Observed responses included one complete response (“CR”) and one partial response (“PR”). Four additional patients have exhibited stable disease (“SD”). We also observed long-term persistence of NKT cells expressing CAR. Importantly, we observed NKT cell localization to the tumor site.

KUR-502 is an allogeneic (“off-the-shelf”) product in which NKT cells are engineered with a CAR targeting CD19. KUR-502 is currently being evaluated in a phase 1 clinical trial (ANCHOR) treating adults with R/R CD19 positive malignancies, including B cell lymphoma, acute lymphoblastic leukemia (“ALL”), and chronic lymphocytic leukemia (“CLL”). In December 2021, we presented an interim data update on the first five evaluable patients at the American Society of Hematology (“ASH”) annual meeting. Tumor biopsies showed presence of NKT cells expressing CARs in the disease sites, indicating that the KUR-502 cells are able to traffic to the tumor. The safety profile was manageable with no DLT. There was one case of grade 1 CRS, no ICANS, and no graft versus host disease (“GvHD”) attributable to KUR-502. Grades 3-4 AEs, reported regardless of relationship to KUR-502, have included lymphopenia, leukopenia, neutropenia, thrombocytopenia, liver enzyme elevation, bilirubin elevation, anemia, diarrhea, hypoalbuminemia, and myositis. As this clinical development program is still in the early stages, we do not yet have meaningful statistics on safety, including AEs, to report. Of the first five evaluable patients, the overall response rate was 80%, and the complete response rate was 60%.

KUR-503 is an allogeneic (“off-the-shelf”) product in which NKT cells are engineered with a CAR targeting glypican-3 (“GPC3”). GPC3 is a molecule that is highly expressed on most hepatocellular carcinomas (“HCC”) but not normal liver or other non-neoplastic tissue. KUR-503 is currently in preclinical development, and we are planning to submit an IND by the first half of 2023.

We continue to advance TCR affinity-enhancing specific T-cell (“TAEST”) therapy with our drug candidate, TCRT-ESO-A2. TCRT-ESO-A2 is an autologous T cell receptor (“TCR”)-T cell therapy targeting solid tumors that are NY-ESO-1 positive in HLA-A*02:01 positive patients. A phase 1 clinical trial treating adults with advanced solid tumors expressing NY-ESO-1 is currently open enrolling.

Orascovery

Our Orascovery technology is based on the novel P-gp pump inhibitor molecule, encequidar. Oral administration of encequidar in combination with established chemotherapy agents such as paclitaxel, irinotecan, docetaxel, topotecan and eribulin has been shown

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to improve the absorption of these agents by blocking the P-gp pump in the intestinal wall. Oral paclitaxel and encequidar (“Oral Paclitaxel”), is our lead asset in our Orascovery platform.

Significant developments in our Orascovery platform in 2021 include the following:

On February 26, 2021, we received a Complete Response Letter (“CRL”) from the U.S. Food and Drug Administration (“FDA”) regarding our New Drug Application (“NDA”) for Oral Paclitaxel for the treatment of metastatic breast cancer ("mBC").

In June 2021, we presented data on Oral Paclitaxel for the treatment of mBC at the American Society for Clinical Oncology 2021 (ASCO2021) Virtual Scientific Program. Results of a post-hoc subgroup efficacy analysis based on additional tumor subtype data were presented.

In June 2021, we presented data from an open-label, two-way crossover phase 1 pharmacokinetic study of oral docetaxel and encequidar (“Oral Docetaxel”) vs IV docetaxel, at the ASCO2021 Virtual Scientific Program. The data demonstrated the drug was well tolerated with no dose limiting toxicities, or drug-related serious adverse events at the doses tested. The mean absolute bioavailability was 15.9% (range 8% to 25%) with PK exposure becoming non-linear at 300 mg/m2.

In September 2021, we presented interim data from a study of Oral Paclitaxel in combination with pembrolizumab at the European Society for Medical Oncology (“ESMO”) Virtual Congress 2021. The safety data helps establish Part B dose expansion and Phase 2 dose. The data showed encouraging anti-tumor activity in non-small cell lung cancer patients who failed prior PD1/PDL1 therapies.

Following the CRL, we held two Type A meetings with the FDA to discuss the deficiencies raised in the CRL, review a proposed design for a new clinical trial intended to address the deficiencies raised in the CRL, and discuss the potential regulatory path forward for Oral Paclitaxel in metastatic breast cancer (“mBC”) in the U.S. In October 2021, after careful consideration of the FDA feedback, we determined to redeploy our resources to focus on other ongoing studies of Oral Paclitaxel and our Cell Therapy platform.

On November 29, 2021, we announced the U.K. Medicines and Healthcare products Regulatory Agency (“MHRA”) validation of the Marketing Authorization Application (“MAA”) for Oral Paclitaxel, for review. The Phase 3 study of Oral Paclitaxel in MBC (KX-ORAX-001) served as the basis of the MAA.

In December 2021, we presented a subgroup analysis from the Phase 3 study of Oral Paclitaxel in mBC patients, at the 2021 San Antonio Breast Cancer Symposium (“SABCS”). Analysis of safety data demonstrated that patients with elevated liver tests were at increased risk of neutropenia related toxicities. Post hoc analysis of this subgroup of patients with hepatic impairment was conducted and showed a median survival rate of 18.9 months in patients treated with Oral Paclitaxel vs 10.1 months in those treated with IV Paclitaxel, with a hazard ratio of 0.59.

We are continuing to evaluate Oral Paclitaxel in combination with check point inhibitors.

Src Kinase Inhibition

Our Src Kinase inhibition platform technology is based on novel small molecule compounds that have multiple mechanisms of action, including the inhibition of the activity of Src Kinase and the inhibition of tubulin polymerization, which may limit the growth or proliferation of cancerous cells. We believe the combination of these mechanisms of action provides a broader range of anti-cancer activity compared to either mechanism of action alone. Our lead product candidate on our Src Kinase inhibition platform is tirbanibulin (formerly known as KX2-391 and KX-01) ointment, which we are advancing for the treatment of actinic keratosis (“AK”) and skin cancer.

Significant developments in our Src Kinase inhibition platform in 2021 include the following:

The New England Journal of Medicine published the pivotal Phase 3 trial results on Klisyri® for the topical treatment of AK of the face or scalp in the February 11, 2021 issue.

On February 15, 2021, we entered into the Second Amendment to the 2011 license agreement with PharmaEssentia Corp. (“PharmaEssentia”) for tirbanibulin ointment (the “Second Amendment to the PharmaEssentia Agreement”). The Second Amendment to the PharmaEssentia Agreement expands the territory to include Japan and South Korea and includes a license to use the intellectual property for additional dermatology indications and skin cancer in the existing territories.

On February 18, 2021, our partner Almirall S.A. (“Almirall”) launched Klisyri® for AK in the US.

On May 21, 2021, we announced our partner Almirall S.A. received a positive opinion from the Committee for Medicinal Products for Human Use (“CHMP”) of the European Medicines Agency (“EMA”) for the regulatory approval of Klisyri®, indicated for the topical treatment of AK of the face or scalp.

On July 19, 2021, our partner Almirall received approval from the European Commission to market Klisyri®, indicated for the topical treatment of AK of the face or scalp in adults.

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On July 26, 2021, we announced that we entered into licensing agreements and strategic partnerships with Seqirus Pty Ltd (“Seqirus”), a subsidiary of CSL Limited, and AVIR Pharma Inc. (“AVIR”) for tirbanibulin. Under the terms of the agreements, Seqirus will have an exclusive license to commercialize tirbanibulin in Australia and New Zealand, and AVIR will have an exclusive license to commercialize tirbanibulin in Canada.

On September 27, 2021, we announced our partner Almirall had launched Klisyri® in Germany and the UK, as part of a phased European launch.

 

Mission and Strategy

Our company’s mission is to become a leader in bringing innovative cancer treatments to the market and to improve patient health outcomes. Historically, we had focused development of our Orascovery platform which is based on a technology that converts IV chemotherapy to oral chemotherapy. We conducted a large phase 3 clinical trial in metastatic breast cancer comparing Oral Paclitaxel to IV paclitaxel, which was the basis of our NDA submission. Unfortunately, in February 2021, we received a CRL from the FDA which asked for an additional clinical study to support approval. After careful evaluation and prioritization of our research and development (“R&D”) pipeline, we have decided to focus our R&D resources on our innovative cell therapy platform, which is based on NKT cells. NKT cells have unique biology that has potential advantages over current T cell and NK cell based technologies. We believe these advantages include the following:

 

(1)
There is still a major unmet need in hematological and solid tumors in that even in those indications where autologous CAR-T cells have been previously approved, up to 60% of patients receiving CAR-T therapy do not achieve long term durable responses.
(2)
Cellular therapies have generally not been effective in the treatment of solid tumors. We believe NKT cells are an ideal platform for treatment of solid tumors because NKT cells home to tumors, and we have data demonstrating that CAR-NKT cells are superior in tumor homing compared to CAR-T cells.
(3)
Our allogeneic (“off-the-shelf”) CAR-NKT cell therapy products may be produced at larger scale than autologous products, potentially at lower cost.
(4)
Our allogeneic CAR-NKT cells are manufactured starting with the lymphocytes of healthy donors. Use of healthy donors, rather than patients (who are the source of autologous cell therapy starting materials), results in a more robust and consistent product, because patient lymphocytes are usually dysfunctional due to previous cancer therapy.

NKT cells demonstrate anti-tumor activity, even without a CAR. This is because NKT cells can kill immune suppressive cells in the local tumor microenvironment. Thus, when we add a CAR to NKT cells they are now equipped with two different anti-tumor mechanisms, which may lead to more potent anti-tumor activity and reduce the potential for relapse.

Advancing KUR-501 CAR-NKT Targeting GD2 – KUR-501 is an autologous product in which NKT cells are engineered with a CAR targeting GD2 and is currently being evaluated in a phase 1 clinical trial (GINAKIT2) treating children with R/R high risk neuroblastoma. Neuroblastoma is a rare pediatric cancer and patients with R/R high risk neuroblastoma have very poor outcomes. Therefore, we believe there is a significant unmet need for better treatment options. Interim data presented at the American Society of Gene and Cell Therapy (ASGCT) 2021 Annual Meeting for the first eleven evaluable patients, showed long-term persistence of CAR-NKT cells and CAR-NKT cell localization at the tumor site. Responses were observed in two patients, including one CR, one PR, and four patients achieved SD. The safety profile of KUR-501 was manageable and the product is being administered in the outpatient setting. GINATKIT2 will continue enrolling patients at higher dose level cohorts with a goal to identify an optimal dose that we may take into a pivotal study.

Advancing KUR-502 CAR-NKT Targeting CD19 – Early data, as presented at the ASH annual meeting in December 2021, indicated that, of the first five evaluable patients, there was a promising overall response rate of 80% with a complete response rate of 60%. KUR-502 is an allogeneic, “off-the-shelf” product in which NKT cells are engineered with a CAR targeting CD19. Today, autologous CAR-T cell treatments are available to patients, but the patient-to-patient variability and long manufacturing lead times limit patient care options. As an allogeneic “off-the-shelf” product, KUR-502 leverages economies of scale and has the potential to significantly increase patient access to innovative CAR-NKT treatments. Our aim is to expand the phase 1 (ANCHOR) clinical trial treating adults with R/R CD19 positive malignancies currently being conducted at the Baylor College of Medicine (“BCM”) to a phase 1 multicenter clinical trial (ANCHOR2).

Focusing on Specific Programs of Oral Paclitaxel – For Oral Paclitaxel, while our MAA submission is currently under review by the U.K. MHRA, we have focused our efforts on our ongoing combination clinical trials with checkpoint inhibitors where we believe there is an opportunity. Oral Paclitaxel is currently being evaluated in combination with pembrolizumab in non-small cell lung cancer (“NSCLC”); and dostarlimab +/- carboplatin in neoadjuvant breast cancer, as part of the I-SPY TRIAL (Investigation of Serial studies to Predict Your Therapeutic Response with Imaging And moLecular analysis 2) (“I-SPY 2 TRIAL”).

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Licensing and Partnership Opportunities – We continue to increase the global reach of tirbanibulin 1% ointment by maintaining strong global partnerships with existing partners such as Almirall, Seqirus, and AVIR and by evaluating other strategic territories to launch the product. Our team will continue to work closely with our partners to explore additional treatment regimens and indications for tirbanibulin 1% ointment.

 

We will pursue strategic licensing and partnership opportunities for our small molecule programs and target opportunities that will create potential value for stockholders and support our business strategy and mission.

Operating Segments

We have organized our business model into three platforms: (1) our Oncology Innovation Platform, dedicated to the research and development of our proprietary drugs; (2) our Commercial Platform, focused on the sales and marketing of our specialty drugs and the market development of our proprietary drugs; and (3) our Global Supply Chain Platform, dedicated to providing a stable and efficient supply of active pharmaceutical ingredients (“API”) for our clinical and commercial efforts. Athenex has global operations with offices and facilities in Buffalo and Clarence, New York; Cranford, New Jersey; Houston, Texas; Chicago, Illinois; Hong Kong; Taipei, Taiwan; multiple locations in Chongqing, China; Manchester, United Kingdom; Guatemala City, Guatemala and Buenos Aires, Argentina.

Our Oncology Innovation Platform

Within our Oncology Innovation Platform, we have three different technologies: (1) Cell therapy (2) Orascovery, based on a P-glycoprotein (P-gp) pump inhibitor, and (3) Src Kinase inhibition. The following table summarizes the development status of our current pipeline of product candidates in our Oncology Innovation Platform as of March 1, 2022:

 

img102724940_0.jpg 

 

We collaborate with a number of biotechnology pharmaceutical companies, including Hanmi Pharmaceutical Co., Ltd. (“Hanmi”), Eli Lilly and Company (“Lilly”), Almirall, Guangzhou Xiangxue Pharmaceutical Co., Ltd. (“Xiangxue”), ZenRx Limited (“ZenRx”) and PharmaEssentia, to support the development of our clinical pipeline globally and explore additional indications. For additional information, please see “Business—License and Collaboration Agreements”.

Our Cell Therapy Platform

NKT cells are a core aspect of our cell therapy platform. NKT cells are a subset of lymphocytes that share properties of both innate and adaptive immune cells. NKT cells acquire effector memory functions immediately after exiting the thymus and, thus, behave similarly to innate immunity cells like natural killer (“NK”) cells. Within the immune system, NKT cells have an important function, acting among the first cells to respond to either infection or stress in the tissues.

The target recognition for both NKT and T-cells is strictly restricted and antigen specific. Although both NKT and T-cells express TCRs, their models for recognition of antigen (target) are distinct. Both T-cells and NKT cells recognize target antigens in

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association with other molecules, a phenomenon called “restriction.” T-cell TCRs are restricted by either human leukocyte antigen (HLA) class I or class II whereas NKT cell TCRs are restricted by CD1d, which is related to class I HLA in structure. The CD1d molecule is identical in all people (monomorphic) while HLA class I and II molecules are polymorphic (see following figure). T-cells utilize a wide variety of different TCRs, whereas type 1 NKT cells (which we use) employ an invariant TCR (iTCR). As a result, without major genetic engineering, the majority of T-cell products must be limited to autologous use, given the potential for toxicity if T-cell products are infused into a genetically different recipient (e.g., GvHD). In contrast, because CD1d is the same in all individuals, and NKT cells express an iTCR restricted by CD1d, the potential for GvHD toxicity is minimal. We believe that this provides us a promising basis to use NKT cells for an “off-the-shelf” product, without the need for complex genetic engineering to prevent GvHD.

 

img102724940_1.jpg 

Clinical Development

KUR-501 is an autologous product in which NKT cells are engineered with a CAR targeting GD2. Neuroblastoma is a pediatric cancer, and we believe there is a significant unmet need as the patient prognoses are often poor and treatment options are limited. KUR-501 is currently being evaluated in a phase 1 clinical trial (GINAKIT2) treating children with R/R high risk neuroblastoma. In May 2021, we presented an interim data update from the first eleven evaluable patients at ASGCT. During this initial evaluation, the safety profile of KUR-501 was manageable, and there was no DLT. No patients experienced grade 2 or higher toxicities related to KUR-501. There were no grades 3-5 CRS and no evidence of ICANS in any of the patients. Grades 3-4 AEs, reported regardless of relationship to KUR-501, have included anemia, leukopenia, lymphopenia, neutropenia, thrombocytopenia, abdominal distension, acute gastroenteritis, liver enzyme increase, vomiting, bone pain, headache, neck pain, fever, urinary tract infection, altered mental status, and hypoxia. As this clinical development program is still in the early stages, we do not yet have meaningful statistics on safety, including AEs, to report. Observed responses included one CR and one PR. Four additional patients have exhibited SD. We also observed long-term persistence of NKT cells expressing CAR. Importantly, we observed NKT cell localization to the tumor site. GINAKIT2 is supported by Athenex and is being conducted by Athenex’s collaborator, the Baylor College of Medicine ("BCM”). GINAKIT2 is currently recruiting patients.

KUR-502 is an allogeneic (“off-the-shelf”) product in which NKT cells are engineered with a CAR targeting CD19. In addition to the CAR, KUR-502 is genetically engineered to down regulate surface expression of HLA class I and class II proteins, resulting in reduced recognition and elimination by the host immune system following infusion. Therefore, unlike KUR-501, the KUR-502 CAR NKT product is manufactured from NKT cells isolated from healthy donors. Today, there are autologous CAR-T cell treatments available to patients, however, these treatments are limited by manufacturing lead time and variable final product quality due to their patient specific starting material (e.g., leukapheresis). As an “off-the-shelf” product, KUR-502 is designed to minimize manufacturing impact and increase patient accessibility. KUR-502 is currently being evaluated in a phase 1 (ANCHOR) clinical trial treating adults with R/R CD19 positive malignancies, including B cell lymphoma, ALL, and CLL. The single-arm study evaluates three dose levels of KUR-502 with patients receiving pre-dose lymphodepletion chemotherapy consisting of cyclophosphamide and fludarabine. Interim data showed the presence of NKT cells expressing CARs in the disease sites, indicating that the KUR-502 cells are able to traffic to the tumor. The safety profile was manageable with no DLT, only one case of grade 1 CRS, no ICANS, and no GvHD

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attributable to NKT cells expressing CAR. Grades 3-4 AEs, reported regardless of relationship to KUR-502, have included lymphopenia, leukopenia, neutropenia, thrombocytopenia, liver enzyme elevation, bilirubin elevation, anemia, diarrhea, hypoalbuminemia, and myositis. As this clinical development program is still in the early stages, we do not yet have meaningful statistics on safety, including AEs, to report. Of the first five evaluable patients, the overall response rate was 80%, and the complete response rate was 60%. Given that these patients were heavily pretreated, including with prior autologous CAR-T cell treatment, we believe the early response data suggests that KUR-502 may yield high efficacy at low dose levels. The study is ongoing. ANCHOR is supported by Athenex and is being conducted by Athenex’s collaborator, BCM. ANCHOR is currently recruiting patients.

KUR-503 is an allogeneic (“off-the-shelf”) product in which NKT cells are engineered with a CAR targeting GPC3. GPC3 is a molecule that is highly expressed on most HCC but not normal liver or other non-neoplastic tissue. KUR-503 is currently in preclinical development, and we are planning to submit an IND by the first half of 2023.

We continue to advance TAEST therapy with our drug candidate, TCRT-ESO-A2. TCRT-ESO-A2 is an autologous TCR-T cell therapy targeting solid tumors that are NY-ESO-1 positive in HLA-A*02:01 positive patients. A phase 1 clinical trial treating adults with advanced solid tumors expressing NY-ESO-1 is currently open enrolling.

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Our Orascovery Platform

Our Orascovery platform technology is based on the novel oral P-gp pump inhibitor molecule, encequidar. The P-gp pump is a plasma membrane efflux protein on the cells which forms a localized drug transport system. In the intestine it limits the oral absorption of a large number of drugs, including widely used P-gp substrate cancer chemotherapeutic drugs such as paclitaxel, irinotecan, docetaxel and eribulin, thus restricting their current dosing to IV administration.

Mechanism of Action - P-gp Inhibition

Encequidar is a P-gp pump inhibitor and an oral absorption enhancer that prevents the P-gp pump-mediated efflux of chemotherapy agents back into the gastrointestinal tract. P-gp plays an important physiologic role as a transporter protein at multiple barrier sites, including the gastrointestinal tract and the blood brain barrier (“BBB”). The demonstrated role of P-gp in limiting intestinal absorption of multiple cancer chemotherapies highlighted the potential utility of a small molecule P-gp inhibitor for enabling oral administration of P-gp substrate drugs otherwise restricted to IV dosing. Encequidar was originally identified by Hanmi as a highly selective and potent P-gp inhibitor, capable of elevating the oral bioavailability of paclitaxel from less than 5% (in the absence of encequidar) to 41% in rats. Encequidar is distinct from previously developed small molecule P-gp inhibitors because it is designed to not be systemically absorbed in the gastrointestinal tract following oral administration with only small amounts detectable in the plasma even after relatively high doses. This unique property makes encequidar a good candidate for co-administration with P-gp substrate drugs, such as paclitaxel, which normally exhibit poor oral bioavailability and are therefore limited to IV routes of dosing.

Clinical Development

In three separate pharmacokinetics (“PK”) studies of encequidar conducted in healthy subjects, a total of 81 individuals received single oral doses of encequidar tablets in single doses of up to 900 mg, and 30 individuals were enrolled in multiple dose cohorts with treatment groups receiving encequidar tablets ranging from 60 to 360 mg per day for five days. Encequidar was well-tolerated, with mostly mild gastrointestinal adverse effects. No serious adverse events (“SAEs”) were reported. At the current clinical dose of 15 mg given once daily for up to five days, the maximal concentration of the drug in plasma ("Cmax") in systemic circulation is low. Drug-drug interaction studies of encequidar with digoxin and dabigatran have been conducted, and the metabolism and routes of excretion in humans has been determined.

Our Orascovery Product Candidates

Oral Paclitaxel and Encequidar

Overview

IV paclitaxel is used widely for the treatment of breast, ovarian, and lung cancer. Due to its poor solubility, paclitaxel is usually dissolved in ethanol and polyethoxylated castor oil, which is a major cause of IV hypersensitivity reactions. As a result, premedication with high dose steroids and antihistamines is required to minimize these adverse reactions. Additional common toxicities associated with IV administration of paclitaxel include neuropathy, neutropenia and alopecia. These side effects limit dose intensification and often require reduction in dosing.

Oral Paclitaxel is our lead drug candidate in our Orascovery Platform and is initially being developed for the treatment of patients with metastatic breast cancer. We conducted a pivotal, randomized Phase 3 study of Oral Paclitaxel monotherapy versus IV paclitaxel monotherapy which met its primary endpoint of confirmed response rate in patients receiving Oral Paclitaxel. On February 26, 2021, we received a CRL from the FDA regarding our NDA for Oral Paclitaxel. Following the CRL, we held two Type A meetings with the FDA to discuss the deficiencies raised in the CRL, review a proposed design for a new clinical trial intended to address the deficiencies raised in the CRL, and discuss the potential regulatory path forward for Oral Paclitaxel in mBC in the U.S. In October 2021, after careful consideration of the FDA feedback, we determined to redeploy our resources to focus on other ongoing studies of Oral Paclitaxel and our Cell Therapy platform. We are also evaluating Oral Paclitaxel as a monotherapy treatment for patients with cutaneous angiosarcoma, and in combination with pembrolizumab for advanced solid malignancies including gastric or gastroesophageal or non-small cell lung cancer. A study is also being conducted in combination with GlaxoSmithKline’s (“GSK”) dostarlimab in the neoadjuvant chemotherapy setting for breast cancer.

Clinical Development by Indication

Metastatic Breast Cancer

Phase 3 Study

Our Phase 3 pivotal study of Oral Paclitaxel in patients with metastatic breast cancer was a randomized, active-controlled clinical trial comparing Oral Paclitaxel monotherapy against IV paclitaxel monotherapy. The trial randomized subjects in a 2:1 ratio to

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Oral Paclitaxel, and was designed to compare the safety and efficacy of Oral Paclitaxel with IV paclitaxel. The primary endpoint was ORR (confirmed by scans at two consecutive timepoints) as assessed by RECIST v1.1 criteria, a generally accepted method for assessing tumor response. Blinded assessments of tumor response were made by independent radiologists.

A total of 402 metastatic breast cancer patients were enrolled (Oral Paclitaxel=265 vs. IV paclitaxel=137), which represented the ITT population.

In the final analysis of the primary endpoint of the study, Oral Paclitaxel (205 mg/m2 per day 3 days/week) showed a statistically significant improvement in ORR. Based on ITT analysis, Oral Paclitaxel showed a statistically significant improvement in ORR over IV paclitaxel, with 35.8% ORR, compared to 23.4% for IV paclitaxel, a difference of 12.4% (p=0.011).

Secondary endpoints in the study included PFS and OS. In December 2020, we presented updated PFS and OS data at the 2020 SABCS. In the ITT population, the median PFS showed a benefit for Oral Paclitaxel versus IV paclitaxel (8.4 months vs. 7.4 months, respectively; hazard ratio (HR) = 0.768; 95% confidence interval (CI): 0.584, 1.01; p = 0.046). The median OS data demonstrated a trend favoring Oral Paclitaxel versus IV paclitaxel (22.7 months vs. 16.5 months, respectively; HR = 0.794; 95% CI: 0.607, 1.037; p = 0.082).

Based on data presented at the 2019 SABCS: 31.1% of IV paclitaxel patients experienced grade 2 or above neuropathy versus 7.6% of Oral Paclitaxel patients. The results also showed lower incidence of alopecia compared to IV paclitaxel, with 28.8% of the Oral Paclitaxel group experiencing alopecia versus 48.2% of the IV paclitaxel group in treatment-emergent adverse events of interest. For other treatment-emergent adverse events of interest, there was a higher incidence of neutropenia with CTCAE grade ≥ 3 (29.9% vs. 28.1%; with Grade 4 14.8% vs 8.9%) and gastro-intestinal side effects, such as diarrhea with CTCAE grade ≥ 3 (5.3% vs. 1.5%) and vomiting or nausea with CTCAE grade ≥ 3 (6.8% vs. 0.7%), in the Oral Paclitaxel group as compared to the IV paclitaxel group.

Based on data presented at the 2020 SABCS: all grades of neuropathy were observed in 22% of Oral Paclitaxel patients versus 64% of IV paclitaxel patients, and grade 3 neuropathy was observed in 2% of Oral Paclitaxel patients versus 15% of IV paclitaxel patients. Also presented were data on the effect of prophylactic treatments on the incidence and severity of gastrointestinal-related adverse events. After approximately 30% of patients were enrolled, the Phase 3 trial protocol was amended to allow patients randomized to the Oral Paclitaxel arm to receive prophylactic pre-medications for gastrointestinal side effects. Overall gastrointestinal (GI)-related adverse events (AEs) were less frequent in the IV paclitaxel arm. GI-related AEs improved in the Oral Paclitaxel arm following the amendment, as measured by lower incidences of grade 2 vomiting before and after amendment (24% vs. 7%) and grade 2 diarrhea before and after amendment (27% vs. 16%).

On February 26, 2021, we received a CRL from the FDA regarding our NDA for Oral Paclitaxel for the treatment of metastatic breast cancer. Following the CRL, we held two Type A meetings with the FDA to discuss the deficiencies raised in the CRL, review a proposed design for a new clinical trial intended to address the deficiencies raised in the CRL, and discuss the potential regulatory path forward for Oral Paclitaxel in mBC in the U.S. In October 2021, after careful consideration of the FDA feedback, we determined to redeploy our resources to focus on other ongoing studies of Oral Paclitaxel and our Cell Therapy platform.

On November 29, 2021, we announced the U.K. MHRA validation of the MAA for Oral Paclitaxel, for review. The Phase 3 study of Oral Paclitaxel in MBC (KX-ORAX-001) served as the basis of the MAA.

Angiosarcoma

We have also been developing Oral Paclitaxel for the treatment of cutaneous angiosarcoma. Angiosarcomas are rare, aggressive and heterogeneous tumors accounting for approximately 2% of all soft tissue sarcomas. Only limited treatment options for advanced disease exist with poor outcomes and low 5-year survival rates.

We commenced a study of Oral Paclitaxel monotherapy in the treatment of angiosarcoma in December 2018. At the ASCO 2020 Virtual Scientific Program, we announced interim data from an ongoing Phase 2 clinical trial in which Oral Paclitaxel monotherapy showed encouraging efficacy and tolerability in elderly patients with unresectable cutaneous angiosarcoma, an aggressive malignancy with poor prognosis. The interim results reflect data from 22 evaluable patients out of 26 enrolled patients. The interim data showed a clinical benefit rate (CR+PR+SD) of 100% in 22 evaluable patients who reached their first post treatment efficacy evaluation. All 22 patients experienced reduction in tumor size. Complete responses (CR) were observed in 27.3% of patients (6/22), partial responses (PR) were observed in 22.7% of patients (5/22), and stable disease was observed in 50% of patients (11/22). Oral Paclitaxel has been generally well tolerated in this predominantly elderly population. The study is ongoing and the enrollment goal has been reached.

Combination studies

Oral Paclitaxel in combination with pembrolizumab

We have an ongoing Phase 1/2 clinical study to assess the safety, tolerability and activity of Oral Paclitaxel in combination with an anti-programmed cell death protein 1 (anti-PD1) antibody (pembrolizumab) in patients with advanced solid malignancies who have

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failed treatment with checkpoint inhibitors. The study is being conducted in patients with gastric or gastroesophageal or non-small cell lung cancer that have previously failed treatment with a checkpoint inhibitor. Part 2 of the study in patients with non-small cell lung cancer has initiated.

I-SPY 2 TRIAL (Oral Paclitaxel in combination with dostarlimab +/- carboplatin)

In September 2020, we and Quantum Leap Healthcare Collaborative (Quantum Leap) announced the launch of two new study arms of the I-SPY 2 TRIAL to evaluate Oral Paclitaxel with GSK’s dostarlimab, an investigational antibody binding PD-1, in the neoadjuvant chemotherapy setting. Quantum Leap is the trial sponsor and manages all study operations, and Athenex provides Oral Paclitaxel. The goal of this study is to evaluate the safety and efficacy of oral paclitaxel plus encequidar with dostarlimab +/- carboplatin in Stage 2/3 HER2- breast cancer patients and plus trastuzumab in HER2+ patients, followed, by doxorubicin plus cyclophosphamide chemotherapy and surgical resection. The primary objective is to determine whether this regimen increases the probability of pathologic complete response (pCR) over standard neoadjuvant chemotherapy alone for any of the tumor subtypes established at trial entry, and to determine the predictive probability of success in a subsequent Phase 3 trial. The study is ongoing.

Other Indications

We are conducting an MTD (maximum tolerated dose) study of Oral Paclitaxel in combination with ramucirumab in patients with advanced gastric cancer in the U.S. and Asia through a clinical trial collaboration with Lilly. We commenced a study of up to 32 patients in a dose escalation part of the trial with a dose expansion of Oral Paclitaxel in combination with a fixed dose of ramucirumab in July 2017.

