RISK FACTORS

The combined company will be faced with a market environment that cannot be predicted and that involves significant risks, many of which will be beyond its control. In addition to the other information contained in this proxy statement/prospectus/information statement, you should carefully consider the material risks described below before deciding how to vote your shares of stock. In addition, you should read and consider the risks associated with the business of Versartis because these risks may also affect the combined company. These risks can be found in Versartis’ Annual Report on Form 10-K, as updated by subsequent Quarterly Reports on Form 10-Q, all of which are filed with the SEC. You should also read and consider the other information in this proxy statement/prospectus/information statement and the other documents incorporated by reference into this proxy statement/prospectus/information statement. Realization of any of the risks described below, any of the uncertainties described under “ Cautionary Statement Regarding Forward-Looking Statements ” or any of the risks or uncertainties described in the documents incorporated by reference in this proxy statement/prospectus/information statement could have a material adverse effect on Versartis’, Aravive’s or the combined company’s businesses, financial condition, cash flows and results of operations. For more information, please see the section titled “ Where You Can Find More Information .”

Risks Related to the Merger

The Exchange Ratio is not adjustable based on the market price of Versartis common stock so the merger consideration at the closing may have a greater or lesser value than at the time the Merger Agreement was signed.

The Merger Agreement has set the Exchange Ratio for the Aravive common stock, and the Exchange Ratio is only adjustable upward or downward based on increases or decreases in the number of shares of Aravive’s issued and outstanding capital stock and the number of shares of Aravive capital stock issuable upon the exercise of all issued and outstanding equity awards, increases or decreases the number of Versartis’ issued and outstanding common stock, if the cash balances at closing of either Versartis or Aravive fall outside a pre-determined range, and the proposed reverse stock split, prior to the closing of the merger as described in the section titled “ The Merger—Merger Consideration .” The pre-reverse stock split Exchange Ratio is currently estimated to be 2.29, and the post-split Exchange Ratio will depend on the exact reverse stock split ratio that is ultimately mutually determined by Versartis and Aravive and certain changes in the capitalization of the two companies. Any changes in the market price of Versartis common stock before the closing of the merger will not affect the number of shares Aravive securityholders will be entitled to receive pursuant to the Merger Agreement. Therefore, if before the closing of the merger the market price of Versartis common stock declines from the market price on the date of the Merger Agreement, then Aravive stockholders could receive merger consideration with substantially lower value. Similarly, if before the closing of the merger the market price of Versartis common stock increases from the market price on the date of the Merger Agreement, then Aravive stockholders could receive merger consideration with substantially more value for their shares of Aravive capital stock than the parties had negotiated for in the establishment of the Exchange Ratio. Because the Exchange Ratio does not adjust as a result of changes in the value of Versartis common stock, for each one percentage point that the market value of Versartis common stock rises or declines, there is a corresponding one percentage point rise or decline, respectively, in the value of the total merger consideration issued to Aravive stockholders.

Failure to complete the merger may result in Versartis or Aravive paying a termination fee to the other party and could harm the common stock price of Versartis and future business and operations of each company.

If the merger is not completed, Versartis and Aravive are subject to the following risks:

 

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if the Merger Agreement is terminated under certain circumstances and certain events occur, Versartis or Aravive will be required to pay the other party a termination fee of $2.5 million;

 

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the price of Versartis stock may decline and remain volatile; and

 

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costs related to the merger, such as legal, accounting and investment banking fees which (1) Versartis estimates will total approximately $3.8 million, of which $2.3 million must be paid even if the merger is not completed, and (2) Aravive estimates will total $2.2 million, respectively.

In addition, if the Merger Agreement is terminated and the Versartis or Aravive board of directors determines to seek another business combination, there can be no assurance that Versartis or Aravive will be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be provided by each party in the merger.

If the conditions to the merger are not met, the merger may not occur.

Even if the proposals referred to herein are approved by the stockholders of Versartis and Aravive, specified other conditions must be satisfied or waived to complete the merger. These conditions are set forth in the Merger Agreement and described in the section titled “ The Merger Agreement—Conditions to the Closing of the Merger .” Versartis and Aravive cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the merger may not occur or will be delayed, and Versartis and Aravive each may lose some or all of the intended benefits of the merger.

The merger may be completed even though material adverse changes may result from the announcement of the merger, industry-wide changes and other causes.