The objective of our Phase 1 study was to define the MTD of daily Oral Paclitaxel dosing, starting at 200 mg/m2 for three days in a week, in combination with ramucirumab, which will be dosed every other week. In the first part of the study, 17 subjects were enrolled at doses ranging from 200-300 mg/m2. We defined the MTD dose of Oral Paclitaxel as 200 mg/m2 daily for three consecutive days weekly in combination with ramucirumab. Dose limiting toxicities (“DLTs”) included febrile neutropenia, grade 4 neutropenia and grade 3 gastric hemorrhage. The most frequently reported adverse events were vomiting (70%), neutropenia (59%), decreased appetite (53%), nausea (24%) and mucositis (24%). Enrollment is completed and long term survival follow up has been stopped.

Overview of Safety Observations in Oral Paclitaxel Studies

Studies to date have indicated that Oral Paclitaxel does not result in hypersensitivity reactions when given without premedication for hypersensitivity type reactions, in contrast to the premedication requirement for IV paclitaxel, namely steroids and antihistamines. No new toxicity, apart from those typically observed with paclitaxel, was observed. Infusion related reactions, including hypersensitivity type reactions, have not been observed in patients administered Oral Paclitaxel. Additionally, severe toxicities associated with IV administration of paclitaxel, including neuropathy and alopecia, are at a lower incidence and severity for Oral Paclitaxel.

As of December 31, 2021, approximately 16% of patients treated in clinical studies with Oral Paclitaxel experienced SAEs that were considered to be related to the study treatment. The most common were neutropenia in approximately 3% of patients and febrile neutropenia in approximately 4.7% of patients; pneumonia in approximately 2.7% of patients; septic shock in approximately 1.7% of patients; sepsis in 1.5% of patients; dehydration in approximately 1.2% of patients; gastroenteritis, anemia, diarrhea, mucositis, gastrointestinal bleeding, vomiting, nausea and hypokalaemia, pneumonitis, colitis, tachycardia and atrial fibrillation, each in less than one percent of patients. Other serious treatment-related infections were reported in approximately 1.7% of patients. Approximately 3.3% of patients had other treatment-related SAEs (one patient each including rectal bleeding, altered state of consciousness, cardiac arrest, cardiogenic shock, hypotension, pancytopenia, multiorgan failure, renal failure, pleural effusion, supraventricular tachycardia, respiratory failure, malnutrition, dyspnoea, cardiac failure, upper abdominal pain, fatigue, decreased appetite, pulmonary tuberculosis and peripheral sensory neuropathy).

Oral Irinotecan and Encequidar

Current and Planned Clinical Development

A Phase 1 MTD study has been clinically completed. This study is to determine the MTD of Oral Irinotecan, when given once every three weeks, in subjects with advanced malignancies. We have identified a dosing regimen suitable for Phase 2. However, further development of Oral Irinotecan has been suspended at this time.

Overview of Safety Observations in Oral Irinotecan Studies

In our Oral Irinotecan clinical studies to date, the SAEs observed that were deemed to be at least possibly related to Oral Irinotecan include diarrhea, rash, gastrointestinal hemorrhage, anorexia, vomiting, nausea, enteritis, asthenia, neutropenia, increased alanine aminotransferase, increased aspartate aminotransferase, and C diff infection. As the clinical development program is still in its early stages, we do not yet have meaningful statistics on safety, including adverse events, to report.

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Oral Docetaxel and Encequidar

Current and Planned Clinical Studies

A Phase 1 dose escalation U.S. based trial for Oral Docetaxel in patients with various solid tumors given once every three weeks is ongoing. Another Phase 1 study to identify the absolute bioavailability of Oral Docetaxel in prostate cancer patients has been completed. Based on Phase 1 results so far, we believe that we can achieve similar exposure to IV docetaxel with one to three days of dosing every three weeks. Alternative schedules such as weekly or 2 of 3 weeks are also being explored. Further development of Oral Docetaxel has been suspended at this time.

Overview of Safety Observations in Oral Docetaxel Studies

We expect that the overall safety profile of Oral Docetaxel will be similar to that of IV docetaxel, with differences related to the route of administration. As with Oral Paclitaxel, premedication has not been required and hypersensitivity type reactions have not been observed. As of December 31, 2021, in our Oral Docetaxel clinical studies, the SAEs observed that were deemed to at least possibly related to Oral Docetaxel include gastrointestinal toxicity; vomiting, nausea and diarrhea in 1 subject.

Oral Topotecan and Encequidar

A Phase 1 clinical trial in advanced malignancies for Oral Topotecan has completed enrollment. Further development of Oral Topotecan has been suspended at this time. As the clinical development program has enrolled few patients, we do not have meaningful statistics on safety, including adverse events, to report.

Oral Eribulin and Encequidar

In October 2018, the FDA allowed our IND application for Oral Eribulin. A Phase 1 study commenced in 2019 to assess the safety, MTD, DLT and absolute bioavailability of Oral Eribulin in subjects with solid tumors. Enrollment into the trial has been suspended, and no further trials are planned at this time. As few patients were enrolled into the trial, we do not have meaningful statistics on safety, including adverse events, to report.

Our Src Kinase Inhibition Platform

Our Src Kinase inhibition platform technology is based on novel small molecule compounds that have multiple mechanisms of action, including the inhibition of the activity of Src Kinase and the inhibition of tubulin polymerization, which may limit the growth or proliferation of cancerous cells. We believe the combination of these mechanisms of action provides a broader range of anti-cancer activity compared to either mechanism of action alone. Our lead product candidate on our Src Kinase inhibition platform is tirbanibulin ointment. Our other clinical candidates in this platform include tirbanibulin oral and KX2-361.

Tirbanibulin

Mechanism of Action

Tirbanibulin, formerly known as KX2-391 or KX-01, is a novel small molecule that we discovered and developed, which demonstrates at least two mechanisms of action (“MOAs”) relevant to the potential control of cancer and hyper-proliferative disorders: (1) Src tyrosine kinase inhibition (non-ATP competitive) and (2) tubulin polymerization inhibition. Src Kinase, a tyrosine kinase protein involved in regulating cell growth, is strongly implicated in metastasis. Inhibiting Src Kinase may limit the growth or proliferation of cancerous cell types. Src plays a role in regulating multiple aspects of tumor development, growth and metastases, and its inhibition limits such tumor activity. Interfering with tubulin polymerization activity is a clinically validated mechanism for treating cancer. For both targets tirbanibulin binds at a novel binding site. Taken together, these two MOAs may provide for a potent means of treating cancer and other hyper-proliferative disorders.

Tirbanibulin Ointment

Tirbanibulin is a compound developed under our Src Kinase inhibition platform that, as a free base, has advantageous physical properties for topical ointment formulations.

Actinic Keratosis

In December 2020, the FDA approved Klisyri® (tirbanibulin), a microtubule inhibitor, for the topical treatment of AK on the face or scalp. The FDA approved Klisyri based on data from two pivotal, randomized, double-blind, vehicle-controlled Phase 3 trials (KX01-AK-003 and KX01-AK-004) that evaluated the efficacy and safety of tirbanibulin ointment 1% (10mg/g) in adults with AK of the face or scalp. In July 2021, our partner Almirall received approval from the European Commission to market Klisyri® in the same indication. Klisyri® has launched in the US and in certain European countries. Our partner, PharmaEssentia, has initiated trials of tirbanibulin ointment for the treatment of AK, in Japan.

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Psoriasis

Tirbanibulin ointment has shown encouraging preclinical results in treating psoriasis, a chronic autoimmune skin disease that speeds up the growth cycle of skin cells. Psoriasis causes localized or generalized patches of red papules and plaques, covered with white or silver scales and itching. A Phase 1 clinical trial of tirbanibulin ointment 1% in psoriasis, performed by our partner PharmaEssentia, has been completed.

Tirbanibulin Oral

Development of our oral formulation of tirbanibulin has been suspended at this time.

KX2-361

KX2-361, formerly known as KX-02, is the second compound we developed using our Src Kinase inhibition platform technology. KX2-361 is a closely related structural analog of tirbanibulin and has been observed to have a similar dual MOA of inhibition of Src activity and microtubule polymerization. Although KX2-361 is an analog of tirbanibulin, it has significantly different physical properties. These properties are designed to allow KX2-361 freely cross the BBB such that the concentration in the brain is equal to, or somewhat greater than, that in the plasma. This trait is uncommon for oncology drugs and highlights the potential for KX2-361 as a novel therapy for unmet medical needs such as brain cancers, including glioblastoma and brain metastases. KX2-361’s multiple MOAs along with its ability to cross the BBB, make it a novel molecule for the treatment of brain tumors. The FDA has granted Orphan Drug Designation to KX2-361 for the treatment of gliomas.

KX2-361 is currently in the early stages of development. In our KX2-361 clinical studies to date, the SAEs observed were thromboembolic events, hyperuricemia and pulmonary embolism. As the clinical development program is still in its early stages, we do not yet have meaningful statistics on safety, including adverse events, to report.

Further development of KX2-361 has been suspended at this time.

Our Other Technologies

Arginine Deprivation Therapy

PT01, the arginine deprivation therapy product, is based on our pegylated genetically engineered human arginase. It targets cancer growth and survival by interrupting the supply of arginine to cancers with disrupted urea cycles such as melanoma, hepatocellular carcinoma and prostate cancer. Our proprietary arginase biologic product is well suited to deplete arginine from the tumors, while healthy cells, capable of producing their own arginine, are largely unaffected. We had enrolled subjects with advanced solid tumors in a study in the US that was intended to determine the dose limiting toxicities, safety, pharmacokinetics and pharmacodynamics of PT01 with administered as a weekly IV infusion. Enrollment into this trial has been suspended, and no further studies are planned at this time.

Proprietary Dual (CYP/P-gp) Inhibitor

We are developing a proprietary class of “dual” absorption enhancers that are intended to inhibit both the P-gp transporter and the cytochrome p450 3A ("CYP") enzymes within the gastrointestinal tract. These dual absorption enhancers may lead to better performing next-generation oral medicines in our pipeline of clinical products.

The development of these dual absorption enhancers is at the preclinical stage. Proof of concept, providing increased oral bioavailability in preclinical species, has been obtained with several absorption enhancers and candidate drugs. Currently additional filters such as patentability/freedom to operate, physical-chemical characterization, pre-formulation studies, manufacturing analysis and preliminary toxicity testing are being applied to our first group of lead candidates to facilitate election of an IND candidate.

Research and Development

We have drug discovery, drug formulation, clinical and regulatory development and API/drug product manufacturing facilities and capabilities around the world. The U.S. drug discovery, clinical and regulatory development and formulation research facilities are largely concentrated in Buffalo, New York and Cranford, New Jersey. The range of capabilities at these facilities includes medicinal chemistry, biochemistry, cell biology, formulation, chemical manufacturing and control, quality control, pharmacokinetics/ pharmacodynamics (“PK/PD”) and data management, as well as pharmacovigilance, clinical development and regulatory expertise functions. Animal efficacy, PK/PD and toxicology studies are carried out at various contract research organizations, or CROs, around the world in order to facilitate the drug research and development process. We also have research, clinical development and regulatory capabilities in China, the U.K. and Latin America, as well as in Taiwan, where we also have built up data management facility. Our research and development center in Hong Kong concentrates on drug formulation development and evaluation. Our global research and development capabilities and facilities are well integrated with our research and development center in the U.S.

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To date, we and our partners have conducted, or are conducting, clinical trials across sites in the U.S., South Korea, New Zealand, Taiwan, China, U.K., Australia, and various countries in Latin America, including Argentina, Guatemala, Honduras, Chile, Colombia, Ecuador, the Dominican Republic, and Peru.

Commercialization

Following the CRL of Oral Paclitaxel in mBC and the decision to redeploy resources to our Cell Therapy technologies and other ongoing studies of Oral Paclitaxel, we have suspended commercial activities for Oral Paclitaxel in the U.S., at this time. Outside of the U.S., we continue to evaluate marketing options, including using our internal resources, partnering with others, or out-licensing the product.

In February 2021 and September 2021, Klisyri® was launched in the U.S. and in Europe, respectively, for the treatment of AK by our partner Almirall. As of December 31, 2021, Klisyri® is available to patients in the U.S., Germany, United Kingdom, and Austria. In 2022, Almirall plans to continue to rollout the launch of Klisyri® throughout Europe. To increase the global reach of tirbanibulin 1% ointment, we have partnered with other third parties and anticipate commercialization efforts outside of the U.S. and E.U. to commence in 2023. For additional information, please see “Business—License and Collaboration Agreements—Tirbanibulin—Almirall License Agreement.” We may also partner with third parties or consider using our internal resources to reach other geographic markets.

Our Commercial Platform

Our Commercial Platform includes our specialty pharmaceuticals business, and our manufacture and marketing of products subject to Section 503B of the Federal Food, Drug & Cosmetic Act (“FDCA”).

Specialty Pharmaceuticals

Our Athenex Pharmaceutical Division ("APD") business develops and sources products through licensing agreements with various partners, whom we collectively refer to as our Global Partner network. Our team has unique commercial expertise in multisource injectable products and has developed a number of Global Partners that develop and manufacture multisource products for the U.S. market. We primarily market products to acute hospital group purchasing organizations, which supply to integrated healthcare networks (“IHNs”), clinics, and directly to physicians. As of December 31, 2021, APD markets 29 molecules with 54 SKUs. In addition, Athenex Pharma Solutions ("APS") markets 5 products with 16 SKUs as of December 31, 2021.

Agreements with Suppliers and Marketing Partners

Gland Term Sheets

From August 2016 to May 2017, we entered into four binding term sheets with Gland Pharma Ltd (“Gland”) to market twenty-seven of Gland’s products. Gland has obtained FDA approval for twenty-two of such products and has filed an abbreviated new drug application, or ANDA, in the U.S. for the remaining five products. For each of the licensed products, we will pay a license fee to Gland. Additionally, during the terms of the term sheets we have a profit-sharing arrangement pursuant to which we will pay to Gland between 0% and 60% of the net profits from sales of each of the licensed products, depending on the product. The initial term of each of the Gland term sheets is five years from the launch of each product licensed pursuant to the term sheet, subject to automatic renewal for additional two-year terms, unless terminated by either party upon provision to the other party at least 90 days’ notice in advance of a renewal date. To date, none of the term sheets have been terminated.

MAIA Agreement

In December 2018, we entered into a distribution and supply agreement with MAIA Pharmaceuticals (“MAIA”) effective as of October 3, 2018 whereby we acquired the exclusive license to a generic version of an approved product, which we began selling in January 2019. In connection with the execution of this agreement, we agreed to pay an upfront milestone payment in addition to profit sharing of 50% of the net profits from the sales of the licensed product. We also agreed to pay an additional milestone payment to MAIA in the event the FDA approves the ANDA for the licensed product. The initial term of the agreement is for seven years from the launch of the product and is subject to an automatic two-year renewal term unless terminated by either party upon at least 180 days’ notice in advance of the renewal date.

In December 2019, the agreement with MAIA was amended to grant us the license to a branded product which MAIA holds the approved NDA. In connection with this amendment, we agreed to an upfront milestone payment and 56% of the net profits from sales

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of the licensed product. Additionally, we agreed to increase MAIA’s share of the net profits to 70% for both products until certain financial metrics are achieved and shall revert to the initial rates after those metrics are satisfied.

Ingenus Agreements

In September 2020, we entered into an asset purchase and sale agreement with Ingenus Pharmaceuticals, LLC (“Ingenus”) whereby we purchased from Ingenus all of their right, title and interest in and to Glycopyrrolate Injection (“Glycopyrrolate”) in the U.S. for $2 million and pursuant to which Ingenus transferred to us the ANDA for Glycopyrrolate.

In November 2020, we entered into a co-marketing, manufacturing and supply agreement with Ingenus pursuant to which Ingenus will be our exclusive supplier of the Cyclophosphamide Injection and granted us a license to market and sell the product to acute care group purchasing organizations (GPOs) and their entire memberships as provided by said GPOs, integrated delivery networks (IDNs) and to hospitals within the U.S. for a purchase price of $1 million. Under the agreement, we are entitled to 25% of the net profits from our sales of the product and we are entitled to a marketing allowance. The agreement has a 3-year term, which may be extended if we mutually agree.

In January 2021, we entered into a manufacture and supply agreement with Ingenus for Arsenic Trioxide Injection pursuant to which Ingenus will be our exclusive supplier of the product and granted us a license to market and sell the product to acute care GPOs and their entire memberships as provided by said GPOs, IDNs and to hospitals within the U.S. Under the agreement, we are entitled to 45% of the net profits from our sales of the product and we are entitled to a marketing allowance. The agreement has a 5-year term, which may be extended if we mutually agree.

Customers and Product Distribution

We distribute APD products primarily through pharmaceutical wholesalers and, to a lesser extent, specialty distributors that focus on particular therapeutic product categories, for use by a wide variety of end-users, including hospitals, integrated delivery networks and alternative site facilities. For the year ended December 31, 2021, the products we sold through our three largest wholesalers in the U.S., accounted for 49% of our total revenue.

We utilize an outside third-party logistics contractor to distribute our U.S. products. Since the inception of the launch of our specialty products, the third-party logistics provider has been handling all aspects of our product logistics efforts and related services for us, including warehousing and shipment services, order-to-cash services, contract administration services and chargeback processing. Our products are warehoused and distributed through a third-party logistics provider located in Memphis, Tennessee. Under our agreement with the third-party logistics provider, we maintain ownership of our finished products until sale to our customers. The initial term of the agreement is three years following the initial delivery date and will automatically renew for successive 12-month periods, unless either we or the other party give notice of intent to terminate at least 90 days in advance of such automatic renewal. We may also have the opportunity to terminate the agreement within 30 days of receiving notice of certain price increases by the third-party logistics provider. The agreement also contains customary termination rights for either party, such as in the event of a breach of the agreement.

We have also created a product portal, which allows APD and APS customers in each class to order from us online, and us to distribute directly from our manufacturing facilities. This portal was created primarily due to prohibitions on wholesaling, under Section 503B.

Global Supply Chain Platform

In 2015, we acquired Polymed Therapeutics Inc. (“Polymed”) and Chongqing Taihao Pharmaceutical Co. Ltd., or Taihao. Taihao operates a cGMP high potency oncology API plant based in Chongqing, China (“Taihao API facility”) and Polymed is the U.S. marketing entity for Taihao’s API in North America and Europe.

We suspended production activities at our Taihao API facility in Chongqing, China, in May 2019, based on concerns raised by the Department of Emergency Management of Chongqing (“DEMC”) related to the location of our plant. We subsequently resumed producing API at the Taihao API facility primarily for our ongoing clinical studies and commercial launches of proprietary drugs in accordance with local regulatory guidance, while we started building out Sintaho, a new API facility in Chongqing. In July 2021, we received verbal notice from the DEMC that we will be required to terminate the production activities at its Taihao API facility. We are continuing to engage in dialogue with the DEMC. While we are able to continue producing certain API at the Taihao API facility in limited quantities and a certain extent of our operations are now being conducted at Sintaho, we are in the process of moving the remainder of the operations and production activities to Sintaho and exploring other sources of API, in the event we are unable to reach an agreement with the DEMC for the continued production activities of the Taihao API facility.

A new API manufacturing facility in Chongqing, China (“New API Facility” or the “Sintaho facility”) was constructed and commenced operations. The facility continues to conduct and complete product qualification activities.

In 2014, we acquired APS (formerly known as QuaDPharma, LLC), one of our suppliers based in Clarence, New York.

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Strategic Public-Private Partnerships

 

To date, we have utilized a combination of acquisitions and public-private partnerships to internalize certain key components of our manufacturing and supply chain.

China Partnership

In October 2015, we entered into an agreement with Chongqing Maliu Riverside Development and Investment Co., LTD (“CQ”), which is wholly owned by the Finance Bureau of Banan district of Chongqing, and is authorized to be responsible for investments, financing, infrastructure construction, operations and management in the Chongqing Maliu Riverside Development Zone. Our agreement with CQ provides for the construction of an API plant and a formulation plant in China. After entering into the agreement, and pursuant to its terms, we established a China-based subsidiary that is responsible for the operations of both facilities in July 2016 and committed to a registration capital requirement of no less than $30.0 million. CQ is responsible for the construction of both facilities according to the U.S. cGMP standards. The land and buildings will be owned by CQ, and we will lease the facilities rent-free, for the first 10-year term, with an option to extend the lease for an additional 10-year term, during which, if we are profitable, we will pay a monthly rent of 5 Chinese Renminbi (“RMB”) per square meter of space occupied. We are responsible for the costs of all equipment and technology for the facilities. In January 2021, we accepted the building and the lease became effective. We have finished equipment installation and testing, and commenced production. We have also committed to achieving certain operational, revenue and tax generation milestones within certain time periods once we commence operations. If we are unable to achieve these milestones, CQ will have the opportunity to terminate the agreement and dispose of the plants in its discretion.

The New API Facility commenced operations in January 2021 and is part of our strategy for vertical integration in order to capture value across the supply chain.

Our goal is to use our public-private partnerships as a capital efficient method for large scale cGMP manufacturing within our supply chain and to facilitate market access in China. We believe those facilities will be adequate and suitable for our operations for the foreseeable future.

New York State Partnership

On February 14, 2022, we completed the sale of our leasehold interest, and certain other related assets, in the new manufacturing facility in Dunkirk, New York (the “Dunkirk Facility”) to ImmunityBio, Inc. (“ImmunityBio”) for approximately $40.0 million. The Dunkirk Facility had been constructed in connection with our agreement with Fort Schuyler Management Corporation (“FSMC”) a not-for-profit corporation affiliated with the State of New York, for a medical technology research, development, innovation and commercialization alliance (the “Alliance Agreement”). Under the Alliance Agreement, FSMC had been responsible for the costs of construction and equipment for the facility up to an aggregate of $200.0 million, plus any additional funds available from the previous $25.0 million grant, and FSMC would retain ownership of the facility and equipment. In a series of agreements with ImmunityBio, we sold our leasehold interest, our interest in certain leased manufacturing equipment and personal property and owned personal property and inventory at the Dunkirk Facility, and our rights in and obligations under our agreements relating to the Dunkirk Facility with the Empire State Development Corporation (“ESD”), FSMC and County of Chautauqua Industrial Development Agency (“CCIDA”) and other parties.

Under the original Alliance Agreement, we had been committed to spending $1.52 billion on operational expenses in the first 10-year term of the Dunkirk Facility and any subsequent extension periods and to hiring 450 employees at our Dunkirk Facility within the first five years of operations, including hiring at least 300 new employees within 2.5 years of the Dunkirk Facility becoming operational. ImmunityBio assumed these capital expenditure and hiring obligations of ours in connection with the purchase of the leasehold interest in the Dunkirk Facility.

We also entered into a preliminary agreement with ImmunityBio, pursuant to which our APS division will have the ability to manufacture our 503B products at the Dunkirk Facility at prices to be determined on a product-by-product basis, provided that the pricing will not exceed ImmunityBio’s costs plus a 15% margin. We expect to enter into a definitive preferred contract manufacturing agreement with ImmunityBio relating to the manufacture of our 503B products.

We did not assign any of our rights to our corporate headquarters in Buffalo, New York, in connection with the sale of the leasehold interest in the Dunkirk Facility and we retained all of our rights and obligations with respect to our corporate headquarters. Under the Alliance Agreement, FSMC agreed to pay up to $25.0 million for the construction of our North American headquarters and formulation lab and equipment in Buffalo, New York. We are sub-leasing the space from FSMC for a 10-year term expiring in October 2025, with an option to extend the term for an additional 10 years. Under the Alliance Agreement, we are obligated to spend $100.0 million in the Buffalo area over the initial 10-year term of the lease and an additional $100.0 million during the second 10-year term if we elect to extend the lease. We also committed to hiring 250 permanent employees in the Buffalo area within the first 5 years of completion of the project. As of December 31, 2021, we had hired 211 permanent employees in the Buffalo area. In the event we

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are unable to hire enough employees in the Buffalo area or meet our other obligations under this agreement, FSMC may terminate the agreement and we may have to renegotiate our lease or relocate our North American headquarters.

License and Collaboration Agreements

Cell Therapy

Baylor College of Medicine Agreements

In October 2021, we simultaneously entered into the Second Amended and Restated Exclusive License and Option Agreement (the “Baylor License Agreement”) and the Second Amended and Restated Co-Development Agreement (the “Baylor Co-Development Agreement,” and together with the Baylor License Agreement, the “Baylor Agreements”) with BCM, which were first entered into in 2016 between BCM and Kuur. Under the Baylor Co-Development Agreement, BCM is responsible for developing the cell therapy products using an annual budget paid by us and under the supervision of a joint steering committee composed of five BCM appointees and five of our appointees. The Baylor License Agreement grants us, among other rights, worldwide rights to research, sell, and commercialize NKT, NKT-CAR, and NKT process technology in the prevention, treatment, or modulation of cancer in humans as well as exclusive future oncology and non-oncology and field expansion options. The Baylor Agreements include execution fees, annual fees, royalties, and milestones. Under the Baylor License Agreement, we have agreed to pay BCM up to $128.5 million in the event defined development and sales milestones are achieved, along with tiered royalties at single digit rates based on annual net sales of licensed products and tiered percentages of sublicensing revenue ranging from mid-single digits to royalty rates in the mid-teens. The Baylor Agreements will remain in effect on a country-by-country basis until the expiration of (i) the date of expiration of the last such patent rights issued in such country; or (ii) in the event that no patents issue in such country, the day immediately following the tenth anniversary of the first commercial sale in such country. The agreements contain customary termination rights such as for material default or failure, insolvency, or convenience on a product-by-product basis.

TCR-T License Agreement

In June 2018, we entered into a Share Subscription Agreement with Xiangxue Life Sciences Ltd. (“XLifeSc”), a subsidiary of Xiangxue, to establish, operate and manage a joint venture named Axis Therapeutics Limited (“Axis”) to offer certain goods and services worldwide except in China. Axis is owned 45% by XLifeSc and 55% by us.

Also in June 2018, Axis entered into a license agreement with XLifeSc (the “TCR-T License”) where XLifeSc granted Axis an exclusive, sublicensable right and license to use XlifeSc’s proprietary TCR-T to develop and commercialize therapeutic products for oncology indications worldwide except in China. Axis is responsible for all development, manufacturing and commercialization, and the related costs and expenses, of any product candidates resulting from the agreement. Pursuant to the TCR-T License, following an upfront payment and the achievement of the first regulatory milestone, Axis may be required to make additional cash payments to XLifeSc worth up to $108.0 million in the aggregate upon the occurrence of certain additional regulatory milestones to be achieved in the U.S., the EU, China, and Japan. In addition, XLifeSc is required to pay Axis royalty payments based on certain percentage of aggregate net income generated by sales of any products using the licensed intellectual property in China. The TCR-T License will remain in effect until the expiration of the patent rights licensed under the agreement. The agreement will terminate automatically if the shareholders agreement between XLifeSc and us is terminated. The TCR-T License also contains customary termination rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party.

Orascovery

Eli Lilly and Company Agreement

In October 2016, we entered into a Clinical Trial Collaboration and Supply Agreement with Eli Lilly and Company ("Lilly") to jointly conduct a Phase 1b trial of Oral Paclitaxel in combination with Ramucirumab in patients with gastric, gastro-esophageal, and esophageal cancers. Under the terms of the agreement, we are the sponsor of the study and hold the study IND/clinical trial application ("CTA") while all clinical data generated under the study will is jointly owned by us and Lilly. The agreement will remain in effect until the study contemplated by the agreement has been completed. The agreement also contains customary termination rights for either party, such as in the event of a breach of the agreement by the other party, or in the event a regulatory authority takes any action against or raises any objection to the study.

Quantum Leap Healthcare Collaborative

In September 2020, we announced with Quantum Leap, the launch of two new study arms of the I-SPY 2 TRIAL, to evaluate the safety and efficacy of Oral Paclitaxel with dostarlimab +/- carboplatin in stage 2/3 HER2- breast cancer patients and plus trastuzumab in HER2+ patients, followed, if needed, by doxorubicin plus cyclophasamide chemotherapy (AC) and surgical resection of breast tissue.

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The trial was designed to rapidly screen promising experimental treatments and identify those most effective in specific patient subgroups based on molecular characteristics (biomarker signatures). The trial is a unique collaborative effort by a consortium that includes the FDA, industry, patient advocates, philanthropic sponsors, and clinicians from 16 major U.S. cancer research centers. Under the terms of the collaboration agreement, Quantum Leap is the trial sponsor and manages all study operations, and Athenex provides Oral Paclitaxel.

Hanmi License Agreements and Related Out-Licenses

We entered into a series of license agreements, as amended from time to time, with Hanmi Pharmaceuticals Ltd. (“Hanmi”) pursuant to which we obtained an exclusive, sublicensable license for development and commercialization activities utilizing Hanmi’s patents and know-how related to the Orascovery platform worldwide except in South Korea, and a non-exclusive license to utilize the same intellectual property in manufacturing worldwide for sales inside those territories (the “Hanmi Agreements”). Under the Hanmi Agreements, we are responsible for all clinical studies and development and commercialization activities, and the related expenses, resulting from the agreements.

Under the Hanmi Agreements, we are obligated to pay Hanmi tiered royalty payments in the teens based on aggregate net sales of any products using the licensed intellectual property in the territory. These royalties will be reduced if competing generic products gain market share in the applicable country. We also granted to Hanmi a one-time right of first negotiation to purchase all of our rights in Oral Paclitaxel or Oral Irinotecan under the Hanmi Agreements during development and prior that, at Hanmi’s discretion, requires us to negotiate in good faith the sale of our rights under such agreement to Hanmi at a purchase price determined by an internationally-recognized investment banking firm with an office in Hong Kong at any time prior to the earlier of (1) our first commercial sale of products using such technology or (2) receipt by Hanmi of written notice from our company of the sublicense of the rights in an applicable product to a third party.

The Hanmi Agreements expire on the earlier of (1) expiration of the last of Hanmi’s patent rights licensed under the agreement or (2) invalidation of Hanmi’s patent rights which are the subject of the agreement, provided that the term will automatically be extended for consecutive one-year periods unless either party gives notice to the other at least 90 days prior to expiration of the patent rights licensed under the agreement or before the then-current annual expiration date of the agreement. The patent rights licensed to us under the Hanmi Agreements have expiry dates ranging from in 2023 to 2033, unless the terms of such licensed patents are extended in accordance with applicable laws and regulations.

We have out-licensed certain of the rights we obtained under the Hanmi Agreements to third parties to develop and commercialize products from the Orascovery platform in certain territories. Under these out-licenses, we are entitled to receive payments and royalties from the licensees, (a portion of which we will be obligated to pay Hanmi under the Hanmi Agreements). These out-license agreements are described below:

ZenRx: We granted ZenRx an exclusive, sublicensable license to develop and commercialize Oral Irinotecan and Oral Paclitaxel in Australia and New Zealand in April 2013, and a non-exclusive license to manufacture a certain compound for use only in Oral Irinotecan and Oral Paclitaxel. We may be entitled to receive up to an aggregate of $1.25 million in additional development, regulatory and sales milestone payments under the license agreement with ZenRx. We will also be eligible to receive tiered royalties in the teens on net sales of each product commercialized by ZenRx utilizing the intellectual property that is the subject of the ZenRx License. Such royalties will be reduced by 40% when competing generic products have 30% of the market share in the applicable country and will be eliminated entirely when competing generic products have 60% of the market share in the applicable country. As an incentive to ZenRx to further development and commercialization of Oral Irinotecan and Oral Paclitaxel in the territory, if ZenRx obtains certain regulatory approvals in the territory prior to regulatory approval of those products in either the U.S. or South Korea, we may be required to make payments to ZenRx, at ZenRx’s option, either up to $0.6 million in cash or $0.35 million in cash plus $0.25 million worth of our common stock.
PharmaEssentia: We granted PharmaEssentia an exclusive, sublicensable license for development and commercialization of Oral Paclitaxel, Oral Irinotecan, and Oral Docetaxel in Taiwan and Singapore pursuant to a license agreement in December 2013, as amended from time to time. We may be entitled to receive up to an aggregate of $7.5 million in additional development, regulatory and sales milestone payments under this license agreement with PharmaEssentia. We may be obligated to pay PharmaEssentia an aggregate of $0.5 million in incentives if PharmaEssentia achieves certain milestones within designated timeframes. We will also be eligible to receive tiered royalties in the mid-teens on net sales of each product commercialized by PharmaEssentia utilizing the intellectual property that is the subject of this agreement. Such royalties will be reduced by 40% when competing generic products have 30% of the market share in the applicable country and will be eliminated entirely when competing generic products have 60% of the market share in the applicable country.
Xiangxue: We granted Xiangxue an exclusive license to develop and commercialize Oral Paclitaxel, Oral Irinotecan and tirbanibulin ointment in China, Hong Kong, and Macau for any oncological indications as well as other indications that

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we mutually agree to pursue (the “Xiangxue License”). We may be eligible to receive future additional payments up to $138.5 million in the event defined regulatory and sales milestones are achieved, a payment of $20.0 million in the event of a change of control or assignment of rights involving Xiangxue, tiered royalties at rates ranging from the low teens to low twenties based on annual net sales of the licensed products in the territory covered by the license, and a percentage of sublicensing revenue. In November 2021, we regained the exclusive rights to develop and commercialize Oral Paclitaxel, Oral Irinotecan, and tirbanibulin ointment for Hong Kong and Macau for $1.5 million. Before the November 2021 amendment to the license agreement, we recognized revenue in the third quarter of 2020 for a $10.0 million milestone fee from Xiangxue upon meeting the first regulatory milestone under the license agreement, but Xiangxue was unable to make the full payment. We received $1.5 million from Xiangxue in February 2021. Consequently, the Company recorded a provision for the outstanding balance of $8.5 million and $0.4 million related to currency conversion in our financial statements for the three months and year ended December 31, 2020, respectively. We have not yet taken legal action against Xiangxue to enforce the provisions of the license, but we may exercise all rights and remedies available to us under the terms of the license and applicable law at any time.

Tirbanibulin

Almirall License Agreement

In December 2017, we entered into a license agreement with Almirall pursuant to which we granted to Almirall an exclusive, sublicensable license of certain of our intellectual property for the development and commercialization of pharmaceutical preparations containing tirbanibulin to treat and prevent skin disorders and diseases in humans in the U.S. and substantially all European countries (including Russia and Turkey). The first label indication is actinic keratosis. In the licensed territory, Almirall also holds a right of first negotiation to license any compound that we may develop in the future with the same mechanism of action as tirbanibulin and for topical administration for the treatment of skin disorders and diseases if we decide to collaborate with a third party regarding that newly developed compound.

Following the receipt of $50.0 million from Almirall in upfront and milestone payments, we may also be entitled to receive an aggregate of $70.0 million in additional milestone payments, as well as sales milestone payments that we estimate will likely total $155.0 million. Almirall will reward Athenex with additional sales milestones should the sales exceed the currently projected amounts. In addition, we are eligible to receive tiered royalty payments for a certain period starting at 15% based on annual net sales of the topical products commercialized by Almirall, utilizing the intellectual property subject to the license agreement, with incremental increases in royalty rates commensurate with increased sales. We may be required to reimburse Almirall in the event Almirall provides notice that certain clinical endpoints under the agreement are not met. Almirall may terminate the agreement in its entirety or with regard to a certain territory in its sole discretion by providing six months’ notice to us. The agreement also contains customary termination rights for both parties, such as in the event of a breach of the agreement or if the other party defaults in performance of its obligations under the agreement.

Other Territories

In 2021, we entered into licensing agreements with strategic partners such as Seqirus and AVIR, to further the global development and commercialization of products containing tirbanibulin for topical administration. We granted Seqirus an exclusive license to commercialize tirbanibulin in Australia and New Zealand. We granted AVIR an exclusive license to commercialize tirbanibulin in Canada.

We granted PharmaEssentia an exclusive, sublicensable license to use any pharmaceutical preparation containing tirbanibulin for use in treating (i) AK in a territory that includes Taiwan, Japan, and South Korea, (ii) psoriasis and other nonmalignant skin conditions in a territory that includes Taiwan, Japan, South Korea, China, Hong Kong, Macau, Singapore, and Malaysia, and (iii) all other dermatology indications, including skin cancer, in a territory that includes Taiwan, Japan, South Korea, Singapore, and Malaysia. We may be entitled to an aggregate of up to $14.6 million in associated with the achievement of certain development and sales milestones, $0.25 million of which may be paid in the form of PharmaEssentia stock. We will also be eligible to receive tiered royalties ranging from the high single-digits to teens on net sales of each product commercialized by PharmaEssentia, which may be reduced accordingly upon the entrance of competing generic products. Prior to the expiration of the term of each agreement, PharmaEssentia may terminate the agreement in its sole discretion, by providing six months’ notice to us. Subject to certain conditions, we may also terminate the agreement if PharmaEssentia fails to comply with certain development timelines set out in each of the agreements. The agreements also contain customary termination rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party.

We granted Xiangxue an exclusive license to develop and commercialize ointment preparations of tirbanibulin ointment for certain indications, including actinic keratosis, for China, Hong Kong, and Macau. In November 2021, we regained the exclusive rights to develop and commercialize Oral Paclitaxel, Oral Irinotecan, and tirbanibulin ointment for Hong Kong and Macau for $1.5 million. We may be eligible to receive $40.0 million if the defined regulatory milestones are achieved, sales milestones up to $30.0

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million when certain sales targets of tirbanibulin ointment among other products are met, and tiered royalties at rates starting from the low teens. The license may be terminated in its entirety upon the mutual agreement of the parties, by Xiangxue for convenience upon requisite notice, or by either party for material breach as set forth in the license. The license also will be terminated with respect to any licensed product for Xiangxue’s failure to meet agreed upon regulatory milestones with respect to such licensed product.

Other Product Candidates

In June 2018, we entered into a license agreement with Avalon Polytom (HK) Ltd. ("Polytom"), an entity affiliated with Avalon Global Holdings Limited ("Avalon"), pursuant to which Polytom granted us an exclusive, sublicensable right and license to develop and commercialize products containing pegylated and cobalt-replaced arginase for the treatment of cancer in humans, apart from ophthalmic uses and use as eye drops, worldwide. Dr. Johnson Lau, our chief executive officer and chairman, and Dr. Manson Fok, one of our directors, collectively have a controlling interest in and serve on the board of directors of Avalon. Also in June 2018, we entered into a license and supply agreement with Avalon HepaPOC Limited ("HepaPOC"), an entity affiliated with Avalon, pursuant to which HepaPOC agreed to exclusively sell to us the meter and consumable strips that can be used to detect galactose concentrations in human blood and granted us an exclusive, sublicensable right and license to use and commercialize the meter and strips for conduct of liver function tests in humans taking our oncology drugs.

For KX2-361, in December 2011, we granted PharmaEssentia an exclusive, sublicensable license to use any pharmaceutical preparation containing KX2-361 for use in treating psoriasis or other non-malignant skin conditions in a territory that includes China, Taiwan, Macau, Hong Kong, Singapore, Malaysia, Japan and South Korea. In May 2012, we granted Xiangxue an exclusive, sublicensable license to use certain of our intellectual property to develop and commercialize products containing KX2-361 in all indications for brain tumors in China, Taiwan, Hong Kong, and Singapore.

Competition

The biopharmaceutical industry and the oncology subsector are characterized by rapid evolution of technologies, fierce competition and strong defense of intellectual property. Any product candidates that we successfully develop and commercialize will have to compete with existing therapies and new therapies that may become available in the future. While we believe that our product candidates, platforms and scientific expertise in the field of biotechnology and oncology provide us with competitive advantages, a wide variety of institutions, including large biopharmaceutical companies, specialty biotechnology companies, academic research departments and public and private research institutions, are actively developing potentially competitive products and technologies. We face substantial competition from biotechnology and biopharmaceutical companies developing oncology products. These competitors and their products generally fall within the following categories:

 

Cell Therapy: Adicet, Allogene, Appia Bio, Atara, Autolus, Biotherapeutics, Cellectis, Celyad, Crispr, Cytovia, Fate Therapeutics, MiNK Therapeutics, Nkarta, ONK Therapeutics, Precision Biosciences, Poseida, and Senti Bio;

Oral administration: Taxol, Abraxane, Cynviloq, Camptosar, Onivyde, Taxotere and Hycamtin; and

Src Kinase inhibitors: Picato and Temodar.

Many of the companies, either alone or with strategic partners, against which we are competing or against which we may compete in the future have significantly greater financial, technical and human resources, and clinical, regulatory, commercialization and manufacturing capabilities than we do. Accordingly, our competitors may be more successful than us in obtaining approval for treatments and achieving widespread market acceptance, rendering our treatments obsolete or non-competitive. Accelerated merger and acquisition activity in the biotechnology and biopharmaceutical industries may result in even more resources being concentrated among a smaller number of our competitors. These companies also compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical study sites and patient registration for clinical studies, acquiring technologies complementary to, or necessary for, our programs and for sales in the API business. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Our commercial opportunity could be substantially limited in the event that our competitors develop and commercialize products that are more effective, safer, less toxic, more convenient or less expensive than our comparable products. In geographies that are critical to our commercial success, competitors may also obtain regulatory approvals before us, resulting in our competitors building a strong market position in advance of our products’ entry. We believe the factors determining the success of our programs will be the efficacy, safety and convenience of our product candidates and our access to supply of API.

Intellectual Property

We strive to protect and enhance the proprietary technologies, inventions, products and product candidates, methods of manufacture, methods of using our products and product candidates, and improvements thereof that are commercially important to our business. We protect our proprietary intellectual property position by, among others, filing patent applications in the U.S. and in

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jurisdictions outside of the U.S. covering our proprietary technologies, inventions, products and product candidates, methods, and improvements that are important to the development and implementation of our business. We also rely on trade secrets, know-how, continuing innovation, and licensing opportunities to develop, strengthen and maintain our proprietary intellectual property position.

Granted patents and pending patent applications related to our platforms and product candidates cover such aspects as composition-of-matter claims to our lead product candidates and their analogs, claims to pharmaceutical compositions comprising such candidates, and claims to methods of making and method of treatment using such candidates. As of February 2, 2022, related to the Src Kinase inhibition platform, we owned approximately 200 granted patents and over 100 pending patent applications, including nine allowed patent applications worldwide. Not accounting for any patent term adjustment, patent term extension or terminal disclaimer, and, assuming that all annuity and/or maintenance fees are paid, the patents and, if granted, patent applications, will expire from 2025 to 2040.

In addition, we have in-licensed various patent, pending patent applications, and technologies. Notably, pursuant to our collaboration with the Center for Cell and Gene Therapy at BCM, in October 2021, we announced the allowance of the first U.S. patent related to our CAR-NKT cell therapy, including a composition-of-matter claim comprising a plurality of genetically modified CD62L-positive human NKT cells comprising at least one CAR. In November 2021, we licensed a portfolio of TCRs that recognize “hotspot” mutations in p53, KRAS, and EGFR genes and methods of isolating T-cells that are reactive to p53 and KRAS specific mutated antigens from the National Cancer Institute (NCI), an institute of the National Institutes of Health (NIH). We continue to maintain licenses for patents related to TCR T-cell therapy, the Orascovery platform, and PEGylation of arginases and their use as anti-cancer and anti-viral therapies.

The term of individual patents depends upon the laws of the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the earliest date of filing of a non-provisional patent application. In the U.S., the term of a patent may be lengthened by patent term adjustment to compensate the patentee for administrative delays by the U.S. Patent and Trade Office ("USPTO") in examining and granting the patent or may be shortened if the patent is terminally disclaimed over an earlier-filed patent. In addition, a patent term may be extended to restore a portion of the term effectively lost as a result of FDA regulatory review. However, the restoration period cannot be longer than five years and cannot extend the remaining term of a patent beyond a total of fourteen years from the date of FDA approval, and only one patent applicable to an approved drug may be extended. Similar extensions as compensation for regulatory delays are available in Europe and other jurisdictions. We have sought patent term extensions in the U.S. and Supplementary Protection Certificates in Europe and intend to seek similar regulatory extensions in other jurisdictions when available. However, there is no guarantee that the applicable authorities will agree with our assessment of whether such extensions should be granted, and we cannot predict the length of the extensions even if they are granted. The actual protection afforded by a patent varies on a claim-by-claim basis, from country-to-country, and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patent. For a granted patent to remain in force most countries require the payment of annuities or maintenance fees, either yearly or at certain intervals during the term of a patent. If an annuity or maintenance fee is not paid, the patent may lapse irrevocably.

Government Regulation and Product Approval

Governmental authorities in the U.S., at the federal, state and local level, and in other countries extensively regulate, among other things, the research, development, testing, manufacture, approval, quality control, labeling, packaging, promotion, storage, advertising, distribution, post-approval monitoring, marketing and export and import of products such as those we are developing. In order to be lawfully marketed in the U.S., our therapeutic drug candidates and compounded products must comply with either Section 503B (outsourcing facility) or Section 505 (new drug approval) of the FDCA as applicable, and they will be subject to similar premarket requirements in other countries. The process of obtaining regulatory approvals and ensuring compliance with applicable federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources.

U.S. Government Regulation

In the U.S., the FDA regulates drugs under the FDCA and its implementing regulations. Failure to comply with the applicable U.S. requirements at any time during the product development or approval process, or after approval, may subject an applicant to administrative or judicial sanctions, any of which could have a material adverse effect on us. These sanctions could include:

refusal to approve pending applications;
withdrawal of an approval;
imposition of a clinical hold;
warning or untitled letters;
seizures or administrative detention of product;

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total or partial suspension of production or distribution; or
injunctions, fines, restitution, disgorgement, refusal of government contracts, or civil or criminal penalties.

NDA approval processes

The process required by the FDA before a therapeutic drug product may be marketed in the U.S. generally involves the following:

completion of extensive nonclinical laboratory tests, animal studies and formulation studies conducted in accordance with GLPs and other applicable regulations;
submission to the FDA of an IND application, which must be authorized before human clinical trials may begin;
performance of adequate and well-controlled human clinical trials in accordance with federal regulations and Good Clinical Practices, or GCPs, an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators, and monitors, to establish the safety and efficacy of the product candidate for its intended use;
submission to the FDA of an NDA;
satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the product candidate is produced to assess readiness for commercial manufacturing and conformance to the manufacturing-related elements of the application, to conduct a data integrity audit, and to assess compliance with cGMP to assure that the facilities, methods and controls are adequate to assure the product candidate’s identity, strength, quality and purity;
potential FDA audit of the clinical trial sites that generated the data in support of the NDA; and
FDA review and approval of the NDA.

Once a pharmaceutical candidate is identified for development, it enters the preclinical or nonclinical testing stage. Nonclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. Such studies must generally be conducted in accordance with the FDA’s GLPs. An IND sponsor must submit the results of the nonclinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND application. Some nonclinical testing may continue even after the IND application is submitted. In addition to including the results of the nonclinical studies, the IND application will also include a protocol detailing, among other things, the objectives of the clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated if the first phase lends itself to an efficacy determination. The IND application automatically becomes effective thirty days after receipt by the FDA, unless the FDA, within the 30-day time period, places the IND on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. A clinical hold may occur at any time during the life of an IND and may affect one or more specific studies or all studies conducted under the IND application. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA.

The manufacture of investigational drugs for the conduct of human clinical trials is subject to cGMP requirements. Investigational drugs and API imported into the U.S. are also subject to regulation by the FDA relating to their labeling and distribution. Further, the export of investigational drug products outside of the U.S. may be subject to regulatory requirements of the receiving country as well as U.S. export requirements under the FDCA.

All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with GCP requirements, which include, among other things, the requirements that all research subjects provide their informed consent in writing for their participation in any clinical trial. Investigators must also provide certain information to the clinical trial sponsors to allow the sponsors to make certain financial disclosures to the FDA. Clinical trials must be conducted under protocols detailing, among other things, the objectives of the trial, dosing procedures, research subject selection and exclusion criteria and the safety and effectiveness endpoints to be evaluated. Each protocol, and any subsequent material amendment to the protocol, must be submitted to the FDA as part of the IND application, and progress reports detailing the status of the clinical trials must be submitted to the FDA annually. Sponsors also must report to the FDA serious and unexpected adverse reactions in a timely manner. Reporting requirements also apply to, among other things, any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator’s brochure and any findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the product candidate. An institutional review board, or IRB, with jurisdiction at each institution participating in the clinical trial must review and approve the protocol before a clinical trial commences at that institution and must also approve the information regarding the trial and the consent form that must be provided to each research subject or the subject’s legal representative, monitor the study until completed and otherwise comply with IRB regulations.

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

Phase 1—The product candidate is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and elimination. In the case of some therapeutic candidates for severe or life-threatening diseases, such as cancer, especially when the product candidate may be inherently too toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients.
Phase 2—Clinical trials are performed on a limited patient population intended to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.
Phase 3—Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical study sites. These studies are intended to establish the overall risk-benefit ratio of the product and provide an adequate basis for product labeling.

A pivotal study is a clinical study that adequately meets regulatory agency requirements for the evaluation of a product candidate’s efficacy and safety such that it can be used to justify the approval of the product. Generally, pivotal studies are also Phase 3 studies but may be Phase 2 studies, with the agreement of FDA, if the trial design provides a reliable assessment of clinical benefit, particularly in situations where there is an unmet medical need.

In the case of a 505(b)(2) NDA, which is a marketing application in which the sponsor may rely on 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 by or for whom the investigations were conducted, some of the above-described studies and nonclinical studies may not be required or may be abbreviated. The applicant may rely upon the FDA’s prior findings of safety and efficacy for a previously approved product or on published scientific literature in support of its application. Bridging studies, including clinical studies, may be needed, however, to demonstrate that it is scientifically appropriate to rely on the findings of the studies that were previously conducted by other sponsors to the drug that is the subject of the marketing application.

In addition, the manufacturer of an investigational drug in a Phase 2 or Phase 3 clinical trial for a serious or life-threatening disease is required to make available, such as by posting on its website, its policy on evaluating and responding to requests for expanded access to such investigational drug.

The outcome of human clinical trials is inherently uncertain, and Phase 1, Phase 2 and Phase 3 testing may not be successfully completed or may not be completed at all. The FDA or the sponsor may suspend a clinical trial at any time for a variety of reasons, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the product candidate has been associated with unexpected serious harm to patients.

During the development of a new product candidate, sponsors are given opportunities to meet with the FDA at certain points; specifically, prior to the submission of an IND, at the end of Phase 2 and before an NDA application is submitted. Meetings at other times may be requested. These meetings can provide an opportunity for the sponsor to share information about the data gathered to date and for the FDA to provide advice on the next phase of development. Sponsors typically use the meeting at the end of Phase 2 to discuss their Phase 2 clinical results and present their plans for the pivotal Phase 3 clinical trials that they believe will support the approval of the new therapeutic. A sponsor may request a Special Protocol Assessment, or SPA, the purpose of which is to reach agreement with the FDA on the Phase 3 clinical trial protocol design and analysis that will form the primary basis of an efficacy claim. The agreement will be binding on the FDA and may not be changed by the sponsor or the FDA after the trial begins except with the written agreement of the sponsor and the FDA or if the FDA determines that a substantial scientific issue essential to determining the safety or efficacy of the product candidate was identified after the testing began.

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

Concurrent with clinical trials, sponsors usually complete additional animal safety studies, develop additional information about the chemistry and physical characteristics of the product candidate and finalize a process for manufacturing commercial quantities of the product candidate in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and the manufacturer must develop methods for testing the quality, purity and potency of the product candidate. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its proposed shelf-life.

The results of product development, nonclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests and other control mechanisms, proposed labeling and other relevant information are submitted to the FDA as part of an NDA requesting approval to market the product. An NDA must also contain data to assess the safety and effectiveness of the product for the claimed indication in all relevant pediatric populations. The FDA may grant deferrals for submission of pediatric data or full or partial waivers. Under the Prescription Drug User Fee Act, or PDUFA, as amended, each NDA must be accompanied by a significant user fee. The FDA adjusts the PDUFA user fees on an annual basis. PDUFA also imposes an annual program fee for each prescription

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drug. Fee waivers or reductions are available in certain circumstances, such as where a waiver is necessary to protect the public health, where the fee would present a significant barrier to innovation or where the applicant is a small business submitting its first human therapeutic application for review. Product candidates that are designated as orphan drugs are also not subject to user fees unless the application contains an indication other than an orphan indication.

Within sixty days following submission of an NDA, FDA reviews the application to determine if it is substantially complete before the agency accepts it for filing. The FDA may refuse to accept any NDA that it deems incomplete or not properly reviewable at the time of submission and may request additional information. In this event, the NDA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA files it. Once the submission is filed, the FDA begins an in-depth substantive review of the NDA. The FDA has agreed to certain performance goals in the review of NDAs. FDA seeks to review NDAs for standard review products that are not new molecular entities, or NMEs, within ten months of the date the NDA is submitted, while FDA seeks to review NDAs for standard review NMEs within ten months of the date FDA files the NDA. FDA seeks to review NDAs for priority review products that are not NMEs within six months of the date the NDA is submitted, while FDA seeks to review NDAs for priority review NMEs within six months of the date FDA files the NDA. The review process for both standard and priority review may be extended by the FDA for three additional months to consider certain late-submitted information, or information intended to clarify information already provided in the submission. The FDA may refer applications for novel drug products or drug products that present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and, if so, under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.

During the product approval process, the FDA also will determine whether a Risk Evaluation and Mitigation Strategy, or REMS, plan is necessary to assure the safe use of the product. If the FDA concludes that a REMS plan is needed, the sponsor of the NDA must submit a proposed REMS plan prior to approval. The FDA has authority to require a REMS plan when necessary to ensure that the benefits of a drug outweigh the risks. In determining whether a REMS plan is necessary, the FDA must consider the size of the population likely to use the drug, the seriousness of the disease or condition to be treated, the expected benefit of the drug, the duration of treatment, the seriousness of known or potential adverse events, and whether the drug is a new molecular entity. A REMS plan may be required to include various elements, such as a medication guide or patient package insert, a communication plan to educate health care providers of the risks, limitations on who may prescribe or dispense the drug or other measures that the FDA deems necessary to assure the safe use of the drug. In addition, the REMS plan must include a timetable to assess the strategy at eighteen months, three years and seven years after the strategy’s approval.

The FDA may also require a REMS plan for a drug that is already on the market if it determines, based on new safety information, that a REMS plan is necessary to ensure that the product’s benefits outweigh its risks.

Before approving an NDA, the FDA will inspect the facilities at which the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are compliant with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites to assure that the clinical trials were conducted in compliance with IND trial requirements and GCP requirements. To assure cGMP and GCP compliance, an applicant must incur significant expenditure of time, money and effort in the areas of training, record keeping, production and quality control.

Notwithstanding the submission of relevant data and information, the FDA may ultimately decide that the NDA does not satisfy its regulatory criteria for approval. Data obtained from clinical trials are not always conclusive, and the FDA may interpret data differently than the applicant. If the agency decides not to approve the NDA in its then present form, the FDA will issue a complete response letter that describes all of the specific deficiencies in the NDA identified by the FDA, with no implication regarding the ultimate approvability of the application or the timing of any such approval, if ever. The deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally, the complete response letter may include recommended actions that the applicant might take to place the application in a condition for approval. If a complete response letter is issued, the applicant must either resubmit the NDA, addressing all of the deficiencies identified in the letter, withdraw the application, or appeal the decision.

Even if a product receives regulatory approval, the approval may be significantly limited to specific indications and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. The FDA may impose restrictions and conditions on product distribution, prescribing or dispensing in the form of a risk management plan, or otherwise limit the scope of any approval. In addition, the FDA may require post marketing clinical trials, sometimes referred to as “Phase 4” clinical trials, designed to further assess a drug’s safety and effectiveness, and testing and surveillance programs to monitor the safety of approved products that have been commercialized.

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Expedited Review and Approval

The FDA has various programs, including Fast Track, priority review, accelerated approval and breakthrough therapy designation, which are intended to expedite or simplify the process for reviewing therapeutic candidates, or provide for the approval of a product candidate on the basis of a surrogate endpoint. Even if a product candidate qualifies for one or more of these programs, the FDA may later decide that the product candidate no longer meets the conditions for qualification or that the time period for FDA review or approval will be lengthened. Generally, therapeutic candidates that are eligible for these programs are those for serious or life-threatening conditions, those with the potential to address unmet medical needs and those that offer meaningful benefits over existing treatments. For example, Fast Track is a process designed to facilitate the development and expedite the review of therapeutic candidates to treat serious or life-threatening diseases or conditions and fill unmet medical needs. Priority review is designed to give therapeutic candidates that offer major advances in treatment or provide a treatment where no adequate therapy exists an initial review within six months of the date that FDA files the NDA as compared to a standard review time of ten months of the date that FDA files the NDA.

Although Fast Track and priority review do not affect the standards for approval, the FDA will attempt to facilitate early and frequent meetings with a sponsor of a Fast Track designated product candidate and expedite review of the application for a product candidate designated for priority review. Under the Fast Track program, the sponsor of a new drug candidate may request that FDA designate the drug candidate for a specific indication as a fast track drug concurrent with, or after, the filing of the IND for the drug candidate. FDA must determine if the drug candidate qualifies for fast track designation within 60 days of receipt of the sponsor’s request. The Fast Track program and FDA’s accelerated approval regulations, which are described in Subpart H of 21 CFR Part 314, provide for an earlier approval for a new product candidate that is (1) intended to treat a serious or life-threatening disease or condition; (2) generally provides a meaningful advantage over available therapies and (3) demonstrates an effect on either a surrogate endpoint that is reasonably likely to predict clinical benefit or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, or IMM, and is reasonably likely to predict an effect on IMM or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. A surrogate endpoint is a laboratory measurement or physical sign used as an indirect or substitute measurement representing a clinically meaningful outcome. As a condition of approval, the FDA will require that a sponsor of a product candidate receiving accelerated approval perform post-marketing studies to verify and describe the predicted effect on IMM or other clinical endpoint. The product may be subject to accelerated withdrawal procedures under certain circumstances.

In addition to the Fast Track, accelerated approval and priority review programs discussed above, a sponsor may seek a breakthrough therapy designation. A breakthrough therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or conditions, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. A breakthrough therapy designation conveys all of the Fast Track program features, as well as more intensive FDA guidance on an efficient drug development program and a commitment from FDA to involve senior managers and experienced review staff in a proactive collaborative, cross-disciplinary review.

Abbreviated New Drug Applications for Generic Drugs and 505(b)(2)NDAs

NDA applicants are required to list with the FDA each patent with claims covering the applicant’s product or method of using the product. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential generic or 505(b)(2) applicants in support of approval of an ANDA, or a 505(b)(2) application. An ANDA provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed drug and has been shown to be bioequivalent to the listed drug. Other than the requirement for bioequivalence testing, ANDA applicants are not required to conduct, or submit results of, preclinical or clinical tests to prove the safety or effectiveness of their drug product. Drugs approved in this way can often be substituted by pharmacists under prescriptions written for the original listed drug. A 505(b)(2) NDA is an application that contains full reports of investigations of safety and effectiveness but where some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. A 505(b)(2) applicant may be able to rely on published literature or on FDA’s previous findings of safety and effectiveness for an approved drug. A 505(b)(2) NDA may be submitted for changes to a previously approved drug, including, for example, in the dosage form, route of administration, or indication.

The ANDA or 505(b)(2) applicant is required to make a certification to the FDA concerning any patents listed for the approved NDA product in the FDA’s Orange Book. Specifically, the ANDA or 505(b)(2) applicant must certify that: (1) the required patent information has not been filed; (2) the listed patent has expired (3) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patent is invalid or will not be infringed by the new product. The ANDA applicant may also elect to submit a section viii statement certifying that its proposed ANDA labeling does not contain (or carves out) any language regarding the patented method-of-use rather than certify to a listed method-of-use patent. If the applicant does not challenge the listed patents, the ANDA or 505(b)(2) application will not be approved until all the listed patents claiming the referenced product have expired.

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A certification that the ANDA or 505(b)(2) product will not infringe the already approved product’s listed patents, or that such patents are invalid, is called a Paragraph IV certification. If the ANDA or 505(b)(2) applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA or 505(b)(2) application has been received by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within forty-five days of the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA or 505(b)(2) application until the earlier of thirty months, expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to the ANDA applicant.

The ANDA or 505(b)(2) application will not be approved until any applicable non-patent exclusivity listed in the Orange Book for the referenced product has expired.

Patent Term Restoration and Marketing Exclusivity

Depending upon the timing, duration and specifics of FDA approval of the use of our drug candidates, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of fourteen years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND application and the submission date of an NDA plus the time between the submission date of an NDA and the approval of that application, except that this review period is reduced by any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved product is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent. The USPTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, if available, we intend to apply for restorations of patent term for some of our currently owned patents beyond their current expiration dates, depending on the expected length of the clinical trials and other factors involved in the filing of the relevant NDA; however, there can be no assurance that any such extension will be granted to us.

Market exclusivity provisions under the FDCA can also delay the submission or the approval of certain applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the U.S. to the first applicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an ANDA, or a 505(b)(2) NDA, submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions of use associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA under 505(b)(1) of the FDCA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

Orphan Drug Designation

Under the Orphan Drug Act, the FDA may grant Orphan Drug Designation to therapeutic candidates intended to treat a rare disease or condition, which is generally a disease or condition that affects either (1) fewer than 200,000 individuals in the U.S., or (2) more than 200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developing and making available in the U.S. a product candidate for this type of disease or condition will be recovered from sales in the U.S. for that product candidate. Orphan Drug Designation must be requested before submitting an NDA. We have received Orphan Drug Designation for KX2-361 for the treatment of gliomas and Oral Paclitaxel for the treatment of angiosarcomas. After the FDA grants Orphan Drug Designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan Drug Designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.

If a product candidate that has Orphan Drug Designation subsequently receives the first FDA approval for the disease for which it has such designation, the product candidate is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the same drug for the same indication, except under limited circumstances, for seven years. Orphan drug exclusivity, however, could also block the approval of one of our therapeutic candidates for seven years if a competitor obtains approval of the same drug for the same disease or condition as defined by the FDA or if our product candidate is determined to be

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contained within the competitor’s product candidate for the same indication or disease. Orphan drug exclusivity does not prevent FDA from approving the same drug for a different disease or a different drug for the same disease.