In general, either Versartis or Aravive can refuse to complete the merger if there is a material adverse change affecting the other party between June 3, 2018, the date of the Merger Agreement, and the closing. However, certain types of changes do not permit either party to refuse to complete the merger, even if such change could be said to have a material adverse effect on Versartis or Aravive, including:

 

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general business or economic conditions affecting the industries in which Aravive or Versartis operate;

 

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acts of war, armed hostilities or terrorism;

 

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changes in financial, banking or securities markets;

 

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the taking of any action required to be taken by the Merger Agreement;

 

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with respect to Versartis, the announcement or pendency of the Merger Agreement or any related transactions; or

 

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with respect to Versartis, any change in the stock price or trading volume of Versartis common stock.

If adverse changes occur and Versartis and Aravive still complete the merger, the combined company stock price may suffer. This in turn may reduce the value of the merger to the stockholders of Versartis and Aravive.

The combined company will need to raise additional capital by issuing securities or debt or through licensing arrangements, which may cause dilution to the combined company’s stockholders or restrict the combined company’s operations or proprietary rights.

The combined company may be required to raise additional funds sooner than currently planned. Additional financing may not be available to the combined company when it needs it or may not be available on favorable terms. To the extent that the combined company raises additional capital by issuing equity securities, such an issuance may cause significant dilution to the combined company’s stockholders’ ownership and the terms of any new equity securities may have preferences over the combined company’s common stock. Any debt financing the combined company enters into may involve covenants that restrict its operations. These restrictive covenants may include limitations on additional borrowing and specific restrictions on the use of the combined company’s assets, as well as prohibitions on its ability to create liens, pay dividends, redeem its stock or make investments. In addition, if the combined company raises additional funds through licensing arrangements, it may be necessary to grant licenses on terms that are not favorable to the combined company.

 

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Certain Versartis and Aravive executive officers and directors have interests in the merger that are different from yours and that may influence them to support or approve the merger without regard to your interests.

Certain officers and directors of Versartis and Aravive participate in arrangements that provide them with interests in the merger that are different from yours, including, among others, the continued service as directors, in the case of Versartis, or directors and officers, in the case of Aravive, of the combined company, severance and retention benefits, the acceleration of stock options and continued indemnification.

For example, Jay P. Shepard, Versartis’ President and Chief Executive Officer, is expected to become a director and the Chief Executive Officer of the combined company upon the closing of the merger.

For more information, please see the section titled “ The Merger—Interests of the Versartis Directors and Executive Officers in the Merger .”

Additionally, certain of Aravive’s directors are expected to become directors of the combined company upon the closing of the merger. Specifically, Raymond Tabibiazar, who is currently the Executive Chairman of Aravive, as well as Amato Giaccia and Eric Zhang, current directors of Aravive, are expected to become members of the combined company’s board of directors upon the closing of the merger.

In addition, all of Aravive’s executive officers and its employee directors have options, subject to vesting, to purchase shares of Aravive common stock which, if in-the-money, shall be converted into and become options to purchase shares of Versartis common stock. For more information, please see the section titled “ The Merger—Interests of the Aravive Directors and Executive Officers in the Merger. ”

The market price of the combined company’s common stock following the merger may decline as a result of the merger.

The market price of the combined company’s common stock may decline as a result of the merger for a number of reasons including if:

 

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investors react negatively to the prospects of the combined company’s business and prospects from the merger;

 

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the effect of the merger on the combined company’s business and prospects is not consistent with the expectations of financial or industry analysts; or

 

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the combined company does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts.

Versartis and Aravive stockholders may not realize a benefit from the merger commensurate with the ownership dilution they will experience in connection with the merger.

If the combined company is unable to realize the full strategic and financial benefits currently anticipated from the merger, Versartis and Aravive securityholders will have experienced substantial dilution of their ownership interests in their respective companies without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined company is able to realize only part of the strategic and financial benefits currently anticipated from the merger.

During the pendency of the merger, Versartis and Aravive may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses.

Covenants in the Merger Agreement impede the ability of Versartis and Aravive to make acquisitions, subject to certain exceptions relating to fiduciary duties, or complete other transactions that are not in the ordinary course of

 

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business pending the closing of the merger. As a result, if the merger is not completed, the parties may be at a disadvantage to their competitors during that period. In addition, while the Merger Agreement is in effect, each party is generally prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination outside the ordinary course of business, with any third-party, subject to certain exceptions. Any such transactions could be favorable to such party’s stockholders.

Certain provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement.