Pediatric Exclusivity and Pediatric Use

Under the Best Pharmaceuticals for Children Act (BPCA), certain therapeutic candidates may obtain an additional six months of exclusivity if the sponsor submits information requested in writing by the FDA, referred to as a Written Request, relating to the use of the active moiety of the product candidate in children. Although the FDA may issue a Written Request for studies on either approved or unapproved indications, it may only do so where it determines that information relating to that use of a product candidate in a pediatric population, or part of the pediatric population, may produce health benefits in that population. This six-month exclusivity may be granted if an NDA sponsor submits pediatric data that fairly responds to a written request from the FDA for such data. The data do not need to show the product to be effective in the pediatric population studied. If the FDA determines that information relating to the use of the new drug in the pediatric population may produce health benefits in the population, the clinical study is deemed to fairly respond to the FDA’s request and the reports of FDA-requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever statutory or regulatory periods of exclusivity or patent protection covering the product are extended by six months. In addition, the Pediatric Research Equity Act, or PREA, requires a sponsor to conduct pediatric studies for most therapeutic candidates, for a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration. Under PREA, original NDAs and supplements thereto must contain a pediatric assessment unless the sponsor has received a deferral or waiver. The required assessment must assess the safety and effectiveness of the product candidate for the claimed indications in all relevant pediatric subpopulations and support dosing and administration for each pediatric subpopulation for which the product candidate is safe and effective. The FDA may grant a waiver or a deferral of pediatric studies for some or all of the pediatric subpopulations. A deferral may be granted for several reasons, including a finding that the product candidate is ready for approval for use in adults before pediatric studies are complete or that additional safety or effectiveness data needs to be collected before the pediatric studies begin. The law requires the FDA to send a PREA Non-Compliance letter to sponsors who have failed to submit their pediatric assessments required under PREA, have failed to seek or obtain a deferral or deferral extension or have failed to request approval for a required pediatric formulation. It further requires the FDA to post the PREA Non-Compliance letter and sponsor’s response.

Post-Approval Requirements

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is not maintained or if problems occur after the product candidate reaches the market. Later discovery of previously unknown problems with a product candidate may result in restrictions on the product candidate or even complete withdrawal of the product candidate from the market. After approval, some types of changes to the approved product candidate, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval in a supplemental NDA, or sNDA. An sNDA must contain all of the information necessary to support the change. In the case of a new indication, that information usually consists of at least one clinical trial, and often more. Like an NDA, FDA determines whether the sNDA is sufficiently complete to permit review before it files the sNDA. FDA then reviews the sNDA. Like an NDA, FDA can either approve the sNDA or issue a complete response letter outlining the deficiencies in the sNDA. In addition, the FDA may under some circumstances require testing and surveillance programs to monitor the effect of approved therapeutic candidates that have been commercialized, and the FDA under some circumstances has the power to prevent or limit further marketing of a product candidate based on the results of these post-marketing programs.

Any therapeutic candidates manufactured or distributed pursuant to FDA approvals for prescription drugs are subject to continuing regulation by the FDA, including, among other things:

reporting and record-keeping requirements;
reporting of adverse experiences;
providing the FDA with updated safety and efficacy information;
product sampling and distribution requirements;
notifying the FDA and gaining its approval of specified manufacturing or labeling changes and
complying with FDA promotion and advertising requirements, which include, among other things, standards for direct-to-consumer advertising, restrictions on promoting products for uses or in patient populations that are not described in or consistent with the product’s approved labeling, limitations on industry-sponsored scientific and educational activities and requirements for promotional activities involving the internet.

Therapeutic manufacturers and other entities involved in the manufacturing of approved therapeutic products are required to register their establishments with the FDA and obtain licenses in certain states and are subject to periodic unannounced inspections by the FDA and some state agencies for compliance with cGMP and other laws. The FDA periodically inspects manufacturing facilities

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to assess compliance with cGMP, which imposes extensive procedural, substantive and record-keeping requirements. In addition, changes to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require FDA approval before being implemented. FDA regulations would also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon us and any third-party manufacturers used. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.

Disclosure of Clinical Trial Information

Sponsors of clinical trials of FDA-regulated products, including drugs, are required to register and disclose certain clinical trial information, which is publicly available at www.clinicaltrials.gov. Information related to the product, patient population, phase of investigation, study sites and investigators and other aspects of the clinical trial is then made public as part of the registration. Sponsors are also obligated to disclose the results of their clinical trials after completion. Disclosure of the results of these trials can be delayed under certain limited circumstances for up to two years after the date of completion of the trial. Competitors may use this publicly available information to gain knowledge regarding the progress of development programs. The government recently released a regulation and policy to expand and enhance the requirements related to registering and reporting the results of which may result in greater enforcement of these requirements in the future.

Regulation of Outsourcing Facilities

Pharmaceutical drug compounding is a practice in which a licensed pharmacist, a licensed physician, or in the case of an outsourcing facility, a person under the direct supervision of a licensed pharmacist, combines, mixes, or alters ingredients of a drug to create a medication. We are engaged in the compounding of sterile drugs as an outsourcing facility registered with FDA under FDCA Section 503B. Title I of the Drug Quality and Security Act, the Compounding Quality Act, or CQA, allows a facility that compounds sterile drugs to register with FDA as an outsourcing facility. Once registered (which includes payment of an annual fee, among other requirements), an outsourcing facility must meet certain conditions in order to be statutorily exempt from the FDCA’s new drug approval requirements, the requirement to label products with adequate directions for use, and certain product tracing and serialization requirements. Under the CQA, a drug must be lawfully compounded in compliance with the provisions set forth in Section 503B including FDA’s cGMP regulations and related cGMP guidance for outsourcing facilities in order to remain eligible for the statutory exemptions. The outsourcing facility must also bi-annually report specific information about the products that it compounds, including a list of all of the products it compounded during the previous six months pursuant to Section 503B(b)(2). The source of any bulk substance active ingredient used in compounding must be a Section 510-registered manufacturer, and the substances must be accompanied by a Certificate of Analysis. If the outsourcing facility compounds using bulk drug substances, the bulk drug substances must either appear on FDA’s “interim” Category 1 list of bulk substances that may be used in compounding under Section 503B, which are bulk drug substances for which FDA has determined there is a clinical need for use in compounding. Drugs may also be compounded if an FDA-approved drug product appears on FDA’s published drug shortage list.

FDA has not yet finalized its list of bulk drug substances for which there is a clinical need. Provided certain conditions are met, FDA will exercise enforcement discretion concerning interim Category 1 substances pending evaluation of the substances for inclusion on FDA’s final list of bulk drug substances for which there is a clinical need.

In addition, an outsourcing facility must meet other conditions described in the CQA, including reporting adverse events pursuant to Section 503B(b)(5) of the FDCA, and labeling its compounded products with certain information pursuant to Section 503B(a)(10). Outsourcing facilities are prohibited from transferring or otherwise selling compounded drugs through a wholesale distributor, or from compounding drugs that are essentially copies of commercially available, FDA-approved drugs. Outsourcing facilities are subject to FDA inspection, and FDA conducts inspections on a risk-based frequency under Section 503B(b)(4).

Pharmaceutical Coverage, Reimbursement and Pricing

Significant uncertainty exists as to the coverage and reimbursement status of any products for which we may obtain regulatory approval or compound. In the U.S., sales of any products for which we may compound or receive regulatory approval for commercial sale will depend in part on the availability of coverage and reimbursement from third-party payors. Third-party payors include managed care providers, private health insurers and other organizations as well as government payors such as Medicare, Medicaid, TRICARE and the Department of Veterans Affairs.

The process for determining whether a payor will provide coverage for a product is typically separate from the process for setting the reimbursement rate that the payor will pay for the product. Third-party payors may limit coverage to specific products on an approved list or formulary which might not include all of the FDA-approved products for a particular indication. Also, third-party payors may refuse to include a particular branded drug on their formularies or otherwise restrict patient access to a branded drug when a less costly generic equivalent or other alternative is available. However, under Medicare Part D—Medicare’s outpatient prescription drug benefit—there are protections in place to ensure coverage and reimbursement for oncology products and all Part D prescription drug plans are required to cover substantially all anti-cancer agents. However, a payor’s decision to provide coverage for a product

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does not imply that an adequate reimbursement rate will be available. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. In order to obtain coverage and reimbursement for any product that might be approved for sale, we may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of any products, in addition to the costs required to obtain regulatory approvals. Our drug candidates may not be considered medically necessary or cost-effective. If third-party payors do not consider a product to be cost-effective compared to other available therapies, they may not cover an approved product as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow a company to sell its products at a profit.

Government Programs

Medicaid, the 340B Drug Pricing Program, and Medicare

Federal law requires that a pharmaceutical manufacturer, as a condition of having its products receive federal reimbursement under Medicaid and Medicare Part B, must pay rebates to state Medicaid programs for all units of its covered outpatient drugs dispensed to Medicaid beneficiaries and paid for by a state Medicaid program under either a fee-for-service arrangement or through a managed care organization. This federal requirement is effectuated through a Medicaid drug rebate agreement between the manufacturer and the Secretary of Health and Human Services. The Centers for Medicare & Medicaid Services (“CMS”) administers the Medicaid drug rebate agreements, which provide, among other things, that the drug manufacturer will pay rebates to each state Medicaid agency on a quarterly basis and report certain price information on a monthly and quarterly basis. The rebates are based on prices reported to CMS by manufacturers for their covered outpatient drugs. For innovator products, that is, drugs that are marketed under approved NDAs, the basic rebate amount is the greater of 23.1% of the average manufacturer price (“AMP”) for the quarter or the difference between such AMP and the best price for that same quarter. The AMP is the weighted average of prices paid to the manufacturer (1) directly by retail community pharmacies and (2) by wholesalers for drugs distributed to retail community pharmacies. The best price is essentially the lowest price available to non-governmental entities. Innovator products are also subject to an additional rebate that is based on the amount, if any, by which the product’s current AMP has increased over the baseline AMP, which is the AMP for the first full quarter after launch, adjusted for inflation. For non-innovator products, generally generic drugs marketed under approved abbreviated new drug applications, the basic rebate amount is 13% of the AMP for the quarter. Non-innovator products are also subject to an additional rebate. The additional rebate is similar to that discussed above for innovator products, except that the baseline AMP quarter is the fifth full quarter after launch (for non-innovator multiple source drugs launched on April 1, 2013 or later) or the third quarter of 2014 (for those launched before April 1, 2013). To date, the rebate amount for a drug has been capped at 100% of the AMP; however, effective January 1, 2024, this cap will be eliminated, which means that a manufacturer could pay a rebate amount on a unit of the drug that is greater than the average price the manufacturer receives for the drug.

The terms of participation in the Medicaid drug rebate program impose an obligation to correct the prices reported in previous quarters, as may be necessary. Any such corrections could result in additional or lesser rebate liability, depending on the direction of the correction. In addition to retroactive rebates, if a manufacturer were found to have knowingly submitted false information to the government, federal law provides for civil monetary penalties for failing to provide required information, late submission of required information, and false information.

A manufacturer must also participate in a federal program known as the 340B drug pricing program in order for federal funds to be available to pay for the manufacturer’s drugs under Medicaid and Medicare Part B. Under this program, the participating manufacturer agrees to charge certain federally funded clinics and safety net hospitals no more than an established discounted price for its covered outpatient drugs. The formula for determining the discounted price is defined by statute and is based on the AMP and the unit rebate amount as calculated under the Medicaid drug rebate program, discussed above. Manufacturers are required to report pricing information to the Health Resources and Services Administration (“HRSA”) on a quarterly basis. HRSA has also issued regulations relating to the calculation of the ceiling price as well as imposition of civil monetary penalties for each instance of knowingly and intentionally overcharging a 340B covered entity.

Federal law also requires that manufacturers report data on a quarterly basis to CMS regarding the pricing of drugs that are separately reimbursable under Medicare Part B. These are generally drugs, such as injectable products, that are administered “incident to” a physician service and are not generally self-administered. The pricing information submitted by manufacturers is the basis for reimbursement to physicians and suppliers for drugs covered under Medicare Part B. As with the Medicaid drug rebate program, federal law provides for civil monetary penalties for failing to provide required information, late submission of required information, and false information.

Medicare Part D provides prescription drug benefits for seniors and people with disabilities. Medicare Part D beneficiaries had a gap in their coverage (between the initial coverage limit and the point at which catastrophic coverage begins) where Medicare did not cover their prescription drug costs, known as the coverage gap. However, by 2020, Medicare Part D beneficiaries will pay 25% of

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drug costs after they reach the initial coverage limit - the same percentage they were responsible for before they reached that limit - thereby closing the coverage gap. Most of the cost of closing the coverage gap is being borne by innovator companies and the government through subsidies. Each manufacturer of a drug approved under an NDA is required to enter into a Medicare Part D coverage gap discount agreement and provide a 70% discount on those drugs dispensed to Medicare beneficiaries in the coverage gap, in order for its drugs to be reimbursed by Medicare Part D.

Federal Contracting/Pricing Requirements

Manufacturers are also required to make their covered drugs, which are generally drugs approved under NDAs, available to authorized users of the Federal Supply Schedule (“FSS”) of the General Services Administration. The law also requires manufacturers to offer deeply discounted FSS contract pricing for purchases of their covered drugs by the Department of Veterans Affairs, the Department of Defense (“DoD”), the Coast Guard, and the Public Health Service (including the Indian Health Service) in order for federal funding to be available for reimbursement or purchase of the manufacturer’s drugs under certain federal programs. FSS pricing to those four federal agencies for covered drugs must be no more than the Federal Ceiling Price (“FCP”), which is at least 24% below the Non-Federal Average Manufacturer Price (“Non-FAMP”) for the prior year. The Non-FAMP is the average price for covered drugs sold to wholesalers or other middlemen, net of any price reductions.

The accuracy of a manufacturer’s reported Non-FAMPs, FCPs, or FSS contract prices may be audited by the government. Among the remedies available to the government for inaccuracies is recoupment of any overcharges to the four specified federal agencies based on those inaccuracies. If a manufacturer were found to have knowingly reported false prices, in addition to other penalties available to the government, the law provides for civil monetary penalties of $100,000 per incorrect item. Finally, manufacturers are required to disclose in FSS contract proposals all commercial pricing that is equal to or less than the proposed FSS pricing, and subsequent to award of an FSS contract, manufacturers are required to monitor certain commercial price reductions and extend commensurate price reductions to the government, under the terms of the FSS contract Price Reductions Clause. Among the remedies available to the government for any failure to properly disclose commercial pricing and/or to extend FSS contract price reductions is recoupment of any FSS overcharges that may result from such omissions.

Tricare Retail Pharmacy Network Program

The DoD provides pharmacy benefits to current and retired military service members and their families through the Tricare healthcare program. When a Tricare beneficiary obtains a prescription drug through a retail pharmacy, the DoD reimburses the pharmacy at the retail price for the drug rather than procuring it from the manufacturer at the discounted FCP discussed above. In order for the DoD to realize discounted prices for covered drugs (generally drugs approved under NDAs), federal law requires manufacturers to pay refunds on utilization of their covered drugs sold to Tricare beneficiaries through retail pharmacies in DoD’s Tricare network. These refunds are generally the difference between the Non-FAMP and the FCP and are due on a quarterly basis. Absent an agreement from the manufacturer to provide such refunds, DoD will designate the manufacturer’s products as Tier 3 (non-formulary) and require that beneficiaries obtain prior authorization in order for the products to be dispensed at a Tricare retail network pharmacy. However, refunds are due whether or not the manufacturer has entered into such an agreement.

Branded Pharmaceutical Fee

A branded pharmaceutical fee is imposed on manufacturers and importers of branded prescription drugs, generally drugs approved under NDAs. The fee is $2.8 billion in 2019 and subsequent years. This annual fee is apportioned among the participating companies based on each company’s sales of qualifying products to or utilization by certain U.S. government programs during the preceding calendar year. The fee is not deductible for U.S. federal income tax purposes. Utilization of generic drugs, generally drugs approved under ANDAs, is not included in a manufacturer’s sales used to calculate its portion of the fee.

The ACA

Effective in 2010, the Affordable Care Act (“ACA”) made several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability by raising the minimum basic Medicaid rebate on most branded prescription drugs from 15.1% of average manufacturer price, or AMP, to 23.1% of AMP, and adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations) of solid oral dosage forms of branded products, as well as potentially impacting their rebate liability by modifying the statutory definition of AMP. The ACA also expanded the universe of Medicaid utilization subject to drug rebates by requiring pharmaceutical manufacturers to pay rebates on Medicaid managed care utilization as of 2010 and by expanding the population potentially eligible for Medicaid drug benefits. CMS will expand Medicaid rebate liability to the territories of the U.S. as well, beginning in 2023, if the territories elect to enroll in the Medicaid Drug Rebate Program. In addition, the ACA provides for the public availability of retail survey prices and certain weighted average AMPs under the Medicaid program. The implementation of this requirement by CMS may also provide for the public availability of pharmacy acquisition cost data, which could influence our decisions related to setting product prices and offering related discounts.

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With regard to the 340B program, effective in 2010, the ACA expanded the types of entities eligible to receive discounted 340B pricing; although, under the current state of the law, with the exception of children’s hospitals, these newly eligible entities will not be eligible to receive discounted 340B pricing on orphan drugs when used for the orphan indication.

The adoption of government controls and measures and tightening of restrictive policies in jurisdictions with existing controls and measures, could also limit payments for pharmaceuticals.

The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

Generic Drugs

Given that we manufacture and market generic drug products, our business may be impacted by laws and policies governing the coverage, pricing and reimbursement of generic drugs. Generic drugs are the same API as initial innovator medicines and are typically more affordable in comparison to the innovator’s products. Sales of generic medicines have benefitted from policies encouraging generic substitution and a general increasing acceptance of generic drugs on the part of healthcare insurers, consumers, physicians and pharmacists. However, while the U.S. generics market is one of the largest in the world, the recent trend of rising generic drug prices has drawn scrutiny from the U.S. government. Specifically, generic drug pricing is the subject of Congressional inquiries and media attention, and many generic drug manufacturers are the targets of government investigations.

In addition, like branded drug manufacturers, generic drug manufacturers are now required to pay an inflation penalty if price increases on generic drugs exceed the rate of inflation.

Also, the ACA revised the methodology for setting Medicaid generic drug reimbursement in order to further limit the reimbursement of generic drugs under the Medicaid program. Specifically, the Federal Upper Limit (“FUL”), which establishes the government’s maximum payment amount for certain generic drugs, is no less than 175% of the weighted average of the most recently reported monthly AMPs for pharmaceutically and therapeutically equivalent multiple source drug products that are available for purchase by retail community pharmacies on a nationwide basis. Similarly, reimbursement for generic drugs is also limited in Medicare Part B, as the Average Sales Price (the metric upon which reimbursement is based or ASP) for multiple-source drugs included within the same multiple-source drug billing and payment code is the volume-weighted average of the various manufacturers’ ASPs for those drug products.

Reimbursement for Compounded Drugs

Given that we intend to compound and sell compounded products, some of which may include APIs that we manufacture, our business may be impacted by the downstream coverage and reimbursement of compounded products. Generally, federal reimbursement is available for compounded drugs but is typically dependent upon whether the individual ingredients or bulk drug substances that make up the compounded product are FDA-approved. Certain of our API products have not yet received FDA approval.

There is a national payment policy for compounded drugs under Medicare Part B, but the policy is unclear because it does not stipulate whether payment is available for ingredients that are bulk drug substances, which are generally not FDA-approved. Under Medicare Part B, claims for compounded drugs are typically submitted using a billing code for “not otherwise classified drugs,” and CMS contractors who process Part B claims may conduct further reviews of outpatient claims to determine whether the drug billed under a nonspecific billing code is a compounded drug and to identify its ingredients in order to make payment decisions. However, CMS contractors who process Part B claims do not always collect information on the FDA-approval status of drug ingredients, and, therefore, payment may be made for ingredients that are not FDA-approved products. Therefore, there is uncertainty as to whether Medicare payments for compounded drugs are consistent with the Medicare Part B policy.

Under Medicare Part D, federal payments are not available for non-FDA-approved products—including bulk drug substances—and inactive ingredients used to make a compounded drug. Insurers that offer Medicare Part D benefits and Part D-only sponsors, generally, pay pharmacies for each ingredient in the compounded drug that is an FDA-approved product and is otherwise eligible for reimbursement under Part D. However, with respect to non-FDA approved bulk drug substances, insurers that offer Medicare Part D benefits and Part D-only sponsors may choose to pay for such bulk substances but may not submit these payments as part of the Part D transaction data CMS uses to determine federal payments to Part D plans.

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Healthcare Fraud and Abuse Laws and Compliance Requirements

We are subject to various federal and state laws targeting fraud and abuse in the healthcare industry. These laws may impact, among other things, our proposed sales and marketing programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration (a term interpreted broadly to include anything of value, including, for example, gifts, discounts, chargebacks, and credits), 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, an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs;
federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment to Medicare, Medicaid or other third-party payors that are false or fraudulent, or making a false statement or record material to payment of a false claim or avoiding, decreasing or concealing an obligation to pay money owed to the federal government;
provisions of the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes, referred to as the “HIPAA All-Payor Fraud Prohibition,” that prohibit knowingly and willfully executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;
the federal transparency laws, including the federal Physician Payment Sunshine Act, which was part of the ACA, that require manufacturers of certain drugs and biologics to track and annually report payments and other transfers of value they make to U.S. physicians, physician assistants, certain types of advance care nurses, and teaching hospitals, as well as physician ownership and investment interests in the manufacturer, and that such information is subsequently made publicly available in a searchable format on a CMS website;
provisions of HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, which imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information and
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, state transparency reporting and compliance laws; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and which may not have the same effect, thus complicating compliance efforts.

The ACA broadened the reach of the fraud and abuse laws by, among other things, amending the intent requirement of the federal Anti-Kickback Statute and the applicable criminal healthcare fraud statutes contained within 42 U.S.C. § 1320a-7b. Pursuant to the statutory amendment, a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act or the civil monetary penalties statute. Many states have adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.

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The federal False Claims Act prohibits anyone from, among other things, knowingly presenting, or causing to be presented, for payment to federal programs (including Medicare and Medicaid) claims for items or services that are false or fraudulent. Although we would not submit claims directly to payors, manufacturers can be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or promoting a product off-label. In addition, our future activities relating to the reporting of wholesaler or estimated retail prices for our products, the reporting of prices used to calculate Medicaid rebate information and other information affecting federal, state and third-party reimbursement for our products, and the sale and marketing of our products, are subject to scrutiny under this law. For example, pharmaceutical companies have been prosecuted under the federal False Claims Act in connection with their alleged off-label promotion of drugs, purportedly concealing price concessions in the pricing information submitted to the government for government price reporting purposes, and allegedly providing free product to customers with the expectation that the customers would bill federal health care programs for the product. Penalties for a False Claims Act violation include three times the actual damages sustained by the government, plus mandatory civil penalties for each separate false claim, the potential for exclusion from participation in federal healthcare programs, and, although the federal False Claims Act is a civil statute, conduct that results in a False Claims Act violation may also implicate various federal criminal statutes. In addition, private individuals have the ability to bring actions under the federal False Claims Act, and certain states have enacted laws modeled after the federal False Claims Act.

New Legislation and Regulations

From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing the testing, approval, manufacturing, marketing, coverage and reimbursement of products regulated by the FDA or other government agencies. In addition to new legislation, FDA and healthcare fraud and abuse and coverage and reimbursement regulations and policies are often revised or interpreted by the agency in ways that may significantly affect our business and our products. Most recently, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted, which, among other things, removes penalties for not complying with the individual mandate to carry health insurance. On June 17, 2021, the United States Supreme Court dismissed a challenge to the constitutionality of the ACA on procedural grounds because the individual mandate was repealed by Congress. It is possible that there will be changes to the ACA in the future. Additional reforms could have an adverse effect on anticipated revenues from therapeutic 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 therapeutic candidates. However, we cannot predict the ultimate content, timing or effect of any healthcare reform legislation or the impact of potential legislation on us.

Furthermore, in the U.S., the health care industry is subject to political, economic and regulatory influences. Initiatives to reduce the federal budget and debt and to reform health care coverage are increasing cost-containment efforts. We anticipate that federal agencies, Congress, state legislatures and the private sector will continue to review and assess alternative health care benefits, controls on health care spending, and other fundamental changes to the healthcare delivery system. Any proposed or actual changes could limit coverage or the amounts that federal and state governments will pay for health care products and services, which could also result in reduced demand for our products or additional pricing pressures and limit or eliminate our spending on development projects and affect our ultimate profitability. We are not able to predict whether further legislative changes will be enacted or whether FDA or healthcare fraud and abuse or coverage and reimbursement regulations, guidance, policies or interpretations will be changed or what the effect of such changes, if any, may be.

Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act of 1977 (“FCPA”) prohibits any U.S. individual or business from corruptly offering, paying, promising or authorizing the provision of anything of value, directly or indirectly, to any foreign official, foreign political party or official thereof, or candidate for foreign political office to obtain or retain business. The FCPA also obligates companies whose securities are listed in the U.S. to comply with accounting provisions requiring the issuer to maintain books and records that accurately and fairly reflect all transactions of the issuer and its controlled subsidiaries and to devise and maintain an adequate system of internal accounting controls.

Environment

We are subject to inspections by the FDA for compliance with cGMP and other U.S. regulatory requirements, including U.S. federal, state and local regulations regarding environmental protection and hazardous and controlled substance controls, among others. Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. We have incurred, and may continue to incur, significant expenditures to ensure that we are in compliance with these laws and regulations. We would be subject to significant penalties for failure to comply with these laws and regulations.

China Government Regulation

In the People’s Republic of China (“PRC” or “China,” for the purposes of this document only, except where the context requires otherwise, references to China or the PRC exclude the special administrative regions of Hong Kong and Macau and Taiwan), we operate in an increasingly complex legal and regulatory environment. We are subject to a variety of PRC laws, rules and regulations affecting many aspects of our business. This section summarizes the principal PRC laws, rules and regulations relevant to our business and operations.

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Foreign Investment in Pharmaceutical Industry

Foreign investment in China was previously subject to the Catalogue for the Guidance of Foreign Investment Industries (2017 Revision) issued and effective beginning July 28, 2017, and the Special Administrative Measures for the Access of Foreign Investment (2018 Revision) (the “Negative List”) issued and effective beginning July 28, 2018, which together comprised the encouraged foreign-invested industries catalogue and the special administrative measures for the access of foreign investments to the restricted or the prohibited foreign-invested industries. The latter set out restrictions such as percentage of shareholding and qualifications of senior management. The Catalogue of Industries in which Foreign Investment is Encouraged and the Negative List have been revised several times. The most updated Catalogue of Industries in which Foreign Investment is Encouraged revision was issued on December 27, 2020 (the “2020 Catalogue”) and came into effect on January 27, 2021. The most updated Negative List was issued on December 27, 2021 (the “2021 Negative List”) and took effect on January 1, 2022, which further reduced restrictions on foreign investment. The manufacturing and production of new anti-cancer drugs, new cardiovascular medicine and new nervous system drugs all fall within the field of industries in which foreign investment is encouraged in the 2020 Catalogue.

General Regulations on China Drug Administration

The pharmaceuticals industry in China is mainly regulated and administrated by the National Medical Products Administration (the “NMPA”), under the administration of the State Administration for Market Regulation (the “SAMR”), the National Health Commission (the “NHC”) and the National Health Care Security Administration (the “NHSA”). Pursuant to the Decision of the First Session of the Thirteenth National People’s Congress on the State Council of the PRC (the “State Council”) Institutional Reform Proposal promulgated by the National People’s Congress of the PRC on March 17, 2018, (1) the SAMR was established; and the China Food and Drug Administration (the “CFDA”) ceased to exist, while the NMPA was established under the administration of the SAMR; (2) the National Health and Family Planning Commission ceased to exist, while the NHC shall be established as a department under the State Council, incorporating duties of supervision and management which had been assigned to relevant departments and (3) the NHSA was established as a bureau directly subordinate to the State Council.

The NMPA, which inherited the drug supervision function from its predecessor the CFDA, is the primary drug regulator responsible for almost all of the key stages of the life-cycle of pharmaceutical products, including preclinical research, clinical trials, marketing approvals, manufacturing, advertising and promotion, distribution and pharmacovigilance.

The PRC Drug Administration Law (the “PRC Drug Administration Law”) promulgated by the Standing Committee of the National People’s Congress in 1984 and the Implementing Measures of the PRC Drug Administration Law promulgated by the Ministry of Health, or the MOH, in 1989 set forth the legal framework for the administration of pharmaceutical products, including the research, development and manufacturing of drugs.

The PRC Drug Administration Law was revised in February 2001, December 2013, April 2015, and again in August 2019. The purpose of the revisions was to strengthen the supervision and administration of pharmaceutical products and to ensure the quality and safety of those products for human use. The revised PRC Drug Administration Law applies to entities and individuals engaged in the development, production, trade, application, supervision and administration of pharmaceutical products. It regulates and prescribes a framework for the administration of pharmaceutical preparations of medical institutions and for the development, research, manufacturing, distribution, packaging, pricing and advertisement of pharmaceutical products. New Implementing Measures of the PRC Drug Administration Law promulgated by the State Council took effect in September 2002 and was revised in February 2016, and again in March 2019, providing detailed implementing regulations for the revised PRC Drug Administration Law.

The PRC Drug Administration Law was newly revised on August 26, 2019 and came into effect on December 1, 2019. As compared to the old law, the current revised PRC Drug Administration Law mainly includes the following key highlights:

The supervision and administration of pharmaceutical products will be improved by emphasizing the responsibility of the enterprise, strengthening the management of drug production process and clarifying the traceability requirements of drug quality and safety;
The responsibility for drug supervision will be clarified, and the supervision measures will be improved;
The punishment of illegal behaviors will be aggravated by increasing the fine limit, strengthening the punishment for the relevant personnel of pharmaceutical production enterprises and supplementing the responsibility of the drug marketing authorization holder (the “MAH”);
The MAH system will be implemented, which will cause the MAH holder to undertake the responsibility of the safety and effectiveness of drugs and to bear legal responsibility during the whole process of development, production, management and use of drugs; and
The drug approval system will be reformed, including the abolishment of the separation of GMP and GSP certification.

Under these regulations, we need to follow related regulations for preclinical research, clinical trials and production of new drugs.

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On April 27, 2021, the General Office of the State Council published the Opinions on Comprehensively Strengthening Regulatory Capacity for Drugs. The Opinions introduced the general requirements and several key tasks and safeguards to improve regulations on drugs, including enhancing drug inspection capability and establishing a national pharmacovigilance system.

Good Laboratories Practice Certification for Preclinical Research

To improve the quality of preclinical research, the CFDA promulgated the Administrative Measures for Good Laboratories Practice of Preclinical Laboratory in 2003, which was revised in 2017, and began to conduct the certification program of GLP. In addition, the CFDA promulgated the Administrative Measures for the Certification of Good Laboratory Practices of Preclinical Laboratory in April 2007 which determines whether an institution is qualified for undertaking pharmaceutical preclinical research upon the evaluation of the institution’s organizational administration, its research personnel, its equipment and facilities and its operation and management of preclinical pharmaceutical projects. If all requirements are met, a GLP Certification will be issued by the CFDA, and the result will be published on the CFDA’s website.

Approval for Clinical Trials and Production of New Drugs

According to the Provisions for Drug Registration promulgated by the SAMR in January 2020, which abolished the old Provisions for Drug Registration promulgated by the CFDA in 2007, the PRC Drug Administration Law, the Provisions on the Administration of Special Examination and Approval of Registration of New Drugs, or the Special Examination and Approval Provisions issued by the CFDA in 2009 and the Circular on Information Publish Platform for Pharmaceutical Clinical Trials issued by the NMPA in 2013, we must comply with the following procedures and obtain several approvals for clinical trials and production of new drugs.

Clinical Trial Application

Upon completion of its preclinical research, a research institution must apply for approval of a CTA before conducting clinical trials. According to the Decision of the CFDA on Adjusting the Approval Procedures of the Administrative Approval Items for Certain Drugs promulgated by the CFDA on March 17, 2017, the decision on the approval of clinical trials of drugs enacted by the CFDA can be made by the Center for Drug Evaluation of the CFDA, or the CDE in the name of the CFDA from May 1, 2017. In July 2018, the NMPA promulgated the Announcement on Adjusting Evaluation and Approval Procedures for Clinical Trials for Drugs, which further adjusted for those who apply for drug clinical trials in China, and stipulated that if an applicant does not receive any negative or questioning opinions from the CDE within sixty days after the date of accepting the application and the payment of the fee, drug clinical trials may be conducted in accordance with the plan being submitted.

According to the Provisions for Drug Registration (2020 Revision), a drug clinical trial consists of Phase I clinical trial, Phase II clinical trial, Phase III clinical trial, Phase IV clinical trial, and bioequivalence trial. Pursuant to the characteristics of a drug and the research purpose, the research contents shall include clinical pharmacological research, exploratory clinical trial, confirmatory clinical trial and post-marketing research. Clinical trials must be conducted in accordance with the new Administrative Measures for Good Clinical Practice, which was promulgated by NMPA and NHC on April 23, 2020 and took effect on July 1, 2020, which also sets forth the requirements for conducting the clinical trial, including preparation of clinical trials, clinical trial protocol, duties of the sponsor and investigators and protection of the trial subjects. According to the Announcement on Adjusting Evaluation and Approval Procedures for Clinical Trials for Drugs issued by the NMPA on July 24, 2018, where the application for clinical trial of new drug has been approved, upon the completion of Phases I and II clinical trials and prior to Phase III clinical trial, the applicant shall submit the application for Communication Session to CDE to discuss with CDE the key technical questions including the design of Phase III clinical trial protocol.

New Drug Application

According to the Provisions for Drug Registration (2020 Revision), upon completion of clinical trials, determination of quality standards, completion of validation of commercial-scale production processes, and preparation for acceptance of verification and inspection for drug registration, the applicant may apply to the NMPA for approval of a new drug application. The NMPA then determines whether to approve the application according to the comprehensive evaluation opinion provided by the CDE of the NMPA. We must obtain approval of a new drug application before our drugs can be manufactured and sold in the Chinese market.

Drug Manufacturing Permit and Good Manufacturing Practice

Pursuant to the PRC Drug Administration Law and its implementing measures, a drug manufacturer must obtain a Drug Manufacturing Permit from the local branch of the NMPA at provincial level before it starts to manufacture drug products. Prior to granting such permit, the relevant government authority will inspect the applicant’s production facilities, and decide whether the sanitary conditions, quality assurance system, management structure and equipment within the facilities have met the required standards. Each Drug Manufacturing Permit is valid for a period of five years and the manufacturer is required to apply for renewal of the permit within six months prior to its expiration date and will be subject to reassessment by the authority in accordance with then prevailing legal and regulatory requirements for the purposes of such renewal. All facilities and techniques used in the manufacture of

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products for clinical use or for sale in China must be operated in conformity with GMP guidelines as established by the MOH and CFDA. GMP certification was no longer required from December 2019 and regular and random onsite checking and supervision will be implemented by the relevant authority. Failure to comply with applicable requirements could result in the termination of manufacturing and significant fines. The NMPA promulgated the Administration Measures for Drug Inspection (for Trial Implementation) in May 2021, which provides details of the onsite checking and inspection procedures and requirements after GMP certification was abolished.

Animal Test Permits

According to Regulations for the Administration of Affairs Concerning Experimental Animals promulgated by the State Science and Technology Commission in November 1988, as revised in January 2011, July 2013, and March 2017, and Administrative Measures on the Certificate for Animal Experimentation (for Trial Implementation) promulgated by the State Science and Technology Commission and other regulatory authorities in December 2001, performing experimentation on animals requires a Certificate for Use of Laboratory Animals. Applicants must satisfy the following conditions:

Laboratory animals must be qualified and sourced from institutions that have Certificates for Production of Laboratory Animals;
The environment and facilities for the animals’ living and propagating must meet state requirements;
The animals’ feed and water must meet state requirements;
The animals’ feeding and experimentation must be conducted by professionals, specialized and skilled workers or other trained personnel;
The management systems must be effective and efficient; and
The applicable entity must follow other requirements as stipulated by the PRC laws and regulations.

Drug Registration Classification and Special Examination and Approval

According to the Provisions for Drug Registration (2007 Revision), drug registration applications are divided into three different types, namely Domestic New Drug Application, Domestic Generic Drug Application and Imported Drug Application. Drugs fall into one of three categories, namely chemical medicine, biological product or traditional Chinese or natural medicine. The registrations of chemical medicines are divided into six categories, among which, a Category 1 drug is a new drug that has never been marketed in any country. However, the Provisions for Drug Registration (2020 Revision) stipulated that drug registration shall be classified into several categories including traditional Chinese drugs, chemical drugs and biological drugs. Among them, the registration applications of chemical drugs shall be categorized by innovative chemical drugs, modified new chemical drugs, generic chemical drugs, etc.

In March 2016, the CFDA promulgated the Work Plan for Reforming the Chemical Medicines Registration Classification System, under which, the registrations of chemical medicines are divided into five categories as follows:

Category 1: Innovative drugs that are not marketed both domestically and abroad. These drugs contain new compounds with clear structures and pharmacological effects, and they have clinical value.

Category 2: Modified new drugs that are not marketed both domestically and abroad. With known active components, the drug’s structure, phase, prescription manufacturing process, administration route and indication are optimized, and it has obvious clinical advantage.

Category 3: The drugs that are imitated by domestic applicants to original drugs that have been marketed abroad but not domestically. These kinds of drugs are supposed to have the same quality and effects with original drugs. Original drugs are the foremost drugs that are approved to be marketed domestically and /or abroad with complete and full safety and validity data as marketing evidence.

Category 4: The drugs that are imitated by domestic applicants to original drugs that have been marketed domestically. These kinds of drugs are supposed to have the same quality and effects with original drugs.

Category 5: The drugs that have been marketed abroad are applied to be marketed domestically.

As a support policy and implementing rule of the Provisions for Drug Registration (2020 Revision), the NMPA issued the Chemical Drug Registration Classification and Application Data Requirements in June 2020, effective in July 2020, which reaffirmed the principles of the classification of chemical drugs set forth by the Work Plan for Reforming the Chemical Medicines Registration Classification System, and made minor adjustments to the subclassifications of Category 5. According to such regulation, Category 5.1 are innovative chemical drugs and improved new chemical drugs while Category 5.2 are generic chemical drugs, all of which shall have been already marketed abroad but not yet approved in China.

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According to the Special Examination and Approval Provisions for New Drugs, the CFDA conducts special examination and approval for new drugs registration application when:

(1)
active ingredients and their preparations extracted from plants, animals and minerals, and newly discovered medical materials and their preparations have not been marketed in China;
(2)
the chemical raw material medicines as well as the preparations and biological products thereof have not been approved for marketing home and abroad
(3)
the new drugs are for treating AIDS, malignant tumors and rare diseases, etc., and have obvious advantages in clinic treatment; or
(4)
the new drugs are for treating diseases with no effective methods of treatment.

The Special Examination and Approval Provisions for New Drugs provide that the applicant may file for special examination and approval at the stage of Clinical Trial Application if the drug candidate falls within items (1) or (2), and for drug candidates that fall within items (3) or (4), the application for special examination and approval must be made when filing for production.

Adjustment on the Administration of Imported Drug Registration

On October 10, 2017, the CFDA promulgated the Decision on Adjusting Relevant Matters Concerning the Administration of Imported Drug Registration, effective as of the date of its promulgation, which stipulates that, among others, (1) simultaneous research and application are allowed, meaning that, in the case of a clinical trial concerning a drug subject thereto to be conducted at an international multi-center clinical trial (“IMCCT”) in China, Phase 1 clinical trials of the drug are allowed simultaneously, and the requirement that the drug subject to the clinical trial need to have been previously registered overseas or to have entered a Phase 2 or Phase 3 clinical trial shall not apply, except for preventative biological products; (2) the drug registration procedure is to be optimized, meaning that, upon the completion of a clinical trial at an IMCCT in China, an applicant may directly file a drug registration application and (3) for a new chemical drug or an innovative therapeutic biological drug for which a clinical trial or market registration is made, in each case as an imported drug, the requirement that such drug has received an overseas license issued by the country or region where the drug’s overseas pharmaceutical manufacturer is located shall not apply.

Changes to the Review and Approval Process

In August 2015, the State Council issued a statement, Opinions on Reforming the Review and Approval Process for Pharmaceutical Products and Medical Devices, which contained several potential policy changes that could benefit the pharmaceutical industry:

A plan to accelerate innovative drug approval with a special review and approval process, with a focus on areas of high unmet medical needs, including drugs for HIV, cancer, serious infectious diseases, orphan diseases and drugs on national priority lists.
A plan to adopt a policy which would allow companies to act as the marketing authorization holder and to hire contract manufacturing organizations to produce drug products.
A plan to improve the review and approval of clinical trials, and to allow companies to conduct clinical trials at the same time as they are in other countries and encourage local clinical trial organizations to participate in international multi-center clinical trials.

In November 2015, the CFDA released the Circular Concerning Several Policies on Drug Registration Review and Approval, which further clarified the following policies potentially simplifying and accelerating the approval process of clinical trials:

A one-time umbrella approval procedure allowing approval of all phases of a new drug’s clinical trials at once, rather than the current phase-by-phase approval procedure, will be adopted for new drugs’ CTAs.
A fast track drug registration or clinical trial approval pathway will be available for the following applications: (1) registration of innovative new drugs treating HIV, cancer, serious infectious diseases and orphan diseases; (2) registration of pediatric drugs; (3) registration of geriatric drugs and drugs treating China-prevalent diseases; (4) registration of drugs sponsored by national science and technology grants; (5) registration of innovative drugs using advanced technology, using innovative treatment methods, or having distinctive clinical benefits; (6) registration of foreign innovative drugs to be manufactured locally in China; (7) concurrent applications for new drug clinical trials which are already approved in the U.S. or EU, or concurrent drug registration applications for drugs which have applied for marketing authorization and passed onsite inspections in the U.S. or EU and are manufactured using the same production line in China and (8) clinical trial applications for drugs with urgent clinical need and patent expiry within three years, and marketing authorization applications for drugs with urgent clinical need and patent expiry within one year.

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In March 2016, the CFDA issued the Interim Provisions on the Procedures for Drug Clinical Trial Data Verification that provides procedural rules for CFDA’s on-site verification of clinical data before drug approvals.

Also, in February 2016, the CFDA published the Opinions on Implementing a Prioritized Review System to Avoid Drug Review Backlogs, which introduces a prioritized review and approval pathway to clinical trial applications and registration applications of certain drugs as part of CFDA’s ongoing reform of its current drug review and approval system.

The CFDA issued the Procedures for Priority Examination and Approval of Medical Devices (Procedures) on October 25, 2016, which came into effect on January 1, 2017. The Procedures, composed of seventeen articles, specify that the priority in examination and approval shall be given, in relation to the applications of registering Class-III domestic, or Class-II and Class-III imported medical devices, when those applications fall within such categories as diagnosis or treatment of rare disease or malignant tumor with significant clinical advantage. According to the Procedures, the medical device technical evaluation center of the CFDA will tentatively decide on the applicants applying for their project given priority examination and approval, names of their products and the reception numbers and disclose such information on its website for a period of no less than five working days. The Procedures provide that for projects given priority in examination and approval, the medical device technical evaluation center shall communicate with applicants in an active way, as required by applicable provisions, in the course of evaluating relevant technologies and may arrange for special talks when necessary; food and drug administrative departments at provincial levels shall take the review of the registered quality management system of medical devices as priority and the CFDA will prioritize their administrative examination and approval.

In December 2017, the CFDA innovations promulgated the Opinions on Encouraging the Prioritized Evaluation and Approval for Drug, which abolished the Opinions on Implementing a Prioritized Review System to Avoid Drug Review Backlogs. The CFDA would prioritize the examination and approval on applications of new drugs in particular cases, including (1) applications of new drugs with significant clinical value satisfying particular conditions; (2) applications of new drugs with significant clinical advantages preventing or treating particular diseases and (3) other particular conditions.

According to the Announcement on Optimizing the Evaluation and Approval of Drug Registration promulgated by the NMPA and the NHC in May 2018, the Chinese government seeks to further simplify and accelerated the clinical trial approval process.

The Provisions for Drug Registration (2020 Revision) has incorporated the previous reform in respect of the accelerated approval for clinical trial and drug marketing registration and introduces four procedures for expedited marketing registration of drugs, which are procedures for groundbreaking therapeutic drugs, procedures for conditional approval, procedures for prioritized reviews and approval, and procedures for special examination and approval:

Procedures for ground-breaking therapeutic drugs: during the drug clinical trials, for an innovative drug or improved new drug used for prevention and treatment of life-threatening illnesses or illnesses which have a serious impact on quality of life and for which there is no other effective prevention and treatment method or there is adequate evidence to prove that the said innovative drug or modified new drug has obvious clinical advantages over existing treatment approach, the applicant may request for application of procedures for ground-breaking therapeutic drugs.
Procedures for conditional approval: during the drug clinical trials, for drugs which fall under the following circumstances, an application for conditional approval of marketing registration may be submitted (i) for drugs for treatment of life threatening illnesses for which there is no effective treatment approach, the clinical trial of drugs already has data to prove efficacy and is able to forecast the clinical value; (ii) for drugs urgently needed for public health, the clinical trial of drugs already has data to prove efficacy and is able to forecast the clinical value; and (iii) for other vaccines urgently needed for major public health emergencies or deemed by the NHC to be urgently needed, its benefits outweigh the risks according to the evaluation.
Procedures for prioritized reviews and approval: at the time of the drug marketing registration, drugs have obvious clinical value may apply for application of procedures for prioritized review and approval, including (i) clinically and urgently needed but insufficient drug, innovative drugs and modified new drugs for prevention and treatment of major contagious diseases and rare diseases; (ii) new pharmaceutical product types, dosage form and specifications of pediatric drugs which comply with pediatric physiological characteristics; (iii) vaccines and innovative vaccines urgently needed for prevention and control of diseases; (iv) drug included in the procedures for ground-breaking therapeutic drug; (v) drug which comply with conditional approval criteria; and (vi) other circumstances of prioritized review stipulated by the NMPA.
Procedures for special examination and approval: at the time of a threat or occurrence of public health emergency, the NMPA may, in accordance with law, decide to implement special examination and approval for urgently needed drug required for the prevention and treatment during the public health emergency. Drug included in the special examination and approval procedures may, based on special needs of disease prevention and control, be restricted for use within a certain period and scope.

On July 7, 2020, the NMPA promulgated the Announcement on Promulgating Three Documents Including the Working Procedures for the Evaluation of Breakthrough Therapy Designation Drugs (for Trial Implementation) and Priority Review and Approval Procedures for Drug Marketing Authorizations (for Trial Implementation), which abolished the Opinions on Encouraging

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the Prioritized Evaluation and Approval for Drug. According to the Working Procedures for the Evaluation of Breakthrough Therapy Designation Drugs (for Trial Implementation), sponsors of innovative drug candidates which exhibit clinical benefits for the treatment of life-threatening or other serious conditions for which there is no existing effective prevention and treatment method, or compared with existing treatment methods that have sufficient evidence to show that they have obvious clinical advantages, can apply for breakthrough therapeutic drug programs during Phase I and II clinical trials for such drug candidates. According to the Priority Review and Approval Procedures for Drug Marketing Authorizations (for Trial Implementation), an applicant for drug marketing authorization may apply for priority review and approval procedures for the following drugs with obvious clinical value: (I) drugs in urgent clinical demand and in shortage, innovative drugs and modified new drugs for prevention and treatment of serious infectious diseases, rare diseases and other diseases; (II) new varieties, dosage forms and specifications of children’s drugs that conform to children’s physiological characteristics; (III) vaccines and innovative vaccines that are in urgent need for disease prevention and control; (IV) drugs that have been included in the procedures for breakthrough therapy designation; (V) drugs that are subject to conditional approval; and (VI) other circumstances under which priority review and approval shall be provided for by the NMPA.

On November 15, 2021, the CDE of the NMPA issued the Guiding Principles for Clinical Research and Development of Oncology Drugs Oriented by Clinical Value, which emphasized the clinical value-oriented and patient-centered concept during the whole research and development process of oncology drugs.

PRC Enterprise Income Tax Law and Its Implementation

According to the new PRC Enterprise Income Tax Law (the “EIT Law”), effective from January 1, 2008, and amended on February 24, 2017 and December 29, 2018, a uniform income tax rate of 25% is applied equally to domestic enterprises as well as foreign investment enterprises and permit certain High and New Technologies Enterprises (“HNTEs”) to enjoy preferential enterprise income tax rates subject to these HNTEs meeting certain qualification criteria.

The EIT Law and its implementation rules provide that a withholding tax at the rate of 10% is applicable to dividends and other distributions payable by a PRC resident enterprise to investors who are “non-resident enterprises” (that do not have an establishment or place of business in China, or that have such establishment or place of business but the relevant dividend or other distribution is not effectively connected with the establishment or place of business). However, pursuant to the Arrangement between the Mainland and Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income effective on December 8, 2006, the withholding tax rate for dividends paid by a Chinese resident enterprise is 5% if the Hong Kong enterprise owns at least 25% of the capital of the Chinese enterprise; otherwise, the dividend withholding tax rate is 10%. According to the Notice of the State Taxation Administration of the PRC (the “STA”) on Issues relating to the Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009 and effective on the same day, the corporate recipient of dividends distributed by Chinese enterprises must satisfy the direct ownership thresholds at all times during the twelve consecutive months preceding the receipt of the dividends. The STA promulgated the Notice on Certain Issues of the “Beneficial Owner” in Tax Treaties on February 2, 2018. Pursuant to these regulations and the Administrative Measures for Treaty Treatment for Non-Resident Taxpayers promulgated by the STA in October 2019 and effective from January 1, 2020, non-resident enterprises are required to file information sheets to the competent tax authorities in order to enjoy the favorable treatments under the treaties. However, the relevant tax authorities may check and verify at their discretion, and if a company is deemed to be a pass-through entity rather than a qualified owner of benefits, it cannot enjoy the favorable tax treatments provided in the tax arrangement. In addition, if transactions or arrangements are deemed by the relevant tax authorities to be entered into mainly for the purpose of enjoying favorable tax treatments under the tax arrangement, such favorable tax treatments may be subject to adjustment by the relevant tax authorities in the future.

Pursuant to the Announcement on Continuation of Enterprise Income Tax Policies for Extensive Development in the Western Region issued by the Ministry of Finance (the “MOF”), the STA and the National Development and Reform Commission (the “NDRC”) and effective from January 1, 2021, which partially replaced the Notice on the Relevant Tax Policies for the Implementation of the Strategy of Extensive Development of the Western Regions, under which from January 1, 2021 to December 31, 2030, a reduced enterprise income tax rate of 15% is applicable to the enterprises set up in the western regions as designated by the relevant PRC regulations with their main business in the encouraged industries. The encouraged industries are those listed in the Catalog of Encouraged Industries in the Western Regions as promulgated by NDRC. To qualify for the reduced tax rate, an enterprise must derive 60% or more of its revenue from the business listed in the Catalog of Encouraged Industries in the Western Regions.

Regulations Relating to Business Tax and Value-added Tax

Pursuant to the Temporary Regulations on Business Tax, which were promulgated by the State Council on December 13, 1993 and effective on January 1, 1994, as amended on November 10, 2008 and effective January 1, 2009, any entity or individual conducting business in a service industry is generally required to pay business tax at the rate of 5% on the revenues generated from providing such services.

In November 2011, the MOF and the STA promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax (“Pilot Plan”). Since January 2012, the STA has been implementing the Pilot Plan, which imposes value-added tax (“VAT”) in lieu of business tax for certain industries in Shanghai. The Pilot Plan was expanded to other regions, including Beijing, in September

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2012 and was further expanded nationwide beginning August 1, 2013. VAT is applicable at a rate of 6% in lieu of business taxes for certain services, and 17% for the sale of goods and provision of tangible property lease services. VAT payable on goods sold or taxable services provided by a general VAT taxpayer for a taxable period is the net balance of the output VAT for the period after crediting the input VAT for the period. In March 2016, the MOF and STA jointly issued the Notice on Adjustment of Transfer Business Tax to Value Added Tax effective from May 2016, according to which PRC tax authorities have started imposing VAT on revenues from various service sectors, including real estate, construction, financial services and insurance as well as other lifestyle service sectors, replacing the business tax.

On November 19, 2017, the Temporary Regulations on Business Tax was abolished and the Interim Regulations of the People’s Republic of China on Value Added Tax was revised by the State Council. According to the revised Interim Regulations of the People’s Republic of China on Value Added Tax, selling goods, providing labor services of processing, repairs or maintenance, or selling services, intangible assets or real property in the PRC, or importing goods to the PRC, shall be subject to value added tax. According to a notice jointly issued by MOF and STA in April 2018, starting from May 1, 2018, the VAT rate will be lowered from 17% to 16% for manufacturing and certain other industries, and from 11% to 10% for transportation, construction, real estate leasing service, sale of real estate, basic telecommunication services and farm produce. According to a notice jointly issued by MOF, STA and the General Administration of Customs in March 2019, from April 1, 2019, the value-added tax rate of 16% will be further lowered to 13% and the value-added tax rate of 10% will be further lowered to 9%.

Regulations Relating to Environmental Protection

China has adopted extensive environmental laws and regulations with national and local standards for emissions control, discharge of wastewater and storage and transportation, treatment and disposal of waste materials. At the national level, the relevant environmental protection laws and regulations include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Air Pollution, the PRC Law on the Prevention and Control of Water Pollution, the PRC Law on the Promotion of Clean Production, the PRC Law on the Prevention and Control of Noise Pollution, the PRC Law on the Prevention and Control of Solid Waste Pollution, the PRC Recycling Economy Promotion Law, the PRC Law on Environmental Impact Assessment, the Environmental Protection Tax Law and its implementation rules, and Regulations on the Administration of Pollutant Discharge Permits. In recent years, the PRC Government has introduced a series of new policies designed to generally promote the protection of the environment. For instance, on November 10, 2016, the General Office of the State Council has released the Implementing Plan for the Permit System for Controlling the Discharge of Pollutants (Plan). The Plan proposes the need of instituting a system for enterprises and public institutions to control their respective total amount of pollutants discharged, which shall be connected with the environmental impact assessment system organically. The Plan also stipulates that it is necessary to regulate the orderly issuance of pollutant discharge permits, to make a name list to manage the permission of pollutant discharge, to promote the administration of such permission system per industry and to impose severer administration and control over enterprises and public institutions located at such places where environment quality fails to reach relevant standards. Furthermore, the Plan requires that a national pollutant discharge permit management information platform shall be established by 2017 to strengthen the information disclosure and social supervision.

Regulations Relating to Foreign Exchange and Dividend Distribution

Foreign Exchange Regulation

The Foreign Exchange Administration Regulations, most recently amended in August 2008, are the principal regulations governing foreign currency exchange in China. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be made in foreign currencies without prior approval from the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. In contrast, approval from or registration with appropriate government authorities is required when RMB is converted into a foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans.

In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment (“SAFE Circular 59”), which has been partially repealed and revised. SAFE Circular 59 substantially amends and simplifies the foreign exchange procedure. Pursuant to SAFE Circular 59, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds by foreign investors in China, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not previously possible. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by the SAFE or its local branches over direct investment by foreign investors in China will be conducted by way of registration, and banks must process foreign exchange business relating to the direct investment in China based on the registration information provided by SAFE and its branches.

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Under the Circular of the SAFE on Further Improving and Adjusting the Policies for Foreign Exchange Administration under Capital Accounts promulgated on January 10, 2014 and effective from February 10, 2014, administration over the outflow of the profits by domestic institutions has been further simplified. In principle, a bank is no longer required to examine transaction documents when handling the outflow of profits of no more than the equivalent of $50,000 by a domestic institution. When handling the outflow of profits exceeding the equivalent of $50,000, the bank, in principle, is no longer required to examine the financial audit report and capital verification report of the domestic institution, provided that it must examine, according to the principle of transaction authenticity, the profit distribution resolution of the board of directors (or the profit distribution resolution of the partners) relating to this profit outflow and the original copy of its tax record-filing form. After each profit outflow, the bank must affix its seal to and endorsements on the original copy of the relevant tax record-filing form to indicate the actual amount of the profit outflow and the date of the outflow.

On March 30, 2015, SAFE promulgated the Circular on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises (“SAFE Circular 19”), which became effective on June 1, 2015. According to SAFE Circular 19, the foreign exchange capital of foreign-invested enterprises may be settled on a discretionary basis, meaning that the foreign exchange capital in the capital account of a foreign-invested enterprise for which the rights and interests of monetary contribution has been confirmed by the local foreign exchange bureau (or the book-entry registration of monetary contribution by the banks) can be settled at the banks based on the actual operational needs of the foreign-invested enterprise. The proportion of such discretionary settlement is temporarily determined as 100%. The RMB converted from the foreign exchange capital will be kept in a designated account, and if a foreign-invested enterprise needs to make further payment from such account, it still must provide supporting documents and go through the review process with the banks.

Furthermore, SAFE Circular 19 stipulates that the use of capital by foreign-invested enterprises must adhere to the principles of authenticity and self-use within the business scope of enterprises. The capital of a foreign-invested enterprise and capital in RMB obtained by the foreign-invested enterprise from foreign exchange settlement must not be used for the following purposes:

(1)
directly or indirectly used for the payment beyond the business scope of the enterprises or the payment prohibited by relevant laws and regulations;
(2)
directly or indirectly used for investment in securities, unless otherwise provided by relevant laws and regulations;
(3)
directly or indirectly used for granting the entrusted loans in RMB, unless permitted by the scope of business, repaying the inter-enterprise borrowing (including advances by the third party), or repaying the bank loans in RMB that have been sub-lent to the third party; and/or
(4)
paying the expenses related to the purchase of real estate that is not for self-use, except for the foreign-invested real estate enterprises.

On June 9, 2016, SAFE issued the Notice to Reform and Regulate the Administration Policies of Foreign Exchange Capital Settlement to further reform foreign exchange capital settlement nationwide.

On October 23, 2019, SAFE issued Circular of the SAFE on Further Promoting the Facilitation of Cross-border Trade and Investment, or the Circular 28, which took effect on the same day. Circular 28 allows non-investment foreign-invested enterprises to use their capital funds to make equity investments in China, with genuine investment projects and in compliance with effective foreign investment restrictions and other applicable laws.

Our PRC subsidiaries’ distributions to the offshore parent and carrying out cross-border foreign exchange activities shall comply with the various SAFE registration requirements described above.

Share Option Rules

Under the Administration Measures on Individual Foreign Exchange Control issued by the People’s Bank of China on December 25, 2006, all foreign exchange matters involved in employee share ownership plans and share option plans in which Chinese citizens participate require approval from SAFE or its authorized branch. In addition, under the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed Companies, commonly known as SAFE Circular 7, or Share Option Rules, issued by the SAFE on February 15, 2012, Chinese residents who are granted shares or share options by companies listed on overseas stock exchanges under share incentive plans are required to (1) register with the SAFE or its local branches; (2) retain a qualified Chinese agent, which may be a PRC subsidiary of the overseas listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the share incentive plans on behalf of the participants and (3) retain an overseas institution to handle matters in connection with their exercise of share options, purchase and sale of shares or interests and funds transfers.

In addition, the STA has issued certain circulars concerning employee share options or restricted shares, including the Circular of the STA on Issues Concerning Individual Income Tax in Relation to Share Options, promulgated in August 2009. Under these circulars, the employees working in China who exercise share options or are granted restricted shares will be subject to PRC individual income tax. The PRC subsidiaries of such overseas listed companies have obligations to file documents related to employee

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share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If the employees fail to pay or the PRC subsidiaries fail to withhold their income taxes in accordance with relevant laws and regulations, the PRC subsidiaries may face fines or sanctions imposed by tax authorities or other PRC government authorities.

Regulation of Dividend Distribution

The principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in China are the Company Law of China, as amended, and the Foreign Investment Law, which took effect on January 1, 2020 and replaced the Wholly Foreign-owned Enterprise Law, the Cooperative Joint Venture Law, and the Equity Joint Venture Law. Under these laws, rules and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any, as determined in accordance with PRC accounting standards and regulations. Both PRC domestic companies and wholly-foreign owned PRC enterprises are required to allocate at least 10% of their respective accumulated after-tax profits each year, if any, to fund certain capital reserve funds until the aggregate amount of these reserve funds have reached 50% of the registered capital of the enterprises. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.

Labor Laws and Social Insurance

Pursuant to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees. All employers must comply with local minimum wage standards. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative and criminal liability in the case of serious violations.

In addition, according to the PRC Social Insurance Law, employers like our PRC subsidiaries in China must provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, and medical insurance and housing funds.

Rest of the World Regulation

For other countries outside of the U.S. and China, the requirements governing the conduct of clinical trials, drug licensing, pricing and reimbursement vary from country to country. In all cases the clinical trials must be conducted in accordance with GCP requirements and the applicable regulatory requirements and the ethical principles having their origin in the Declaration of Helsinki.

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

Human Capital

As of December 31, 2021, we had 652 full-time employees and 14 part-time employees. Of these, 242 are engaged in full-time research and development and laboratory operations, 268 are engaged in manufacturing activities and 142 are engaged in full-time selling, general and administrative functions.

As of December 31, 2021, 55% of our personnel were located in the U.S., 37% were located in Asia, 7% were located in Latin America, and 1% in Europe. We have also engaged and may continue to engage independent consultants and contractors to assist us with our operations. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We have not experienced any employment related work stoppages, and we consider our relations with our employees to be good.

Supporting our people is a fundamental value for Athenex. We believe the Company’s success depends on its ability to attract, develop and retain key personnel. We monitor our compensation and total reward programs closely and provide a competitive mix of compensation and benefits for all employees. This includes competitive salaries, bonus opportunities for approximately one-third of our employees, and long-term incentives in the form of stock options and other equity awards for nearly one-half of our employees. Benefits include opportunities for 401(k) matches, insurance covering health, dental and life, and HSA contributions.

Because of our global presence with locations and employees around the world, Athenex maintains a rich diverse culture. We believe this diversity is an asset and with the skills, experience and industry knowledge of our employees significantly benefit our operations and performance. We believe in a culture of equity, diversity and inclusion. We are also committed to advancing safe and respectful work environments. We recognize and value that our employees can make important contributions to our business based on their individual talents, backgrounds, and expertise, allowing everyone to thrive personally and professionally. We strive for a diverse workforce at every level of the company and its board of directors.