The terms of the Merger Agreement prohibit each of Versartis and Aravive from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover proposals, except in certain circumstances where the Versartis or Aravive board of directors, as applicable, determines in good faith, after consultation with its financial advisor and outside legal counsel, that an unsolicited alternative takeover proposal constitutes or is reasonably likely to result in a superior takeover proposal. In addition, if Versartis or Aravive terminate the Merger Agreement under certain circumstances, including terminating because of a decision of the Versartis or Aravive board of directors, as applicable, to recommend an alternative proposal, Versartis or Aravive, as applicable, would be required to pay a termination fee of $2.5 million to the other party. These termination fees and reimbursement obligations described above may discourage third parties from submitting alternative takeover proposals to Versartis and its stockholders and Aravive and its stockholders, and may cause the Versartis board of directors or the Aravive board of directors to be less inclined to recommend an alternative proposal.

The lack of a public market for Aravive shares makes it difficult to determine the fair market value of the Aravive shares, and Aravive stockholders may receive consideration in the merger that is less than the fair market value of the Aravive shares and/or Versartis may pay more than the fair market value of the Aravive shares.

Aravive is privately held and its capital stock is not traded in any public market. The lack of a public market makes it extremely difficult to determine Aravive’s fair market value. Because the percentage of Versartis equity to be issued to Aravive stockholders was determined based on negotiations between the parties, it is possible that the value of the Versartis common stock to be received by Aravive stockholders will be less than the fair market value of Aravive, or Versartis may pay more than the aggregate fair market value for Aravive.

Risks Related to Versartis

Investing in Versartis common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information contained in this proxy statement/prospectus/information statement and in the other periodic and current reports and other documents it files with the SEC, before deciding to invest in its common stock. If any of the following risks materialize, Versartis’ business, financial condition, results of operation and future prospects will likely be materially and adversely affected. In that event, the market price of its common stock could decline and you could lose all or part of your investment.

Versartis is, and will continue to be, subject to the risks described in Part I, Item 1A in Versartis’ Annual Report on Form 10-K for the year ended December 31, 2017 and in Part II, Item 1A in Versartis’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, each as filed with the SEC and incorporated by reference into this Proxy Statement/Prospectus. For more information, please see the section titled “Where You Can Find More Information . ”

 

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Versartis Risks Related to the Merger

If the merger is not completed, Versartis may be unsuccessful in completing an alternative transaction on terms that are as favorable as the terms of the proposed transaction with Aravive, or at all, and Versartis may be unable to reestablish an operating business. The Versartis board of directors may decide to pursue a dissolution and liquidation of Versartis. In such an event, the amount of cash available for distribution to Versartis’ stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.

To date, Versartis’ current assets consist primarily of cash, cash equivalents and marketable securities, Versartis’ listing on the Nasdaq Global Select Market and the Merger Agreement with Aravive. While Versartis has entered into the Merger Agreement with Aravive, the closing of the merger with Aravive may be delayed or may not occur at all and there can be no assurance that the merger will deliver the anticipated benefits Versartis expects or enhance shareholder value. If Versartis is unable to consummate the merger with Aravive, the Versartis board of directors may elect to pursue an alternative strategy, one of which may be a strategic transaction similar to the proposed merger with Aravive. Attempting to complete an alternative transaction will be costly and time consuming, and Versartis can make no assurances that such an alternative transaction would occur at all. Alternatively, the Versartis board of directors may elect to continue operations or decide to pursue a dissolution and liquidation of the company. In such an event, the amount of cash available for distribution to Versartis’ stockholders will depend heavily on the timing of such decision, as with the passage of time the amount of cash available for distribution will be reduced as Versartis continues to fund its operations. In addition, if the Versartis board of directors was to approve and recommend, and Versartis’ stockholders were to approve, a dissolution and liquidation of the company, Versartis would be required under Delaware corporate law to pay its outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to Versartis’ stockholders. Versartis’ commitments and contingent liabilities may include severance obligations and fees and expenses related to the merger. As a result of this requirement, a portion of Versartis’ assets may need to be reserved pending the resolution of such obligations. In addition, Versartis may be subject to litigation or other claims related to a dissolution and liquidation. If a dissolution and liquidation were pursued, the Versartis board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of Versartis common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of the company.

Failure to obtain stockholder approval for the proposed reverse stock split may result in the combined company being unable to obtain compliance with minimum bid price requirements for an initial listing on Nasdaq, if required, and may result in Versartis common stock being delisted from Nasdaq.