Health and safety in the workplace for our employees and personnel has been of primary importance, particularly with the many issues surrounding COVID-19. The COVID-19 pandemic has underscored the importance of keeping our employees safe and healthy. In response to the pandemic, the Company has taken actions aligned with the Centers for Disease Control and Prevention to protect its

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workforce so that its workforce can more safely and effectively perform their work. We have invested in systems and technology to allow many employees the ability to work remotely. We have implemented wellness checks for employees including officers and board members. We did not lay off or furlough our work force in response to the COVID-19 pandemic.

Financial Information

We manage our operations and allocate resources in line with our three distinct reportable segments. Financial information regarding our operations, assets and liabilities, including our net loss for the years ended December 31, 2021, 2020, and 2019 and our total assets as of December 31, 2021 and 2020, is included in our Consolidated Financial Statements in Item 8 of this Annual Report.

Corporate Information

We were originally formed under the laws of the state of Delaware in November 2003 under the name Kinex Pharmaceuticals, LLC. In December 2012, we converted from a limited liability company to a Delaware corporation, Kinex Pharmaceuticals, Inc. In August 2015, we changed our name to Athenex, Inc. Our principal executive offices are located at 1001 Main Street, Suite 600, Buffalo, New York 14203, and our telephone number is (716) 427-2950. Our website address is www.athenex.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this Annual Report, and you should not consider information on our website to be part of this Annual Report.

Available Information

We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and other information with the Securities and Exchange Commission ("SEC"). Our filings with the SEC are available on the SEC’s website at www.sec.gov. You may also access our press releases, financial information and reports filed with the SEC (for example, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to those Forms) on our website under the “Investor Relations” tab. Copies of any documents on our website are available without charge, and reports filed with or furnished to the SEC will be available as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC.

 

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Item 1A. Risk Factors.

Investing in our common stock involves a high degree of risk. You should consider carefully the following risk factors, as well as the other information in this report, including our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition and results of operations and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to the COVID-19 Pandemic and Macroeconomic Factors

The COVID-19 pandemic and other macroeconomic factors could continue to adversely impact our business, including our commercial operations, clinical development activities and clinical trials.

As a result of the COVID-19 pandemic, we experienced supply chain disruptions and, in line with the industry overall, slowed enrollment or suspensions of ongoing clinical trials for our earlier stage product candidates as healthcare resources are diverted to address the COVID-19 pandemic and the emergence and spread of COVID-19 variants. The surge of COVID-19 cases in India during the first half of 2021, a country where we source supplies and maintain partnerships that are key to our specialty drug business, including API, presented business and supply chain disruption risks for us. For example, we were unable to receive inventory from our partners in India for a certain period of time. We could face similar risks in other regions, or a resurgence in India, to the extent the virus is not able to be contained or there is widespread sickness and disruption of operations.

The future extent of the impact of the COVID-19 pandemic on our business and operations will depend on a number of factors, including (i) the ultimate spread and continued severity of the outbreaks in the U.S. and globally, including additional waves of outbreak as containment measures are lifted, (ii) the long-term scope, duration and impact of containment measures on individuals and businesses, and (iii) the timing to market and relative availability of testing, vaccination and treatment options for COVID-19. If the pandemic worsens, we experience additional waves of outbreak on a local, national or global scale, or the war in Ukraine causes a significant macroeconomic downturn, we may experience a multitude of additional disruptions that could severely impact our business, operations, clinical development activities and planned clinical trials, including without limitation, the following:

a spread of COVID-19 among our workforce and/or management team, which would result in our reduced capacity to manage our business to the extent key personnel are impacted or our personnel are impacted in significant numbers;
continued delays or difficulties in clinical trials, which could include extended periods of time in which early stage trials are suspended, sustained difficulties enrolling patients in clinical trials and/or disruptions to ongoing trials based on the attrition of patients as a result of contracting or being exposed to COVID-19, facility closures or limitations on the use of hospitals as clinical trial sites and governmental restrictions on “non-essential” procedures and activities, any of which may further delay our clinical development plans and timelines and also may impact the integrity of our clinical trial data for ongoing trials;
temporary or long-term disruptions in our supply chains and resulting delays in the delivery of products, services or other materials necessary for our operations;
interruptions in FDA operations or the operations of comparable foreign regulatory agencies, which may in turn impact our timelines for receiving regulatory approvals and feedback;
complete or partial shutdowns of the buildout efforts at our New API Facility or production slowdowns or stoppages at the New API Facility;
disruptions, including data breaches and data loss, due to the increased cybersecurity vulnerabilities caused by remote work and a distributed workforce on the one hand, and potential cyberattacks from state actors on the other hand;
government regulations that may be imposed in response to the COVID-19 pandemic and the war in Ukraine may restrict the movement of our global supply chain and divert hospital resources that are necessary to administer our future product candidates or delay the review of future product candidates; and
interruption or delays in our and our partners' ability to meet expected clinical development deadlines or to comply with contractual commitments with respect to the same, including timelines around preclinical studies and planned clinical trials which could in turn delay overall developmental and commercialization timelines.

If our partners experience significant or extended disruptions to their business due to COVID-19 and other macroeconomic factors, including the war in Ukraine, it could result in substantial supply shortages and harm our generics or specialty drug business, as well as our overall financial condition and results of operations. Each of these disruptions as well as others arising from the COVID-19 pandemic and other macroeconomic factors could adversely impact our ability to conduct clinical development activities,

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planned clinical trials and our business generally, and could have a material adverse impact on our operations and financial condition and results.

The economic disruption from the COVID-19 pandemic and the war in Ukraine may result in material adverse consequences for general economic, financial and business conditions, and could result in increased credit and counterparty risks.

Through our normal business activities, we are subject to significant credit and counterparty risks that arise in the ordinary course of business. These risks have been heightened due to the COVID-19 pandemic and resulting economic turbulence, giving rise to substantial macroeconomic uncertainty. Furthermore, following the Russian invasion of Ukraine, macroeconomic uncertainty has increased. In the event of a sustained economic downturn, our customers, lenders, licensing partners, service providers, and other counterparties may be unable to fully fulfil their respective obligations to us in a timely manner, or at all. In addition, governments that we have partnered with and received grants from in connection with the construction of certain production facilities may be unable to timely fulfil their obligations under such agreements due to the impact of these macroeconomic forces on their financial conditions.

In particular, we are a party to various strategic collaboration and license agreements that are important to our business and to our current and future product candidates. Unfavorable macroeconomic conditions caused by COVID-19 or the war in Ukraine may lead our business partners to delay or curtail planned expenditures under our licensing arrangements, which could delay the development and commercialization of our product candidates in certain geographies for certain indications, which would harm our business prospects, financial condition and results of operations.

As a result of COVID-19, we have experienced difficulties in collecting certain license agreement receivables. For instance, we have experienced significant delays in the receipt of payments due from Xiangxue and recorded a provision for credit loss of $8.9 million for the outstanding balance due under a license agreement and related currency conversion during the year ended December 31, 2020. In November 2021, we regained the exclusive rights to develop and commercialize Oral Paclitaxel, Oral Irinotecan, and tirbanibulin ointment for Hong Kong and Macau for $1.5 million, but the $8.5 million balance remains outstanding. We may be unable to collect the outstanding balance from this license partner. If any of these difficulties persist for one or more of our partnerships, we may need to declare a default and terminate a license arrangement, which could delay or impair our ability to develop and commercialize the product candidates in the territories covered by the license agreement. In addition, we may seek replacement partnerships to develop and commercialize these product candidates in the territories covered by the terminated arrangement, the negotiation and entry into which may be costly, impact our development timelines, and otherwise be on terms less favorable compared to existing contractual terms. This could in turn have a material adverse effect on our competitive position, business, financial conditions, results of operations, and prospects.

In addition, a prolonged downturn in macroeconomic conditions or negative trends in the global credit markets could further negatively impact our ability to collect on receivables, including milestone payments, due to us which may increase our concessions and discount rates as well as the length of time until these receivables are collected. An inability to timely collect may lead to an increase in our borrowing requirements, our accounts receivable and potentially lead to increased write-offs, with possible adverse effects on our business, financial condition, results of operations and cash flows.

Risks Related to Our Financial Position and Need for Additional Capital

We have incurred net losses every year since our inception and anticipate that we will continue to incur net losses for the foreseeable future, and as a result, our management has identified and our auditors agreed that there is a substantial doubt about our ability to continue as a going concern.

Investment in pharmaceutical product development is highly speculative because it entails substantial upfront costs and expenses and significant risk that a drug candidate will fail to gain regulatory approval or become commercially viable. Since our formation, we have relied on a combination of public and private securities offerings, public-private partnerships, the issuance of convertible notes and public grants to fund our operations. We have devoted most of our financial resources to research and development, including our non-clinical development activities and clinical trials. We have not generated substantial revenue from product sales to date, and we continue to incur significant development and other expenses related to our ongoing operations. As a result, we incurred losses in 2021, 2020 and 2019. For the years ended December 31, 2021, 2020 and 2019, we reported net losses of $202.0 million, $148.4 million and $125.5 million, respectively, and had an accumulated deficit of $913.4 million as of December 31, 2021. Substantially all of our operating losses have resulted from costs incurred in connection with our research and development programs and from selling, general and administrative expenses associated with our operations.

We expect to continue to incur losses for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals for, our drug candidates. Due to our receipt of the CRL for Oral Paclitaxel, which was our lead product candidate, and following two Type A meetings with the FDA, we determined to no longer pursue regulatory approval for Oral Paclitaxel monotherapy for the treatment of mBC in the U.S. Given that our other drug development programs were not as

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advanced as Oral Paclitaxel for mBC, we expect to incur losses for longer than initially anticipated. Typically, it takes many years to develop a new drug before it is available for treating patients. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses, our ability to generate revenue and the timing and amount of milestones, payments due pursuant to our financing arrangements, and other required payments to third parties in connection with our potential future arrangements with third parties. If any of our drug candidates fail in clinical trials or do not gain regulatory approval, or if approved, fail to achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our prior losses and expected future losses have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

We expect our research and development expenses to continue to be significant in connection with our continued investment in our drug candidates and our ongoing and planned clinical trials for our drug candidates. In addition, as a public company, we incur additional costs associated with operating as a public company. As a result, we expect to continue to incur significant operating losses and negative cash flows from operations for the foreseeable future. These losses have had and will continue to have a material adverse effect on our stockholders’ equity, financial position, cash flows and working capital.

The report of our independent registered public accounting firm that accompanies our audited consolidated financial statements contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result if we are unable to continue as a going concern. If we are unable to continue as a going concern, holders of our securities might lose their entire investment. These factors, among others, may make it difficult to raise any additional capital and may cause us to be unable to continue to operate our business.

Our strategic pivot to focus on our cell therapy platform and our plan to dispose of non-core assets may not result in anticipated savings, could result in total costs and expenses that are greater than expected, could make it more difficult to retain qualified personnel and may significantly disrupt our operations, each of which could have a material adverse effect on our business.

We are undertaking a strategic pivot from our focus on the Orascovery platform to our cell therapy platform. As part of this pivot, we are planning to divest non-core assets to raise capital and extend our cash runway. There can be no assurance that our divestiture of these assets will be successful, or that the sale of any non-core assets will raise sufficient funds for us to continue our business. We may not realize in full the anticipated benefits, savings and improvements in our strategic pivot efforts due to unforeseen difficulties, delays, disruptions or unexpected costs. Even if we are able to sell non-core assets, the disposal may not result in the savings we anticipate. The costs of disposing of the assets may exceed the cost savings we generate.

The process of disposing of non-core assets may be disruptive to our daily operating activities and our execution of short- and long-term strategies. Any cost-saving measures we implement, including any workforce reduction, may distract remaining employees from our business, cause unplanned employee attrition, reduce employee morale and productivity, disrupt our disclosure controls and procedures and internal control over financial reporting, yield other unanticipated consequences and damage our reputation.

There can be no assurance that our focus on our cell therapy platform will be successful, result in the advancement of a proprietary drug product, or yield any revenue in the future. The drug development process is expensive, can take many years to complete, and its outcome is inherently uncertain. We may suffer significant additional setbacks in focusing on our cell therapy platform and may never become profitable. Any of these factors could have a material adverse effect on our business.

Our financial results are subject to volatility related to our revenue and expenses, and despite beginning to generate revenue from product sales, we have not yet been profitable and may never become profitable.

Our financial results are subject to volatility based on a number of factors, including the timing of milestone licensing fees that we receive or are required to pay, the amount and timing of our debt repayment obligations, the change in product types sold by APD and APS and whether those products are in high demand, our ability to predict the products in high demand in the market, competition in the market for generic drugs. As we currently only have commercialized our API products and recently commercialized Klisyri, our ability to generate revenue and become profitable depends upon our ability to successfully complete the development of, and obtain the necessary regulatory approvals for, our proprietary drug candidates, and specialty products, such as medical testing kits. Our product sales of API totaled $4.0 million, $3.6 million and $12.7 million in the years ended December 31, 2021, 2020 and 2019, respectively. Our specialty products sales totaled $67.0 million, $89.6 million, and $50.4 million for the years ended December 31, 2021, 2020, and 2019, respectively. Our revenue and gross margins are also subject to fluctuation due to changes in product mix and the expenses we incur to continue our research and development and commercialization efforts.

We expect to continue to incur substantial losses through the projected development and commercialization of our drug candidates. Other than Klisyri, none of our proprietary drug candidates have been approved for marketing in the U.S., China or any other jurisdiction, and they may never receive such approval. Our ability to achieve revenue and profitability is dependent on our

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ability to complete the development of our proprietary drug candidates, obtain necessary regulatory approvals, and have our proprietary drugs manufactured and successfully marketed.

Even as we receive regulatory approval of our proprietary drug candidates for commercial sale, we do not know when they will generate revenue, if at all. Our ability to generate revenue from product sales of our drug candidates depends on a number of factors, including our ability to:

complete research regarding, and non-clinical and clinical development of, our proprietary drug candidates;
formulate appropriate dosing protocols, drug preparations and capsule encapsulation methods;
obtain regulatory approvals and marketing authorizations for drug candidates for which we complete clinical trials;
develop a sustainable and scalable manufacturing processes, including establishing and maintaining commercially viable supply relationships with third parties and establishing our own manufacturing capabilities and infrastructure;
compliantly launch and commercialize proprietary drug candidates for which we obtain regulatory approvals and marketing authorizations, either directly or with a collaborator or distributor;
obtain market acceptance of our proprietary drug candidates and their routes of administration as viable treatment options;
obtain optimal pricing for products in key global markets;
obtain adequate coverage and reimbursement for our proprietary drug candidates from government (including U.S. federal healthcare programs) and private payors;
identify, assess, acquire and/or develop new proprietary drug candidates;
address any competing technological and market developments;
negotiate and maintain favorable terms in any collaboration, licensing or other arrangements into which we may enter;
maintain, protect and expand our portfolio of intellectual property rights, including patents, trade secrets and know-how;
successfully commercialize our 503B outsourcing facility products and U.S. specialty pharmaceutical products;
further develop our API business; and
attract, hire and retain qualified personnel.

In addition, because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of increased expenses, or when, or if, we will be able to achieve or maintain profitability. In addition, our expenses could increase beyond expectations if we are required by the FDA, NMPA, or regulatory authorities in other jurisdictions to perform studies in addition to those that we currently anticipate.

If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce our operations. Failure to become and remain profitable may adversely affect the market price of our common stock and our ability to raise capital and continue operations. A decline in the value of our company could also cause you to lose all or part of your investment.

We will need to obtain additional financing to fund our operations, and if we are unable to obtain such financing, we may be unable to complete the development and commercialization of our drug candidates or continue to operate our business.

To date, we have financed our operations with the proceeds from debt financings, public and private securities offerings, public-private partnerships, the issuance of convertible notes and public grants, and as of the date of this report, we project insufficient liquidity to fund our operations through the next twelve months. Our drug candidates will require the completion of clinical studies and regulatory review, substantial investment before they can provide us with any product sales revenue. Our operations have consumed substantial amounts of cash since inception. The net cash used for our operating activities from continuing operations was $138.3 million, $127.8 million, and $97.0 million for the years ended December 31, 2021, 2020, and 2019 respectively. We expect to continue to spend substantial amounts on advancing the clinical development of our proprietary drug candidates. Moreover, our research and development expenses and other contractual commitments are substantial and may increase in the future. In addition, we may require additional financial resources and personnel to build out operations at the New API Facility.

We have also incurred debt service obligations under a senior secured loan agreement and related security agreements (the “Senior Credit Agreement”) with Oaktree Fund Administration, LLC as administrative agent, and the lenders party thereto (collectively “Oaktree”) and have minimum payment obligations to Oaktree under the Senior Credit Agreement, which could make it more difficult for us to fund our operations. Under the Senior Credit Agreement, we are required to make quarterly interest-only

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payments until June 19, 2022, after which we are required to make quarterly amortizing payments, with the remaining balance of the principal plus accrued and unpaid interest due at maturity. Beginning on September 17, 2020, we were required to pay a commitment fee on any undrawn commitments equal to 0.6% per annum, payable on each subsequent funding date or the commitment termination date. Furthermore, under an amended to the Senior Credit Agreement we entered into in January 2022 (the “January Credit Agreement Amendment”), we paid Oaktree 62.5% of the proceeds of the sale of the Dunkirk Facility, or $25 million, as a mandatory prepayment of loans under the Senior Credit Agreement, along with accrued and unpaid interest and certain fees and expenses. Under the January Credit Agreement Amendment, we are obligated to make an additional mandatory prepayment of $12.5 million in principal plus costs and fees by June 14, 2022.

If we are unable to make these payments as they come due, we would trigger an event of default under the Senior Credit Agreement. If an event of default were to occur, Oaktree will have the right to accelerate all amounts outstanding under the Senior Credit Agreement, in addition to other remedies available to it as a secured creditor of ours. If we are unable to raise additional capital or monetize assets, we may breach financial covenants under the Senior Credit Agreement. The credit facility carried an outstanding balance of $150.0 million as of December 31, 2021. If we are unable to raise additional capital, we would not have sufficient cash on hand or available liquidity that can be utilized to repay the outstanding debt in the event of default. We do not expect to have further access to additional capital under the Senior Credit Facility. We could spend our available financial resources much faster than expected and may need to raise additional funds sooner than anticipated. If we are unable to raise capital when needed or on attractive terms, we will be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts. Our inability to obtain additional funding when needed could seriously harm our business or make it impossible for us to continue to operate our business.

We may not be able to refinance, extend, or repay our substantial indebtedness owed to our senior secured lender, which would have a material adverse effect on our financial condition.

We anticipate that we will need to raise a significant amount of debt or equity capital in the future in order to repay our outstanding debt obligations owed to under the Senior Credit Agreement when a mandatory prepayment is due in June 2022, when the remaining amounts due under the Senior Credit Agreement mature on July 3, 2023, and to continue to fund our operations. We are obligated to make a mandatory prepayment of $12.5 million in principal plus costs and fees by June 14, 2022. In addition, we are required to make quarterly interest-only payments until June 19, 2022, after which we are required to make quarterly amortizing payments, with the remaining balance of the principal plus accrued and unpaid interest due at maturity. If we are unable to raise sufficient capital to repay these obligations and we are otherwise unable to extend the maturity dates or refinance these obligations, we would be in default. We cannot provide any assurances that we will be able to raise the necessary amount of capital to repay these obligations or that we will be able to extend the maturity dates or otherwise refinance these obligations. If we are unable to raise additional capital or monetize assets, we may breach financial covenants under the Senior Credit Agreement. The credit facility carried an outstanding balance of $150.0 million as of December 31, 2021. If we are unable to raise additional capital or monetize assets, we would not have sufficient cash on hand or available liquidity that can be utilized to repay the outstanding debt in the event of default. Upon a default on the senior debt, our senior secured lender would have the right to exercise its rights and remedies to collect, which would include foreclosing on our assets. Accordingly, a default would have a material adverse effect on our business and, if our senior secured lender exercises its rights and remedies, we would likely be forced to seek bankruptcy protection.

Covenants in the agreements governing our existing debt agreements restrict the manner in which we conduct our business.

The Senior Credit Agreement contains various covenants that limit, subject to certain exemptions, our ability and/or our certain of our subsidiaries’ ability to, among other things, incur additional indebtedness or liens; make investments; consummate business combinations such as mergers and dispositions; prepay other indebtedness; and to declare dividends and other distributions, subject to certain exceptions, including specific exceptions with respect to product commercialization and development activities. In addition, the Senior Credit Agreement contains certain financial covenants, including, among other things, maintenance of minimum liquidity and a minimum revenue test, measured quarterly until the last day of the second consecutive fiscal quarter where the consolidated leverage ratio does not exceed 4.5 to 1, provided that thereafter we cannot allow our consolidated leverage ratio to exceed 4.5 to 1, measured quarterly.

The Senior Credit Agreement requires that we maintain a minimum liquidity amount in cash or permitted cash equivalent investments of $20.0 million. Our obligations under the Senior Credit Agreement are guaranteed by certain of our existing domestic subsidiaries and subsequently acquired or organized subsidiaries subject to certain exceptions. Our obligations under the Senior Credit Agreement and the related guarantees thereunder are secured, subject to customary permitted liens and other agreed upon exceptions, by (i) a pledge of all of the equity interests of our direct subsidiaries, and (ii) a perfected security interest in all of our tangible and intangible assets.

The restrictions contained in our Senior Credit Agreement governing our debt could adversely affect our ability to:

finance our operations;

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make needed capital expenditures;
make strategic acquisitions or investments or enter into alliances;
withstand a future downturn in our business or the economy in general;
engage in business activities, including future opportunities, that may be in our interest; and
plan for or react to market conditions or otherwise execute our business strategies.

A breach of any of these covenants, subject to certain cure rights of the Company, could result in a default under the agreements governing our debt. Further, additional indebtedness that we incur in the future may subject us to further covenants. If a default under any such debt agreement is not cured or waived, the default could result in the acceleration of debt, which could require us to repay debt prior to the date it is otherwise due and that could adversely affect our financial condition. If we default under the Senior Credit Agreement, the lenders may seek repayment through our subsidiary guarantors or by executing on the security interest granted pursuant to the Senior Credit Agreement and related security agreements. If we are unable to raise additional capital or monetize assets, we may breach financial covenants under the Senior Credit Agreement. The credit facility carried an outstanding balance of $150.0 million as of December 31, 2021. If we are unable to raise additional capital or monetize assets, we would not have sufficient cash on hand or available liquidity that can be utilized to repay the outstanding debt in the event of default.

Our ability to comply with the covenants, restrictions and specified financial ratios contained in our senior secured loan agreement may be affected by events beyond our control, including prevailing economic, financial, and industry conditions. Even if we are able to comply with all of the applicable covenants, the restrictions on our ability to manage our business in our sole discretion could adversely affect our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions, and other corporate opportunities that we believe would be beneficial to us. In addition, our obligations under the loan agreement are secured, on a first-priority basis, and such security interests could be enforced in the event of default by the collateral agent for the loan agreement.

An impairment of goodwill and long-lived assets have had and other impairment in the future could have a material adverse effect on our results of operations.

Our acquisitions of APS, Polymed, CDE and Kuur resulted in the recording of goodwill and other intangible assets. Goodwill is not amortized and is subject to impairment testing at least annually using a fair value-based approach. The identification and measurement of goodwill impairment involves the estimation of the fair value of our reporting units. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment and incorporate management assumptions about expected future cash flows and other valuation techniques. Future cash flows can be affected by changes in industry or market conditions, among other factors. The recoverability of goodwill is evaluated at least annually or more frequently when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. As a result of the significant decrease in our market capitalization and in accordance with our policy to perform a goodwill impairment test during the fourth quarter, we performed a goodwill impairment test for our reporting units, updating with information regarding conditions that existed as of December 31, 2021. We compared the fair value of our Global Supply Chain Platform and Oncology Innovation Platform reporting units to carrying value. Based on the results from the test on December 31, 2021, the carrying value of the Global Supply Chain Platform and Oncology Innovation Platform reporting units exceeded their fair value, and therefore, goodwill was determined to be fully impaired. Accordingly, the Company recorded goodwill impairment of $67.7 million during the year ended December 31, 2021 (see Part II, Item 8. Note 8—Intangible Assets, Net). We may never be able to recover the value of our investment in these acquisitions. A lack of sustained recovery or further deterioration in market conditions related to the general economy and the industries in which we operate, a sustained trend of weaker than anticipated financial performance, further decline in our share price for a sustained period of time, or an increase in the market-based weighted average cost of capital, among other factors, could significantly impact the impairment analysis and may result in future impairment charges that, if incurred, could have a material adverse effect on our financial condition and results of operations.

In addition, we review the recoverability of our long-lived assets, excluding goodwill, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. On December 31, 2021, we reviewed the recoverability of the carrying value of the Polymed technology and customer list and the intangible assets related to the Taihao API facility and determined that their carrying value was greater than their fair value. We accordingly wrote off their corresponding values of $1.7 million and less than $0.1 million, respectively, as impaired.

We cannot accurately predict the amount and timing of any future impairment of assets, and, going forward, we may be required to take additional charges relating to certain of our reporting units. Any such charges would have an adverse effect on our financial results.

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We are a party to ongoing legal proceedings and, while we cannot predict the outcome of those proceedings and other contingencies with certainty, if we settle these claims or the proceedings are not decided in our favor, our business and financial condition could be materially adversely affected.

We have been, and may in the future be, subject to various legal and regulatory proceedings, including class action litigation. It is inherently difficult to assess the outcome of these matters, and there can be no assurance that we will prevail in any proceeding or litigation. Legal and regulatory matters of any degree of significance could result in substantial cost and diversion of our efforts, which by itself could have a material adverse effect on our financial condition and operating results.

As disclosed in Part I, Item 3, “Legal Proceedings,” following our receipt of the CRL in February 2021 and the subsequent decline of the market price of our common stock, two purported class action lawsuits were filed against the Company and certain members of its management team, along with a related shareholder derivative lawsuit. If we settle these claims or the litigation is not resolved in our favor, we may suffer reputational damage and incur legal costs, settlements or judgments that exceed the amounts covered by our existing insurance policies. We can provide no assurances that our insurer will insure the legal costs, settlements or judgements we incur in excess of our deductible. If we are not successful in defending ourselves from these claims, or if our insurer does not insure us against legal costs we incur in excess of our deductible, the result may materially adversely affect our business, results of operations and financial condition. Defending against these and any future lawsuits and legal proceedings, regardless of their merit, may involve significant expense, be disruptive to our business operations and divert our management's attention and resources. Negative publicity surrounding these legal proceedings may also harm our reputation, our stock price, and adversely impact our business and financial condition.

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or drug candidates.

We may seek additional funding through a combination of equity offerings, debt financings, collaborations and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a holder of our common stock. The incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in certain additional restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. In addition, issuance of additional equity securities, or the possibility of such issuance, may cause the market price of our common stock to decline. In the event that we enter into collaborations or licensing arrangements in order to raise capital, we may be required to accept unfavorable terms, including relinquishing or licensing to a third party on unfavorable terms our rights to technologies or proprietary drug candidates that we otherwise would seek to develop or commercialize ourselves or potentially reserve for future potential arrangements when we might be able to achieve more favorable terms.

Risks Related to Clinical Development of Our Proprietary Drug Candidates

The majority of our primary clinical candidates are still in the development stage and have not yet received regulatory approval, which may make it difficult to evaluate our current business and predict our future performance.

We are a globally-focused biopharmaceutical company formed in November 2003. Our operations to date have focused on organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio and conducting preclinical studies and clinical trials of our drug candidates. We have not yet successfully completed large-scale, pivotal clinical trials or obtained regulatory approvals for all of our drug candidates and have not yet established sales and marketing activities necessary for successful commercialization of the drug candidates we plan to commercialize. We are also dependent on the marketing and sales efforts of our partners for the successful commercialization of our approved drug, Klisyri. Consequently, any predictions you make about our future success or viability may not be accurate. In addition, as a developing business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown challenges.

We are focused on the discovery and development of innovative drugs for the treatment of cancers. The fact that we have not yet, among other things, demonstrated our ability to initiate or complete large-scale clinical trials or manufacture drugs at commercial scale, particularly in light of the rapidly evolving cancer treatment field, may make it difficult to evaluate our current business and predict our future performance. These constraints make any assessment of our future success or viability subject to significant uncertainty. We will encounter risks and difficulties frequently experienced by early-stage companies in rapidly evolving fields as we seek to transition to a company capable of supporting commercial activities. If we do not address these risks and difficulties successfully, our business will suffer. We depend substantially on the success of our proprietary drug candidates, which are in pre-clinical and clinical development.

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As of March 1, 2022, we had a total of 7 planned or ongoing clinical trials for our drug candidates. We have one FDA approved drug product, Klisyri, and have completed two Phase 3 clinical trials for tirbanibulin ointment 1% for AK, and one Phase 3 clinical trial for Oral Paclitaxel for the treatment of patients with mBC. However, after careful consideration we determined to not pursue regulatory approval for Oral Paclitaxel monotherapy for the treatment of mBC in the U.S. Our business and the ability to generate revenue related to product sales from our proprietary drug candidates will depend on the successful development, regulatory approval and commercialization for the treatment of patients with our drug candidates, which are still in development, and other drugs we may develop. Clinical development is a lengthy and expensive process with an uncertain outcome. The results of pre-clinical studies and early clinical trials of our drug candidates may not be predictive of the results of later-stage clinical trials. In the case of any trials we conduct, results have in the past, and may in the future, fail to meet the desired safety and efficacy endpoints, or differ from earlier trials due to the larger number of clinical trial sites and additional countries and populations involved in such trials. We have invested a significant portion of our efforts and financial resources in the development of our existing drug candidates. The success of our proprietary drug candidates will depend on several factors, including:

successful enrollment in, and completion of, clinical studies;
receipt of regulatory approvals from the FDA, NMPA and other regulatory authorities for our drug candidates;
establishing commercial manufacturing capabilities, either by using our own facilities or making arrangements with third-party manufacturers;
conducting our clinical trials compliantly and efficiently, and in many cases, relying on third parties to do so;
obtaining, maintaining and protecting our intellectual property rights, including patent, trade secrets, know-how and regulatory exclusivity;
ensuring we do not infringe, misappropriate or otherwise violate the patent, trade secret or other intellectual property rights of third parties;
competition with other drug candidates and drugs; and
continued acceptable safety profile for our drug candidates following regulatory approval, if received.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our drug candidates may not be predictive of the results of later-stage clinical trials. Drug candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, including genetic differences, patient adherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. In the case of any trials we conduct, results may differ from early trials due to the larger number of patients, clinical trial sites and additional countries and populations involved in such trials. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Our future clinical trial results may not be favorable as previous trials with the same compound, even with the same indication.

Because most of our clinical candidates are in the development stage and have not yet received regulatory approval, we may never be able to generate sufficient revenues and cash flows to continue our operations.

We may not be successful in our efforts to identify or discover additional drug candidates. Due to our limited resources and access to capital, we must and have in the past decided to prioritize development of certain product candidates; these decisions may prove to have been wrong and may adversely affect our business.

Historically, we have focused our drug discovery efforts on developing our cancer platform, particularly our Orascovery and Src Kinase inhibition product candidates. However, following the receipt of the CRL for Oral Paclitaxel, which was our lead product candidate, and following two Type A meetings with the FDA, we determined to no longer pursue regulatory approval for Oral Paclitaxel monotherapy for the treatment of mBC in the U.S., and have determined to redeploy our resources to other ongoing studies of Oral Paclitaxel and our Cell Therapy platform. If our platform fails to identify potential drug candidates, our business could be materially harmed. Additionally, our management, at the direction of our board of directors, has discretion in prioritizing which product candidates to develop.

Research programs to pursue the development of our drug candidates for additional indications and to identify new drug candidates and disease targets require substantial technical, financial and human resources whether or not we ultimately are successful. Our research programs may initially show promise in identifying potential indications and/or drug candidates, yet fail to yield results for clinical development for a number of reasons, including:

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the research methodology used may not be successful in identifying potential indications and/or drug candidates;
potential drug candidates may, after further study, be shown to lack efficacy, have harmful adverse effects, pose a safety risk to patients as compared to existing drugs, or other characteristics that indicate they are unlikely to be effective drugs; or
it may take greater human and financial resources to identify additional therapeutic opportunities for our drug candidates or to develop suitable potential drug candidates through internal research programs than we possess, thereby limiting our ability to diversify and expand our drug portfolio.

Because we have limited financial and managerial resources, we focus on research programs and drug candidates for specific indications. As a result, we may forego or delay pursuit of opportunities with other drug candidates or for other indications that later prove to have greater commercial potential or a greater likelihood of success. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities.

Accordingly, there can be no assurance that we will be able to identify additional therapeutic opportunities for our drug candidates or to develop suitable potential drug candidates through internal research programs, which could materially adversely affect our future growth and prospects. We may focus our efforts and resources on potential drug candidates or other potential programs that ultimately prove to be unsuccessful.

If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.

The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of patients who remain in the trial until its conclusion. We and our research partners have from time to time and may in the future experience difficulties in patient enrollment in our clinical trials for a variety of reasons, including:

the prioritization of the treatment of COVID-19 patients;
patients declining to enroll in trials because of the COVID-19 pandemic;
the availability of a sizeable population of eligible patients;
the design of the trial;
our ability to recruit clinical trial investigators with the appropriate competencies and experience;
competing clinical trials for similar therapies or other new therapeutics;
clinicians’ and patients’ perceptions as to the potential advantages and side effects of the drug candidate being studied in relation to other available therapies,
our ability to obtain and maintain patient consents;
the failure of patients to complete a clinical trial; and
the availability of approved therapies that are similar in mechanism to our drug candidates.

In addition, our clinical trials will compete with other clinical trials for drug candidates that are in the same therapeutic areas as our drug candidates, and this competition will reduce the number and types of patients available to us because some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors. Because the number of qualified clinical investigators is limited, we have conducted and expect to conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for our clinical trials at such clinical trial sites.

Even if we are able to enroll a sufficient number of patients in our clinical trials, delays in patient enrollment may result in increased costs or may affect the timing or outcome of the planned clinical trials, which could prevent completion of these trials and adversely affect our ability to advance the development of our drug candidates.

Some of our drug candidates represent a novel approach to cancer treatment, which could result in delays in clinical development, heightened regulatory scrutiny, and delays in our ability to achieve regulatory approval or commercialization, or market acceptance by physicians and patients of our drug candidates.

Some of our drug candidates, particularly those developed through our Cell Therapy platform, represent a departure from more commonly used methods for cancer treatment, and therefore represent a novel approach that carries inherent development risks. Although there is some previous clinical experience with nonengineered NKT cells, given that this is a novel approach, it is possible

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that we may encounter unexpected clinical trial results, which may delay our development programs. In addition, our Orascovery platform intends to facilitate the delivery of chemotherapy agents orally, as opposed to IV, while our Src Kinase inhibitor candidates operate by a new mechanism of action. Because of this, unexpected safety and tolerability concerns may arise during the development process. The need to further develop or modify in any way the protocols related to our drug candidates to demonstrate safety or efficacy may delay the clinical program, regulatory approval or commercialization, if approved.

In addition, potential patients and their doctors may be inclined to use conventional standard-of-care treatments rather than enroll patients in any future clinical trial or to use our product candidates commercially once approved. This may have a material impact on our ability to generate revenues from our drug candidates. Further, given the novelty of the administration of our drug candidates, hospitals and physicians may prefer traditional treatment methods, may be reluctant to adopt the use of our products or may require a substantial amount of education and training, any of which could delay or prevent acceptance of our products by physicians and patients and materially hinder successful commercialization of our drug candidates.

Our products and product candidates may cause undesirable, or an increase in the frequency of, side effects that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA, NMPA or other regulatory authorities, as indicated by the FDA in its CRL with respect to our NDA for Oral Paclitaxel, that indicated a need for an additional study to examine safety and dosing. Further, once a product candidate receives marketing approval and we or others identify undesirable side effects caused by the product after the approval, or if drug abuse is determined to be a significant problem with an approved product, a number of potentially significant negative consequences could result, including:

regulatory authorities may withdraw or limit their approval of the product;
regulatory authorities may require the addition of labeling statements, such as a “Black Box warning” or a contraindication;
we may be required to change the way the product is distributed or administered, conduct additional clinical trials or change the labeling of the product;
we may decide to remove the product from the marketplace;
we could be sued and held liable for injury caused to individuals exposed to or taking the product; and
our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercializing an affected product or product candidate and significantly impact our ability to successfully commercialize or maintain sales of our product or product candidates and generate revenues.

If clinical trials of our drug candidates fail to demonstrate safety and efficacy to the satisfaction of the FDA, NMPA or other regulatory authorities, as the FDA indicated in its CRL with respect to our NDA for Oral Paclitaxel, or do not otherwise produce positive results, we will incur costs and experience delays in completing, and may ultimately be unable to complete, the development and commercialization of our drug candidates.

We may experience various unexpected events during, or as a result of, clinical trials that could delay or prevent our ability to receive regulatory approval or commercialize our drug candidates, including:

regulators, IRBs or ethics committees may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
clinical trials of our drug candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon drug development programs;
the number of patients required for clinical trials of our drug candidates may be larger than we anticipate, enrollment may be insufficient or slower than we anticipate or patients may drop out at a higher rate than we anticipate;
our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;
we might have to suspend or terminate clinical trials of our drug candidates for various reasons, including a finding of a lack of clinical response or a finding that participants are being exposed to unacceptable health risks;

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regulators, IRBs or ethics committees may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;
the cost of clinical trials of our drug candidates may be greater than we anticipate;
the supply or quality of our drug candidates or other materials necessary to conduct clinical trials of our drug candidates may be insufficient or inadequate; and
our drug candidates may cause adverse events, have undesirable side effects or other unexpected characteristics, causing us or our investigators to suspend or terminate the trials.

If we are required to conduct additional clinical trials or other testing of our drug candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of our drug candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive or if they raise safety concerns, we may:

be delayed in obtaining regulatory approval for our drug candidates;
not obtain regulatory approval at all;
obtain approval for indications that are not as broad as intended;
have the drug removed from the market after obtaining regulatory approval;
be subject to additional post-marketing testing requirements;
be subject to restrictions on how the drug is distributed or used; or
be unable to obtain reimbursement for use of the drug.

Delays in testing or approvals may result in increases in our drug development costs. We do not know whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all.

Significant clinical trial delays also could shorten any periods during which we have the exclusive right to commercialize our drug candidates or allow our competitors to bring drugs to market before we do and impair our ability to commercialize our drug candidates and may harm our business and results of operations.

Manufacturing risks, including our inability to manufacture API and clinical products used in the clinical trials of our proprietary product candidates could adversely affect our ability to commercialize our product candidates.

Our business strategy depends on our ability to manufacture API in sufficient quantities and on a timely basis so as to meet our needs to manufacture our product candidates for our clinical trials and to meet consumer demand for our future products, while adhering to product quality standards, complying with regulatory requirements and managing manufacturing costs. We are subject to numerous risks relating to our manufacturing capabilities, including:

our inability to manufacture API and clinical products in sufficient quantities to meet the needs of our clinical trials or to commercialize our products;
our inability to manufacture API and clinical products in the event our manufacturing facilities’ operations are suspended indefinitely or terminated due to events beyond our control;
our inability to secure product components in a timely manner, in sufficient quantities or on commercially reasonable terms;
our failure to increase production of products to meet demand;
our inability to modify production lines to enable us to efficiently produce future products or implement changes in current products in response to regulatory requirements;
difficulty identifying and qualifying alternative suppliers for components in a timely manner; and
potential damage to or destruction of our manufacturing equipment or manufacturing facility.

In addition, we conduct manufacturing operations at our facility in Chongqing, China to manufacture API and our proprietary product candidates. As a result, our business is subject to risks associated with that facility in particular and doing business in China generally, including:

the possibility of our operations at the Chongqing facility being suspended indefinitely or terminated by an order of the local government due to events beyond our control;

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the impact of the ongoing COVID-19 pandemic on our operations in China;
the possibility that the costs of building and maintaining the New API Facility exceed the revenue we are able to generate from manufacturing API at the facility;
adverse political and economic conditions, particularly those negatively affecting the trade relationship between the U.S. and China;
trade protection measures, such as tariff increases, and import and export licensing and control requirements;
potentially negative consequences from changes in tax laws;
difficulties associated with the Chinese legal system, including increased costs and uncertainties associated with enforcing contractual obligations in China;
potentially lower protection of intellectual property rights;
unexpected or unfavorable changes in regulatory requirements;
possible patient or physician preferences for more established pharmaceutical products and medical devices manufactured in the U.S.; and
difficulties in managing foreign relationships and operations generally.

These risks are likely to be exacerbated by our limited experience with our current products and manufacturing processes. If our need for API increases, or demand for our products increase, we will have to invest additional resources to purchase components, hire and train employees and enhance our manufacturing processes and may have to use alternate suppliers of API to meet our needs. If we fail to increase our production capacity efficiently, our sales may not increase in line with our forecasts and our operating margins could fluctuate or decline. Any of these factors may affect our ability to manufacture our product and could reduce our revenues and profitability.

Risks Related to Development, Regulatory Approval and Commercialization

The regulatory approval processes of the FDA, NMPA and other regulatory authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our drug candidates, our business will be substantially harmed.

The time required to obtain approval by the FDA, NMPA and other regulatory authorities in jurisdictions where we seek such approval is unpredictable but typically takes many years following the commencement of preclinical studies and clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. We cannot provide any assurances with respect to the timing for any regulatory approval or if our studies will be considered to be sufficient by regulators, as we experienced with our NDA for Oral Paclitaxel. In addition, approval policies, regulations or the type and amount of clinical data necessary to gain approval may change during the course of a drug candidate’s clinical development and may vary among jurisdictions. It is possible that none of our other existing drug candidates or any drug candidates we may discover, in-license or acquire and seek to develop in the future will ever obtain regulatory approval.

Our drug candidates could fail to receive regulatory approval from the FDA, NMPA or another regulatory authority for many reasons, including:

disagreement with the design or implementation of our clinical trials;
failure to demonstrate that a drug candidate is safe and effective for its proposed indication;
failure of clinical trial results to meet the level of statistical significance required for approval;
failure to demonstrate that a drug candidate’s clinical and other benefits outweigh its safety risks;
disagreement with our interpretation of data from preclinical studies or clinical trials;
the insufficiency of data collected from clinical trials of our drug candidates to support the submission and filing of an NDA or other submission or to obtain regulatory approval;
the FDA, NMPA or another regulatory authority’s finding of deficiencies related to the product, manufacturing processes or facilities of ours or of third-party manufacturers with whom we contract for clinical and commercial supplies; and
changes in approval policies or regulations that render our preclinical and clinical data insufficient for approval.

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The FDA, NMPA or a regulatory authority in another jurisdiction may require more information, including additional preclinical or clinical data, to support approval, which may delay or prevent approval in those territories and our commercialization plans, or we may decide to abandon the development program. If we were to obtain approval, regulatory authorities may approve any of our drug candidates for fewer or more limited indications than we request, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a drug candidate with a label that is not desirable for the successful commercialization of that drug candidate. In addition, if our drug candidate produces undesirable side effects or safety issues, the FDA may require additional clinical or preclinical studies or the establishment of REMS, or the NMPA or a regulatory authority may require the establishment of a similar strategy, that may, for instance, significantly restrict distribution of our drug candidates and impose burdensome implementation requirements on us. Any of the foregoing scenarios could materially harm the commercial prospects of our drug candidates.

The approval process for pharmaceutical products outside the U.S. varies among countries and may limit our ability to develop, manufacture and sell our products internationally. Failure to obtain marketing approval in international jurisdictions would prevent our product candidates from being marketed abroad.

In order to market and sell our products internationally, we must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and may involve additional testing. We may conduct clinical trials for, and seek regulatory approval to market, our product candidates in countries other than the U.S. and China. Depending on the results of clinical trials and the process for obtaining regulatory approvals in other countries, we may decide to first seek regulatory approvals of a product candidate in the U.S. or in countries other than the U.S., or we may simultaneously seek regulatory approvals in the U.S. and other countries. If we seek marketing approval for a product candidate outside the U.S., we will be subject to the regulatory requirements of health authorities in each country in which we seek approval. With respect to marketing authorizations in China, we will be required to seek regulatory approval from the NMPA. For marketing approval in Europe, we will seek to obtain marketing approval from the EMA. The approval procedure varies among regions and countries and may involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval.

Obtaining regulatory approvals from health authorities in countries outside the U.S. is likely to subject us to all of the risks associated with obtaining FDA approval described above. In addition, marketing approval by the FDA does not ensure approval by the health authorities of any other country, and marketing approvals by foreign health authorities do not ensure a similar approval by the FDA.

We are conducting, and may in the future conduct, clinical trials for our product candidates in sites outside the U.S. and the FDA may not accept data from trials conducted in such locations.

We have conducted, and may in the future conduct, certain of our clinical trials outside of the U.S., including in the U.K., China, Taiwan and Latin America. Although the FDA may accept data from clinical trials conducted outside the U.S., acceptance of this data is subject to certain conditions imposed by the FDA. There can be no assurance the FDA will accept data from any clinical trials we conduct outside of the U.S. For example, in the CRL we received regarding the NDA for Oral Paclitaxel, the FDA indicated that the participants in a new clinical trial they are recommending should be reflective of the U.S. population. If the FDA does not accept the data from any of our other clinical trials conducted outside the U.S., it would likely result in the need for additional clinical trials, which would be costly and time-consuming and could delay or prevent the commercialization of any of our product candidates.

Regulatory approval may be substantially delayed or may not be obtained for one or all of our drug candidates for a variety of reasons.

We may be unable to complete development of our drug candidates on schedule, if at all. The completion of the studies for our drug candidates will require funding beyond our current resources. In addition, if regulatory authorities require additional time or studies to assess the safety or efficacy of our drug candidates, we may not have or be able to obtain adequate funding to complete the necessary steps for approval for any or all of our drug candidates. Preclinical studies and clinical trials required to demonstrate the safety and efficacy of our drug candidates are time consuming and expensive and together take several years or more to complete. For example, one of our product candidates, Oral Paclitaxel, for which we received a CRL in February 2021, has been in development since 2011. Delays in clinical trials, regulatory approvals or rejections of applications for regulatory approval in the U.S., United Kingdom, Taiwan, New Zealand, China, Latin America, or other jurisdictions may result from many factors, including:

our inability to obtain sufficient funds required for a clinical trial;
regulatory requests for, or the requirement of, additional analyses, reports, data, non-clinical and preclinical studies and clinical trials;
regulatory questions regarding interpretations of data and results and the emergence of new information regarding our drug candidates or other products;

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clinical holds, other regulatory objections to commencing or continuing a clinical trial or the inability to obtain regulatory approval to commence a clinical trial in countries that require such approvals;
failure to reach agreement with the FDA, NMPA or other regulators regarding the scope or design of our clinical trials;
delay or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a clinical trial;
our inability to enroll and retain a sufficient number of patients who meet the inclusion and exclusion criteria in a clinical trial;
our inability to conduct a clinical trial in accordance with regulatory requirements or our clinical protocols;
clinical sites and investigators deviating from trial protocol, failing to conduct the trial in accordance with regulatory requirements, or dropping out of a trial;
withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials;
inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same indication;
failure of our third-party clinical trial managers to satisfy their contractual duties or meet expected deadlines;
delay or failure in adding new clinical trial sites;
ambiguous or negative interim results, or results that are inconsistent with earlier results;
unfavorable or inconclusive results of clinical trials and supportive non-clinical studies, including unfavorable results regarding safety or effectiveness of drug candidates during clinical trials;
feedback from the FDA, NMPA, IRB, the Data and Safety Monitoring Board (“DSMB”) or comparable entities, or results from earlier stage or concurrent preclinical studies and clinical trials, that might require modification to the protocol;
unacceptable risk-benefit profile or unforeseen safety issues or adverse side effects;
decision by the FDA, NMPA, IRB, comparable entities or the Company, or recommendation by a DSMB or comparable entity, to suspend or terminate clinical trials at any time for safety issues or for any other reason;
failure to demonstrate a benefit from using a drug candidate;
lack of adequate funding to continue the clinical trial due to unforeseen costs or other business decisions;
our inability to reach agreements on acceptable terms with prospective CROs and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
our inability to obtain approval from IRBs or ethics committees to conduct clinical trials at their respective sites;
manufacturing issues, including problems with manufacturing or timely obtaining from third parties sufficient quantities of a drug candidate for use in a clinical trial; and
difficulty in maintaining contact with patients during the study or after treatment, resulting in incomplete data.

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.

According to the Special Examination and Approval Provisions for New Drugs issued by the CFDA in 2009, the CFDA may conduct special examinations and approve new drug registration applications for drugs which (i) have active ingredients extracted from plants, animals and minerals, etc. and their preparations are not yet marketed in China, and newly discovered Chinese crude drugs and their preparations, (ii) contain chemical drug substances and their preparations and biological products not yet approved for marketing in China or abroad, (iii) are new drugs for the treatment of diseases, including, among others, AIDS, malignant tumors and rare diseases, with significant clinical advantage, and (iv) are new drugs for the treatment of diseases, for which effective therapeutic methods are not available. On May 17, 2018, the NMPA and NHC issued the Announcement on Optimizing the Review and Approval of Drug Registration, which clarifies that a priority review and approval mechanism will be available. The current PRC Drug Administration Law, which was promulgated on August 26, 2019 and came into effect on December 1, 2019, also stipulates that the government encourages research and development of innovative drugs for serious diseases such as cancer.

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The Provisions for Drug Registration as revised in 2020 has incorporated the previous reform in respect of the accelerated approval for clinical trial and drug registration and introduces four procedures for expedited marketing registration of drugs, which are procedures for groundbreaking therapeutic drugs, procedures for conditional approval, procedures for prioritized reviews and approval, and procedures for special examination and approval.

On July 7, 2020, the NMPA promulgated the Announcement on Promulgating Three Documents Including the Working Procedures for the Evaluation of Breakthrough Therapy Designation Drugs (for Trial Implementation) and Priority Review and Approval Procedures for Drug Marketing Authorizations (for Trial Implementation), which abolished the Opinions on Encouraging the Prioritized Evaluation and Approval for Drug. According to the Working Procedures for the Evaluation of Breakthrough Therapy Designation Drugs (for Trial Implementation), sponsors of innovative drug candidates which exhibit clinical benefits for the treatment of life-threatening or other serious conditions for which there is no existing effective prevention and treatment method, or compared with existing treatment methods that have sufficient evidence to show that they have obvious clinical advantages, may apply for breakthrough therapeutic drug programs during Phase I and II clinical trials for such drug candidates. According to the Priority Review and Approval Procedures for Drug Marketing Authorizations (for Trial Implementation), an applicant for drug marketing authorization may apply for priority review and approval procedures for the following drugs with obvious clinical value: (I) drugs in urgent clinical demand and in shortage, innovative drugs and modified new drugs for prevention and treatment of serious infectious diseases, rare diseases and other diseases; (II) new varieties, dosage forms and specifications of children’s drugs that conform to children’s physiological characteristics; (III) vaccines and innovative vaccines that are in urgent need for disease prevention and control; (IV) drugs that have been included in the procedures for breakthrough therapy designation; (V) drugs that are subject to conditional approval; and (VI) other circumstances under which priority review and approval shall be provided for by the NMPA. We cannot be sure that the NMPA will grant such priority treatment to any of our drug candidates.

If we experience delays in the completion of, or the termination of, a clinical trial, of any of our drug candidates, the commercial prospects of our drug candidates will be harmed, and our ability to generate revenues from the sale of any of those drug candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our drug candidate 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, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our drug candidates.

Our approved drugs and drug candidates have caused and may cause undesirable adverse events or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following any regulatory approval.

Undesirable adverse events related to our approved drugs or drug candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials that would preclude approval of our drug candidates by the FDA, NMPA, or another regulatory authority or, if approved, could result in a more restrictive label. Results of our trials could reveal a high and unacceptable severity or prevalence of adverse events. In such an event, our trials could be suspended or terminated and the FDA, NMPA or other regulatory authorities could order us to cease further development of, or deny approval of, our drug candidates for any or all targeted indications. For example, in the CRL we received from the FDA, the FDA indicated that it had determined that our Oral Paclitaxel Phase III study demonstrated an unacceptable increase in neutropenia-related sequelae and has determined that additional risk mitigation strategies to improve toxicity, which may involve dose optimization and / or exclusion of the patients deemed to be at a higher risk of toxicity, are required to support potential approval of the NDA. Drug-related adverse events could affect patient recruitment or the ability of enrolled subjects to complete the trial, and could result in potential product liability claims. Any of these occurrences may significantly harm our reputation, business, financial condition and prospects.

For Klisyri® (tirbanibulin), adverse events reported during clinical trials and identified in the approved prescribing information included erythema, flaking/ scaling, crusting, swelling, vesiculation/pustulation, erosion/ ulceration, application site pruritus, and application site pain, which included pain, tenderness, stinging, and burning sensation at the application site.

In our clinical studies to date, we have observed the following SAEs that were deemed at least possibly related to each of our product candidates:

Oral Paclitaxel - neutropenia, febrile neutropenia, pneumonia, septic shock, sepsis and other infections, dehydration gastroenteritis, anemia, pneumonitis, diarrhea, mucositis, gastrointestinal bleeding, vomiting and nausea, rectal bleeding, altered state of consciousness, hypokalemia, cardiac arrest, tachycardia, atrial fibrillation, cardiogenic shock, hypotension, pancytopenia, multiorgan failure, renal failure, atrial fibrillation, pleural effusion, supraventricular tachycardia, respiratory failure, malnutrition, dyspnea, cardiac failure, pulmonary tuberculosis, fatigue, upper abdominal pain, decreased appetite, and peripheral sensory neuropathy;
Oral Docetaxel – vomiting, nausea, diarrhea and gastrointestinal toxicity;

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Oral Irinotecan - diarrhea, rash, gastrointestinal hemorrhage, vomiting, nausea, asthenia, neutropenia, anorexia, increased alanine aminotransferase, increased aspartate aminotransferase, enteritis, decreased neutrophil count and clostridium difficile infection;
Tirbanibulin oral - allergic reaction, bacteremia, rash, syncope, perivascular dermatitis, neutropenic fever, hyponatremia, failure to thrive, hypersensitivity, lower extremity edema, mucositis, neutropenia, pancytopenia, thrombocytopenia, seizure and motor vehicle accident, embolic stroke, pneumonitis, fever, acute kidney injury, increased bilirubin and albumin levels, decreased blood platelet count, abdominal pain, arm pain, pain at the base of the neck, pyrexia, chills, rigors, tachypenea, oxygen desaturation, pneumonia, anemia, elevated ALT and AST, dehydration, leukopenia and tremor; and
KX2-361 - pulmonary embolism; thromboembolic event, hyperuricemia and nausea.

Additionally, if we or others later identify undesirable side effects caused by Klisyri® or one or more of our drug candidates, if approved, a number of potentially significant negative consequences could result, including:

we may suspend marketing of the drug;
regulatory authorities may withdraw approvals of the drug;
regulatory authorities may require additional warnings in the labeling;
we may be required to develop a REMS for the drug or, if a REMS is already in place, to incorporate additional requirements under the REMS, or to develop a similar strategy as required by a regulatory authority;
we may be required to conduct post-marketing studies;
we could be sued and held liable for harm caused to subjects or patients; and
our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the particular drug or drug candidate, if approved, and could significantly harm our business, results of operations and prospects.

The commercialization of Klisyri® and of any of our drug candidates, if approved, subjects us to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expenses and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our drug candidates.

Klisyri® and our drug candidates, if any are approved, are subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies, and submission of safety, efficacy and other post-marketing information, including both federal and state requirements in the U.S. and requirements of foreign regulatory authorities.

Manufacturers and manufacturers’ facilities are required to comply with extensive requirements of the FDA, NMPA and regulatory authorities, including, in the U.S., ensuring that quality control and manufacturing procedures conform to current cGMP regulations. As such, we and our contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any NDA or other marketing application, and previous responses to inspection observations. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control.

Any regulatory approvals that we receive for our drug candidates may be subject to conditions of approval or limitations on the approved indicated uses for which the drug may be marketed, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials and surveillance to monitor the safety and efficacy of the drug candidate. The FDA may also require a REMS program as a condition of approval of one or more of our drug candidates, which could entail requirements for long-term patient follow-up, a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FDA, NMPA or a regulatory authority approves our drug candidates, we will have to comply with requirements including, for example, submissions of safety and other post-marketing information and reports, registration, and continued compliance with cGMP and GCP for any clinical trials that we conduct post-approval.

The FDA may impose consent decrees or withdraw approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the drug reaches the market. Later discovery of previously unknown problems with our drugs, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information;

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imposition of post-marketing studies or clinical studies to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMS program. Other potential consequences include, among other things:

restrictions on the marketing or manufacturing of our drugs, withdrawal of the product from the market, or voluntary or mandatory product recalls;
fines, untitled or warning letters, or holds on clinical trials;
refusal by the FDA to approve pending applications or supplements to approved applications filed by us or suspension or revocation of license approvals;
product seizure or detention, or refusal to permit the import or export of our drug candidates; and
injunctions or the imposition of civil or criminal penalties.

The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for their approved indications and in a manner consistent with the provisions of the approved prescribing information. The FDA, NMPA and other regulatory authorities actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability. The policies of the FDA, NMPA and of other regulatory authorities may change. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the U.S. 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 regulatory approval that we may have obtained, and we may not achieve or sustain profitability.

Risks Related to Commercialization of Klisyri® and Our Drug Candidates

If we and our partners are unable to successfully commercialize Klisyri® or experience significant delays in doing so for our other drug candidates, our business will be materially harmed.

Our business and the ability to generate revenue related to product sales depend in part on the successful commercialization of our approved product Klisyri® and the successful development, regulatory approval and commercialization of any current or future product candidates. Klisyri® has been approved by the FDA in the U.S. and the E.U., but Klisyri® has not received regulatory approval in any other jurisdiction and no sales can be made in any such jurisdiction unless such approval occurs. We have invested a significant portion of our efforts and financial resources to date in the development of Klisyri®, and our prospects are dependent on, and a portion of the value of our company relates to, our ability to successfully commercialize these products. The success of Klisyri® and any current or future product candidates depends on several factors, including:

successfully completing clinical trials;
receiving and maintaining regulatory approvals from applicable regulatory authorities;
developing and maintaining effective sales, marketing and distribution capabilities or partnerships to commercialize our products;
establishing adequate internal manufacturing capacity or arrangements with third-party manufacturers;
obtaining and maintaining patent and trade secret protection and regulatory exclusivity;
establishing commercial markets;
obtaining coverage and reimbursement from third-party payers; and
successfully competing with other products;

If we and our partners do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize Klisyri® or any current or future product candidates, which could materially harm our business, and we may not be able to earn sufficient revenues and cash flows to continue our operations.

We are dependent on the efforts of Almirall for the commercialization of Klisyri in the U.S. and Europe.

We have entered into collaborations with Almirall and are dependent on the efforts of Almirall for the commercialization of Klisyri in the U.S. and in Europe. The success of this arrangement will depend heavily on the efforts and activities of Almirall. In some situations, we may not be able to influence Almirall’s decisions regarding the commercialization of Klisyri or Almirall’s level of effort in marketing and selling Klisyri. Our ability to realize revenue from royalties or milestone payments depends significantly upon

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Almirall’s ability to commercialize, market and sell Klisyri. If they are unsuccessful, we may not receive some of the royalties or milestone payments provided for in the license agreement with Almirall.

If we are not able to obtain, or experience delays in obtaining, required regulatory approvals for our drug candidates, we will not be able to commercialize these drug candidates, and our ability to generate revenue will be materially impaired.

Our business is substantially dependent on our ability to complete the development of, obtain regulatory approval for and successfully commercialize drug candidates in a timely manner. We cannot commercialize drug candidates without first obtaining regulatory approval to market each drug from the FDA, NMPA or regulatory authorities in the relevant jurisdictions. Some of our proprietary drug candidates are currently undergoing various phases of FDA clinical trials. We cannot predict whether these trials and future trials will be successful or whether regulators will agree with our conclusions regarding the preclinical studies and clinical trials we have conducted to date. We have experienced this uncertainty with the receipt of a CRL for our NDA for Oral Paclitaxel, and the FDA recommended an additional clinical trial be completed and additional risk mitigation strategies to improve toxicity, which may involve dose optimization and/or exclusion of the patients deemed to be at a higher risk of toxicity, to support potential approval of the NDA. Before obtaining regulatory approvals for the commercial sale of any drug candidate for a target indication, we must demonstrate in preclinical studies and well-controlled clinical trials, and, with respect to approval in the U.S., to the satisfaction of the FDA, that the drug candidate is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls are adequate. An NDA must include extensive preclinical and clinical data and supporting information to establish the drug candidate’s safety and effectiveness. The NDA must also include significant information regarding the chemistry, manufacturing and controls for the drug. Obtaining approval of an NDA is a lengthy, expensive and uncertain process, and approval may not be obtained. If we submit an NDA to the FDA, the FDA decides whether to accept or reject the submission for filing. We cannot be certain that any submissions will be accepted for filing and review by the FDA.

Regulatory authorities outside of the U.S., such as the regulatory authorities in emerging markets, also have requirements for approval of drugs for commercial sale with which we must comply prior to marketing in those areas. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our drug candidates. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries and obtaining regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking non-U.S. regulatory approval could require additional non-clinical studies or clinical trials, which could be costly and time-consuming. The non-U.S. regulatory approval process may include all of the risks associated with obtaining FDA approval and other risks specific to the relevant jurisdiction. For all of these reasons, we may not obtain non-U.S. regulatory approvals on a timely basis, if at all.

If we are unable to obtain regulatory approval for our drug candidates in one or more jurisdictions, or any approval contains significant limitations, our target market will be reduced and our ability to realize the full market potential of our drug candidates will be harmed. Furthermore, if we are not able to obtain, or experience delays in obtaining, required regulatory approvals, we will not be able to commercialize our drug candidates, and our ability to generate revenue will be materially impaired.

Any fast track designation or grant of priority review status by the FDA may not actually lead to a faster development or regulatory review or approval process, nor will it assure FDA approval of our product candidates.

We previously received priority review for Oral Paclitaxel in the U.S. and may seek fast track designation or priority review of applications for approval of our product candidate for future indications. If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may apply for FDA fast track designation. If a product candidate offers major advances in treatment, the FDA may designate it eligible for priority review. A priority review designation means that the FDA’s goal to review an application is six months, rather than the standard review period of ten months. The FDA has broad discretion whether or not to grant these designations, so even if we believe a particular product candidate is eligible for these designations, we cannot assure you that the FDA would decide to grant them. Even if we do receive fast track designation or priority review, we may not experience a faster development process, review or approval compared to conventional FDA procedures. Receiving priority review from the FDA does not guarantee approval within the six-month review cycle or thereafter.

Klisyri® and any of our drug candidates, if approved, may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success.

Klisyri® and any of our drug candidates, if approved, may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. For example, current cancer treatments like chemotherapy and radiation therapy are well established in the medical community, and doctors may continue to rely on these treatments to the exclusion of our drug candidates. In addition, physicians, patients and third-party payors may prefer other novel products to ours, and we may experience difficulties gaining acceptance for our orally administered drug candidates. We are also subject to regulatory restrictions on

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how we market our drug candidates. If our drug candidates do not achieve an adequate level of acceptance, we may not generate significant product sales revenues, and we may not become profitable. The degree of market acceptance of Klisyri® and our drug candidates, if approved for commercial sale, will depend on a number of factors, including:

the clinical indications for which our drugs are approved;
physicians, hospitals, cancer treatment centers and patients considering our drugs as a safe and effective treatment;
the potential and perceived advantages of our drugs over alternative treatments;
the prevalence and severity of any side effects;
product labeling or product insert requirements of the FDA, NMPA or other regulatory authorities;
limitations or warnings contained in the labeling approved by the FDA, NMPA or other regulatory authorities;
the timing of market introduction of our drugs as well as competitive drugs;
the cost of treatment in relation to alternative treatments;
the amount of upfront costs or training required for physicians to administer our drugs;
obtaining optimal pricing for products in key global markets;
the availability of adequate coverage, reimbursement and pricing by third-party payors and government authorities (including U.S. federal healthcare programs);
the willingness of patients to pay out-of-pocket in the absence of coverage and reimbursement by third-party payors and government authorities;
relative convenience and ease of administration, including as compared to alternative treatments and competitive therapies;
the emergence of new biomarker-driven therapies as alternatives to chemotherapy; and
the effectiveness of our sales and marketing efforts.

If Klisyri® and any of our drug candidates, if approved, fail to achieve market acceptance among physicians, patients, hospitals, cancer treatment centers or others in the medical community, we will not be able to generate significant revenue. Even if our drugs achieve market acceptance, we may not be able to maintain that market acceptance over time if new products or technologies are introduced that are more favorably received than our drugs, are more cost effective or render our drugs obsolete.

Our partner Almirall is commercializing Klisyri® in the U.S. The commercial success of our products in the U.S. will depend on the degree of such market acceptance. Insurers and other third-party payers may also encourage the use of generic products, either in preference to or prior to the use of brand therapies. The degree of market acceptance of Klisyri® and any current or future product candidates, if approved, will depend on a number of factors, including:

the market price, affordability and patient out-of-pocket costs, relative to other available products, which are predominantly generics;
the possibility that third-party payers will not give favorable positions on their formularies or will place restrictions on their use, including through use of step therapy or prior authorization programs;
the timing of market introduction;
their effectiveness as compared with currently available products;
physician willingness to prescribe and patient willingness to adopt them in place of current therapies;
varying patient characteristics including demographic factors such as age, health, race and economic status;
changes in the standard of care for the targeted indications;
the prevalence and severity of any adverse side effects;
limitations or warnings contained in labeling;
limitations in the approved clinical indications;
our success in demonstrating their benefits including relative convenience and ease of initiation, prescription and administration;

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the strength of our selling, marketing and distribution capabilities;
the quality of our relationships with physicians, patient advocacy groups, third-party payers and others in the medical community;
the continuous availability of quality manufactured products;
sufficient third-party coverage or reimbursement; and
the degree to which the products are subject to material product liability claims

It is possible that we or our partners may find it necessary or desirable to provide rebates on Klisyri® or future product candidates, if approved, to customers or third-party payers or to implement patient assistance programs, including co-pay assistance programs, which could affect our profitability. In addition, we do not know how physicians, patients and third-party payers will respond to the pricing of Klisyri® in the U.S. or the pricing of any current or future product candidates in any jurisdiction, if approved.

The market opportunities for our currently marketed or potential products, if approved, are difficult to precisely estimate.

Even though we have obtained orphan drug designation for KX2-361 for the treatment of gliomas in the United States, we may not obtain or maintain orphan drug exclusivity for this product candidate, and we may not obtain orphan drug designation or exclusivity for any of our other product candidates or indications.

Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals in the United States. Similarly, the European Commission may designate a product as an orphan drug under certain circumstances.

Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes the FDA or the EMA from approving another marketing application for the same drug for the same disease for that time period. The applicable period is seven years in the United States and ten years in the European Union. The European exclusivity period can be reduced to six years if a drug no longer meets the criteria for orphan drug designation or if the drug 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 drug to meet the needs of patients with the rare disease or condition. In the United States, a second drug may be approved for the orphan indication despite a product’s orphan drug exclusivity if the FDA determines that the later drug is safer, more effective or makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation.

KX2-361 has obtained Orphan Drug Designation from the FDA for the treatment of gliomas . Even though we have received orphan drug designation for this product candidate for this indication, we may not be the first to obtain marketing approval for the orphan-designated indication in due to the uncertainties associated with developing pharmaceutical product candidates. We may also seek to obtain orphan drug designations in other international jurisdictions. However, there is no guarantee that we would be able to do so on a timely basis, or at all. Further, even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs with different active moieties can be approved for the same condition or a drug with the same active moiety can be approved for a different indication. Orphan drug designation by FDA or EMA neither shortens the development time or regulatory review time of a drug nor gives the drug any advantage in the regulatory review or approval process. In addition, even if we intend to seek orphan drug designation for other product candidates or indications, we may never receive such designations or obtain orphan drug exclusivity.

Moreover, there can be no assurance that the designation and/or exclusivity provisions currently in the law may not be changed in the future and the impact of any such changes, if made, on us. The orphan drug exclusivity provisions have been the subject of recent scrutiny from the press, from some members of Congress and from some in the medical community. Furthermore, the FDA’s interpretations of the Orphan Drug Act have been successfully challenged in court and future court decisions could continue that trend. There can be no assurance that the exclusivity granted to orphan drugs approved by the FDA will not be modified in the future, and how any such change might affect our products, if approved.

Orphan drugs target rare diseases and must therefore capture significant market share at high per-patient cost to generate reasonable returns.

KX2-361 has obtained Orphan Drug Designation from the FDA and Oral Paclitaxel has obtained Orphan Drug Designations from both the FDA and EC, respectively. As orphan drug candidates target rare diseases with small patient populations, we believe that we would need to capture significant market share to achieve meaningful returns on these product candidates. Further, as is

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typical of drugs for rare conditions, we would need to establish relatively higher prices in order to generate a return on investment and achieve meaningful gross margins. There can be no assurance that we will be successful in commercializing our orphan drug product candidates, if at all, or that we will be able to generate sufficient revenues from their sales to produce a meaningful return due to the limited market size.

Our manufacturing experience is limited and any failure by us to manufacture our products for commercial sale after receiving FDA approval would materially impact our revenue and financial condition.

The manufacture of drugs for commercial sale is subject to regulation by the FDA under cGMP regulations and by other regulators under other laws and regulations. We cannot assure you that we will continue to manufacture our products under cGMP regulations or other laws and regulations in sufficient quantities for commercial sale, or in a timely or economical manner.

Our manufacturing facilities require specialized personnel and are expensive to operate and maintain. Any delay in the regulatory approval or market launch of product candidates to be manufactured in these facilities will require us to continue to operate these expensive facilities and retain specialized personnel, which may increase our expected losses.

Through our public-private partnership, the New API Facility is complete in Chongqing, China. Our New API Facility in Chongqing was constructed in accordance with an agreement with CQ. Under the current agreement, CQ is responsible for construction of the facility but we are responsible for the costs of all equipment for the facilities. CQ will own the land and buildings, and we will lease the facilities, rent-free, for the first 10-year term, with an option to extend the lease for an additional 10-year term, during which, if we are profitable, we will pay a monthly rent of 5 RMB per square meter of space occupied. We have committed to achieving certain operational, revenue and tax generation milestones within certain time periods once we commence operation. If we are not able to achieve such milestones, CQ will have the opportunity to terminate the agreement and dispose of the plants in its discretion.

Additionally, the New API Facility will need to be cGMP validated. The New API Facility commenced operations in January of 2021, and the facility continues to conduct and complete product qualification activities. Validation is a lengthy process that must be completed before we can manufacture under cGMP requirements. We cannot guarantee that the FDA or foreign regulatory agencies will approve the manufacture of any products at these or other facilities, that such facilities will remain in compliance with cGMP regulations, or that such facilities will maintain a compliance status acceptable to the FDA or other regulatory agencies.

The manufacture of pharmaceutical products is a highly complex process in which a variety of difficulties may arise from time to time. We may not be able to resolve any such difficulties in a timely fashion, if at all. If anything were to interfere with the continuing manufacturing operations in our facilities, it could materially adversely affect our business and financial condition.

Currently, many of our product candidates are manufactured in small quantities for use in clinical trials. We cannot assure you that we will be able to successfully scale up the manufacture of Klisyri or any of our other product candidates in a timely or economical manner. As with Klisyri or other product candidates approved by the FDA or other drug regulatory authorities for commercial sale, we will need to manufacture them in larger quantities. If we are unable to successfully scale up our manufacturing capacity, the regulatory approval or commercial launch of such product candidate may be delayed or there may be a shortage in supply of such product candidate.

If we fail to develop manufacturing capacity and experience, fail to continue to contract for manufacturing on acceptable terms, or fail to manufacture our product candidates economically on a commercial scale or in accordance with cGMP regulations, our development programs and prospects for commercialization will be materially adversely affected. This may result in delays in receiving FDA or foreign regulatory approval for one or more of our product candidates or delays in the commercial production of a product that has already been approved. Any such delays could materially adversely affect our business and financial condition.

The manufacture of API is highly regulated by FDA, NMPA and other regulatory bodies and is subject to current good manufacturing practice requirements and to inspection by such regulators, which may result in adverse findings and actions against certain API manufacturing facilities.

API manufacturing facilities are subject to regulation by the applicable regulatory bodies in the place of manufacture as well as the regulatory agency in the country to which the product is exported. For instance, FDA’s cGMP regulations apply to these facilities and violation of these, or other, regulations may result in adverse action against the facility, including cessation of manufacturing activities. Our API manufacturing facility in Chongqing is also subject to regulation by the NMPA. If the FDA, NMPA, DEMC or other regulators discover a problem at one facility, we may be subject to increased scrutiny and/or adverse actions across our operations, including fines or orders to cease manufacturing, which could have a material impact on our operations, clinical development, regulatory approval process, business strategy or results of operations.

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We have limited experience in marketing proprietary drug products. If we are unable to establish such marketing and sales capabilities or enter into agreements with third parties to market and sell our proprietary drug candidates, we may not be able to generate sales revenue from such products.

We have limited sales, marketing and commercial product experience. For the product candidates and/or territories where we do not have existing partnerships pursuant to which our partners will be responsible for the marketing and sales of such products, we intend to continue to develop our in-house commercial organization and sales force for such products, which will require significant capital expenditures, management resources and time. We will have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel.

If we are unable to establish sufficient internal sales, marketing and commercial distribution capabilities for these proprietary drug candidates, we will need to pursue additional collaborative arrangements for the sales and marketing of our proprietary drugs. However, there can be no assurance that we will be able to establish or maintain such collaborative arrangements, or if we are able to do so, that they will have effective sales forces. Any revenue we receive will depend upon the efforts of such third parties, which may not be successful. We may have less control over the marketing and sales efforts of such third parties which may present fraud and abuse and other regulatory considerations, and our revenue from product sales may be lower than if we had commercialized our proprietary drug candidates ourselves. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our proprietary drug candidates.

There can be no assurance that we will be able to develop our in-house sales and commercial distribution capabilities or establish or maintain relationships with third-party collaborators to successfully commercialize any proprietary product, and as a result, we may not be able to generate sales revenue from such products.

Factors that may inhibit our efforts to successfully establish a sales force include:

an inability to compete with other pharmaceutical companies to recruit, hire, train and retain adequate numbers of effective sales and marketing personnel with requisite knowledge of our target market;
an inability to effectively manage a geographically dispersed sales and marketing organization in such jurisdictions;
the inability of sales personnel to obtain access to adequate numbers of physicians to prescribe any future approved products;
failure to adhere to regulatory requirements governing the sale of products in any jurisdiction;
unforeseen costs and expenses associated with creating an independent sales and marketing organization; and
a delay in bringing products to market after efforts to hire and train our sales force have already commenced.

In the event we are unable to successfully market and promote our products, our business may be harmed.

We face substantial competition, and our competitors may discover, develop or commercialize competing drugs before or more successfully than we do.

The development and commercialization of new drugs is highly competitive. We face competition with respect to any drug candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell drugs or are pursuing the development of drugs for the treatment of the types of cancer for which we are developing and commercializing our drug candidates and drugs. Some of these competitive drugs and therapies are based on scientific approaches that are the same as or similar to our approach, and others are based on entirely different approaches. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize drugs that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any drugs that we may develop. Our competitors also may obtain approval from the FDA, NMPA or other regulatory authorities for their drugs more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market and/or slow our regulatory approval.

Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved drugs than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with

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large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

If our competitors market products that are more effective, safer, have fewer side effects or are less expensive than our products or that reach the market sooner than any of our current or future product candidates, if approved, we may not achieve commercial success.

Klisyri® and any of our drug candidates, if approved, may become subject to unfavorable pricing regulations, third party reimbursement practices or healthcare reform initiatives, which could harm our business.

Successful sales of Klisyri® and any of our drug candidates, if approved, depend on the availability of adequate coverage and reimbursement from third-party payors. Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid in the U.S., and commercial payors are critical to new drug acceptance.

The regulations that govern regulatory approvals, pricing and reimbursement for new therapeutic products vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or licensing approval is granted. In some non-U.S. markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain regulatory approval for a drug in a particular country but be subject to price regulations that delay our commercial launch of the drug and negatively impact the revenues we are able to generate from the sale of the drug in that country. For example, according to the guidance issued in March 2015 by the central government of China, each province will decide which drugs to include in its provincial major illness reimbursement lists and the percentage of reimbursement, based on local funding. Adverse pricing limitations may hinder our ability to recover our investment in one or more drug candidates, even if our drug candidates obtain regulatory approval. For example, in China, according to a statement entitled Opinions on Reforming the Review and Approval Process for Pharmaceutical Products and Medical Devices, issued by the State Council in August 2015, the enterprises applying for new drug approval will be required to undertake that the selling price of new drug on Chinese mainland market shall not be higher than the comparable market prices of the product in its country of origin or Chinese neighboring markets, as applicable.

Our ability to commercialize any drugs successfully also will depend in part on the extent to which coverage and reimbursement for these drugs and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a drug is:

a covered benefit under its health plan;
safe, effective and medically necessary;
appropriate for the specific patient;
cost-effective and
neither experimental nor investigational.

We cannot be sure that reimbursement will be available for our drugs, if and once approved, and, if coverage and reimbursement are available, what the level of reimbursement will be. Reimbursement may impact the demand for, or the price of, any drug for which we obtain regulatory approval. Obtaining reimbursement for our drugs may be particularly difficult because of the higher prices often associated with branded drugs and drugs administered under the supervision of a physician. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize any drug candidate that we successfully develop. If we or our partners fail to obtain and sustain an adequate level of coverage and reimbursement for Klisyri® or any current or future product candidates, if approved, by third-party payers, potential future sales would be materially adversely affected. There will be no commercially viable market for Klisyri® or any current or future product candidates, if approved, without adequate coverage and reimbursement from third-party payers, and any reimbursement policy may be affected by future healthcare reform measures. Further, we cannot be certain that adequate coverage and reimbursement will be available for either of our products in jurisdictions outside the U.S. or for any current or future product candidates, if approved. Additionally, even if there is a commercially viable market, if the level of coverage or reimbursement is below our expectations, our anticipated revenue and gross margins will be adversely affected.

Third-party payers, such as government or private healthcare insurers and pharmacy benefit managers, carefully review and increasingly question and challenge the coverage of and the prices charged for drugs. Reimbursement rates from private health insurance companies vary depending on the company, the insurance plan and other factors. Reimbursement rates may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. A current trend in the U.S. healthcare industry is toward cost containment. Large public and private payers, managed care organizations, group

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purchasing organizations and similar organizations are exerting increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payers, including Medicare, may question the coverage of, and challenge the prices charged for, medical products and services, and many third-party payers limit coverage of or reimbursement for newly approved healthcare products. In particular, third-party payers may limit the covered indications. Cost-control initiatives in the U.S. healthcare industry could put downward pressure on the price established for Klisyri® or any current or future product candidates, if approved, which could result in product revenues being lower than anticipated. If we are unable to show a significant benefit relative to existing generic drugs, Medicare, Medicaid and private payers may not be willing to reimburse for Klisyri® or any current or future product candidates, if approved, which would significantly reduce the likelihood of them gaining market acceptance. Reimbursement systems in international markets vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country basis. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted.

We believe that U.S. third-party payers consider the efficacy, cost effectiveness, safety and tolerability of Klisyri® and will consider such factors of any current or future product candidates, if approved, and whether use of any such products should be a covered benefit under its health plan in determining whether to approve coverage and reimbursement for such products and at what level. Obtaining these approvals can be a time consuming and expensive process. Our business would be materially adversely affected if we do not obtain or maintain approval for reimbursement of Klisyri® or any current or future product candidates, if approved, from third-party payers on a timely or satisfactory basis or if pricing is set at unsatisfactory levels. Limitations on coverage could also be imposed at the local Medicare carrier level or by fiscal intermediaries. Medicare Part D, which provides a pharmacy benefit to Medicare patients as discussed below, does not require participating prescription drug plans to cover all drugs within a class of products. Our business could be materially adversely affected if Part D prescription drug plans were to limit access to or deny or limit reimbursement of any of our approved products.

In the U.S., no uniform policy of coverage and reimbursement for drugs exists among third-party payors. As a result, obtaining coverage and reimbursement approval of a drug from a government 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 drugs 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 drug, 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. Additionally, third-party payors may not cover, or provide adequate reimbursement for, long-term follow-up evaluations required following the use of our drugs. However, under Medicare Part D—Medicare’s outpatient prescription drug benefit—there are protections in place to ensure coverage and reimbursement for oncology products and all Part D prescription drug plans are required to cover substantially all anti-cancer agents.

The State Council requires central and provincial authorities across China to promote a medical insurance program for major illnesses, which targets covering at least 50% of the medical cost as incurred by treating major illnesses but falls out of the coverage of the basic insurance programs. The Ministry of Human Resources and Social Security of the PRC (the “MHRSS”), together with other government authorities, has the power to determine the medicines included in the National Reimbursement Drug List (the “NRDL”). In February 2017, the MHRSS released the 2017 NRDL, which was amended in 2019, 2020, and 2021. Medicines included in the NRDL are divided into two parts, Part A and Part B. Patients purchasing medicines included in Part A of the NRDL are entitled to reimbursement of the entire amount of the purchase price. Patients purchasing medicines included in Part B of the NRDL are required to pay a certain percentage of the purchase price and obtain reimbursement for the rest of the purchase price. The percentage of reimbursement for Part B medicines differs from region to region in the PRC. The National Healthcare Security Administration requires provincial authorities to increase reimbursement rates step by step.

In some non-U.S. countries, the pricing of drugs and biologics is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after obtaining regulatory approval of a drug candidate. In addition, market acceptance and sales of our drug candidates will depend significantly on the availability of adequate coverage and reimbursement from third-party payors for our drug candidates and may be affected by existing and future health care reform measures.

If our drug candidates are approved, we intend to test and market our approved drugs in a variety of international markets and we are exploring the licensing of commercialization rights or other forms of collaboration worldwide, which exposes us to additional risks of conducting business in additional international markets.

We conduct business operations in regions including the U.S., China, Taiwan, New Zealand and the United Kingdom, and other non-U.S. markets, including certain countries in Latin America, are an important component of our growth strategy. If we fail to obtain licenses or enter into collaboration arrangements with third parties in these markets, or if these parties are not successful, our revenue-generating growth potential will be adversely affected.

Moreover, international business relationships subject us to additional risks that may materially adversely affect our ability to attain or sustain profitable operations, including:

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initiatives to develop an international sales, marketing and distribution organization may increase our expenses, divert our management’s attention from the acquisition or development of drug candidates or cause us to forgo profitable licensing opportunities in these geographies;
efforts to enter into collaboration or licensing arrangements with third parties in connection with our international sales, marketing and distribution efforts may increase our expenses or divert our management’s attention from the acquisition or development of drug candidates;
changes in a specific country’s or region’s laws, regulations or political and cultural climate or economic condition;
differing regulatory requirements for drug approvals and marketing internationally;
difficulty of effective enforcement of contractual provisions and intellectual property rights in local jurisdictions;
potentially reduced protection for intellectual property rights;
potential conflicting third-party patent or other intellectual property rights;
unexpected changes in tariffs, trade barriers and regulatory requirements, such as Export Administration Regulations promulgated by the U.S. Department of Commerce and fines, penalties or suspension or revocation of export privileges;
economic weakness, including inflation or political instability, particularly in non-U.S. economies and markets;
compliance with tax, employment, immigration and labor laws for employees traveling abroad;
the effects of applicable non-U.S. tax structures and potentially adverse tax consequences;
currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incidental to doing business in another country;
workforce uncertainty and labor unrest, particularly in non-U.S. countries where labor unrest is more common than in the U.S.;
the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to import goods from a non-U.S. market with low or lower prices rather than buying them locally;
failure of our employees and contracted third parties to comply with Office of Foreign Asset Control rules and regulations and the Foreign Corrupt Practices Act;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters, including earthquakes, volcanoes, typhoons, floods, hurricanes and fires.

These and other risks may materially adversely affect our ability to obtain or sustain revenue from international markets.

The use of legal, regulatory, and legislative strategies by both brand and generic competitors, including but not limited to “authorized generics” and regulatory petitions, may increase costs associated with the introduction or marketing of our generic products, could delay or prevent such introduction, and could adversely affect our results of operations.

Our competitors, both branded and generic, often pursue strategies to prevent, delay, or eliminate competition from generic alternatives to branded products. These strategies include, but are not limited to:

entering into agreements whereby other generic companies will begin to market an authorized generic, a generic equivalent of a branded product, at the same time or after generic competition initially enters the market;
launching a generic version of their own branded product prior to or at the same time or after generic competition initially enters the market;
filing petitions with the FDA or other regulatory bodies seeking to prevent or delay approvals, including timing the filings so as to thwart generic competition by causing delays of our product approvals;
seeking to establish regulatory and legal obstacles that would make it more difficult to demonstrate bioequivalence or to meet other requirements for approval, and/or to prevent regulatory agency review of applications, such as through the establishment of patent linkage (laws and regulations barring the issuance of regulatory approvals prior to patent expiration);
initiating legislative or other efforts to limit the substitution of generic versions of brand pharmaceuticals;

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filing suits for patent infringement and other claims that may delay or prevent regulatory approval, manufacture, and/or scale of generic products;
introducing “next-generation” products prior to the expiration of market exclusivity for the reference product, which often materially reduces the demand for the generic or the reference product for which we seek regulatory approval;
persuading regulatory bodies to withdraw the approval of brand name drugs for which the patents are about to expire and converting the market to another product of the brand company on which longer patent protection exists;
obtaining extensions of market exclusivity by conducting clinical trials of brand drugs in pediatric populations or by other methods; and
seeking to obtain new patents on particular formulations of drugs or methods of administering drugs for which patent protection on the drug itself is about to expire.

If any other actions by our competitors and other third parties to prevent or delay activities necessary to the approval, manufacture, or distribution of our products are successful, our entry into the market and our ability to generate revenues associated with new products may be delayed, reduced, or eliminated, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and/or share price.

Risks Related to Compounding

Our compounded preparations and the compounding industry are subject to regulatory and customer scrutiny, which may impair our growth and sales.

Formulations prepared and distributed by outsourcing facilities may contain ingredients found in FDA-approved drugs (i.e., “sterile-to-sterile” compounding) or ingredients that are on FDA’s interim or final list of bulk substances that may be used in compounding. Compounded formulations are subject to various statutory and FDA regulatory requirements. Outsourcing facilities are regulated under FDCA Section 503B. Certain compounding pharmacies and outsourcing facilities have experienced both facility and product quality issues and been the subject of negative media coverage in recent years. Such product quality and facility issues have resulted in increased scrutiny of compounding activities from the FDA and state governmental agencies. For example, the FDA has in the past requested that a number of compounding pharmacies and outsourcing facilities recall unexpired drug products and cease sterile compounding operations due to, among other reasons, lack of assurance of sterility. Pharmacies and outsourcing facilities have also, at the request of FDA, suspended sterile production or voluntarily recalled certain sterile compounded products after an FDA inspection of those facilities. As a result, some prescribers and hospital/clinic purchasing agents may be hesitant to prescribe or procure compounded formulations, and some patients may be hesitant to purchase the same.

In addition, an outsourcing facility must meet certain conditions under Section 503B of the FDCA in order for its compounded products to be exempt from the FDCA’s premarket approval requirements, from the FDCA requirement that products be labeled with adequate directions for use, and serialization and product tracing requirements. For example, the facility must register with FDA and produce at least one sterile drug product, and the drugs must be compounded by or under the direct supervision of a licensed pharmacist. The facility must also operate in compliance with FDA’s cGMP regulations and FDA’s guidance for outsourcing facilities addressing cGMP. If our outsourcing facility or any of our compounded products are found not to satisfy the criteria set forth in Section 503B, the marketing of our products absent Section 503B’s exemptions from FDA's new drug approval requirements, adequate directions for use on the product labeling, or without compliance with certain serialization and product tracing requirements could render our products adulterated or misbranded under the FDCA, which could have an adverse effect on our business.

The source of any bulk substance active ingredient used in compounding must be a Section 510 registered manufacturer, and the bulk substance must be accompanied by a Certificate of Analysis. If the outsourcing facility compounds using bulk drug substances, the bulk drug substances must either appear on FDA’s “interim” list of bulk substances that may be used in compounding under Section 503B which are those bulk drug substances for which FDA has determined there is a clinical need. Drugs may also be compounded if the FDA-approved drug appear on FDA’s published drug shortage list. Provided certain conditions are met, FDA will exercise enforcement discretion concerning use of “interim” Category 1 substances pending evaluation of the substances for inclusion on FDA’s final list of bulk drug substances for which there is a clinical need.

FDA has also finalized guidance on determining whether a product is an “essential copy” of a commercially available product, which the FDA has announced it intends to revisit in 2021. If our products were ever determined to be an essential copy of a commercially available product, FDA could engage in enforcement action. We use bulk drug substances in the preparation of certain of our compounded products. In the event the FDA’s evaluation of these bulk drug substances results in a determination not to include such substances on the FDA’s list of bulk drug substances for which there is a clinical need, or if FDA were to change its interim policy such that compounding with such bulk drug substances could not proceed while the FDA’s evaluation of the substances is pending or until the FDA has issued its final list of bulk drug substances for which there is a clinical need, our ability to continue marketing compounded products subject to Section 503B would be impaired, and our business could be harmed.

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If a compounded drug formulation provided by our FDA-registered outsourcing facility leads to patient injury or death, results in a product recall, or causes FDA to request the company shut down its sterile compounding operations, we may be exposed to significant liability and reputational harm.

The production, labeling and packaging of compounded drugs is inherently risky. The success of our compounded formulations and facility operations depends to a significant extent upon perceptions of the safety and quality of our products. We could be adversely affected if our formulations are subject to negative publicity. We could also be adversely affected if any of our formulations or other products, any similar products sold by other companies, or any products sold by other outsourcing facilities, prove to be, or are alleged or asserted to be, harmful to patients. There are a number of factors that could result in the injury or death of a patient who receives one of our compounded formulations, including quality issues, manufacturing or labeling flaws, improper packaging or unanticipated or improper distribution or other uses of the products, any of which could result from human or other error. Any of these situations could lead to a recall of, or safety alert relating to, one or more of our products. Similarly, to the extent any of the ingredients used by us to produce compounded formulations have quality or other problems that adversely affect the finished compounded preparations, our sales could be adversely affected. In addition, in the ordinary course of business, we may voluntarily retrieve products from the field in response to a customer complaint. Because of our dependence upon medical and patient perceptions, any adverse publicity associated with illness or other adverse effects resulting from the use or misuse of our products, any similar products sold by other companies, or related to compounded formulations generally, could have a material adverse impact on our business, results of operations and financial condition.

Risks Related to Our Intellectual Property

A significant portion of our intellectual property portfolio currently comprises pending patent applications that have not yet been issued as granted patents, and if our pending patent applications fail to issue our business will be adversely affected. If we are unable to obtain and maintain patent protection for our technology and drugs, our competitors could develop and commercialize technology and drugs similar or identical to ours, and our ability to successfully commercialize our technology and drugs may be adversely affected.

Our success depends in large part on our ability to obtain and maintain patent protection in the U.S., China and other countries with respect to our proprietary technology and drug candidates. We have sought to protect our proprietary position by filing patent applications in the U.S., Europe, China and other countries related to novel technologies and drug candidates that we consider important to our business. The process of obtaining patent protection is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. There can be no assurance that our pending patent applications will result in issued patents. Moreover, even our issued patents do not guarantee us the right to practice our technology in relation to the commercialization of our platforms’ product candidates. Third parties may have blocking patents that could be used to prevent us from commercializing our patented technologies, platforms and product candidates and practicing our proprietary technology. There can also be no assurance that a third party will not challenge the validity of our patents or that we will obtain sufficient claim scope in those patents, in view of prior art, to prevent a third party from competing successfully with our drug candidates. We may become involved in interference, inter partes review, post grant review, ex parte reexamination, derivation, opposition or similar other proceedings challenging our patent rights or the patent rights of others. Such challenges may result in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop others from using or commercializing similar or identical technology and drug candidates, or limit the duration of the patent protection of our technology and drug candidates. 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. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing drug candidates similar or identical to ours.

The patent position of biotechnology and pharmaceutical companies is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Changes in patent laws or the interpretation of patent laws in the U.S. and other countries may diminish the value of our patents or narrow the scope of our patent protection. Publications of discoveries in scientific literature often lag behind the actual discoveries, and patent applications in the U.S. and other jurisdictions are typically not published until eighteen months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in our patents or pending patent applications, or that we were the first to file for patent protection of such inventions.

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

The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions, due to inconsistent policies regarding the scope of claims allowable in patents. Changes in patent laws and rules, either by legislation, judicial

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decisions, or regulatory interpretation in the U.S. and other countries may diminish our ability to protect our inventions and enforce our intellectual property rights, and more generally could affect the value of our intellectual property.

In addition, the laws of certain non-U.S. countries do not protect intellectual property rights to the same extent as U.S. federal and state laws do. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the U.S., or from selling or importing drugs made using our inventions in and into the U.S. or non-U.S. jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own drugs and further, may export otherwise infringing drugs to non-U.S. jurisdictions where we have patent protection but where enforcement rights are not as strong as those in the U.S. These drugs may compete with our drug candidates and our patent or other intellectual property rights may not be effective or adequate to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in certain jurisdictions, including Latin America and China. The legal systems of some countries do not favor the enforcement of patents, trade secrets and other intellectual property, particularly those relating