If Versartis is required pursuant to Nasdaq’s “reverse merger” rules to file an initial listing application for the combined company’s common stock and if the Reverse Stock Split Proposal is not approved by Versartis’ stockholders, the combined company will likely not be able to obtain compliance with the minimum bid price requirement for an initial listing on Nasdaq and, as a consequence, Nasdaq will immediately provide the combined company with written notification that the combined company’s common stock will be delisted.

Upon receipt of such delisting letter, the combined company will appeal the determination to the Nasdaq hearings panel, or the Hearing Panel. In addition, the board of directors of the combined company will immediately call for a second special meeting of the stockholders following the closing of the merger and request the stockholders of the combined company to approve a reverse stock split that will allow the combined company to remain in compliance with Nasdaq listing requirements. If the second special meeting has not been held before the occurrence of a hearing before the Hearing Panel, the combined company will be required to provide a plan to attain compliance. If the combined company has not regained compliance with Nasdaq listing requirements prior to such hearing, and the Hearing Panel decides to continue with delisting of the combined company, the Hearing Panel’s decision may be appealed to the Nasdaq Listing and Hearing Review Council but such appeal would not stay the delisting process.

 

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The issuance of shares of Versartis common stock to Aravive stockholders in the merger will dilute substantially the voting power of Versartis’ current stockholders.

If the merger is completed, each outstanding share of Aravive common stock will be converted into the right to receive a number of shares of Versartis common stock equal to the Exchange Ratio determined pursuant to the Merger Agreement. Immediately following the merger, Versartis securityholders are expected to own approximately 52% of the outstanding equity securities of the combined company on a fully diluted basis, and Aravive securityholders are expected to own approximately 48% of the outstanding equity securities of the combined company on a fully diluted basis. Accordingly, the issuance of shares of Versartis common stock to Aravive stockholders in the merger will reduce significantly the relative voting power of each share of Versartis common stock held by Versartis’ current securityholders. Consequently, Versartis securityholders as a group will have significantly less influence over the management and policies of the combined company after the merger than prior to the merger.

If the combined company after the merger is unable to realize the strategic and financial benefits currently anticipated from the merger, Versartis stockholders and Aravive stockholders will have experienced substantial dilution of their ownership interests in their respective companies without receiving the expected commensurate benefit, or receiving only part of the commensurate benefit to the extent the combined company is able to realize only part of the expected strategic and financial benefits currently anticipated from the merger.

The pendency of the merger could have an adverse effect on the trading price of Versartis common stock and Versartis’ business, financial condition, results of operations or business prospects.

While there have been no significant adverse effects to date, the pendency of the merger could disrupt Versartis’ businesses in the following ways, including:

 

•

the attention of Versartis’ management may be directed toward the closing of the merger and related matters and may be diverted from the day-to-day business operations; and

 

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third parties may seek to terminate or renegotiate their relationships with Versartis as a result of the merger, whether pursuant to the terms of their existing agreements with Versartis or otherwise.

Should they occur, any of these matters could adversely affect the trading price of Versartis common stock or harm Versartis’ financial condition, results of operations or business prospects.

Versartis is substantially dependent on Versartis’ remaining employees to facilitate the consummation of a strategic transaction.

In May 2018, Versartis reduced its workforce by thirteen employees, which represented approximately 48% of its workforce as of May 3, 2018. Versartis’ ability to successfully complete a strategic transaction depends in large part on Versartis’ ability to retain certain of its remaining personnel. Despite Versartis’ efforts to retain these employees, one or more may terminate their employment with Versartis on short notice. The loss of the services of any of these employees could potentially harm Versartis’ ability to consummate the merger, to run Versartis’ day-to-day operations, as well as fulfill Versartis’ reporting obligations as a public company.

There is no assurance that the proposed merger will be completed in a timely manner or at all. If the merger is not consummated, Versartis’ business could suffer materially and its stock price could decline.

The closing of the proposed merger is subject to a number of closing conditions, including the approval by Versartis’ stockholders of the issuance of shares of Versartis common stock pursuant to the Merger Agreement and other customary closing conditions. If the conditions are not satisfied or waived, the merger will not occur or will be delayed.

 

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If the proposed merger is not consummated, Versartis may be subject to a number of material risks, and Versartis’ business and stock price could be adversely affected, as follows:

 

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Versartis has incurred and expects to continue to incur significant expenses related to the proposed merger even if the merger is not consummated;

 

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Versartis could be obligated to pay Aravive a termination fee of $2.5 million under certain circumstances pursuant to the Merger Agreement;

 

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the market price of Versartis common stock may decline to the extent that the current market price reflects a market assumption that the proposed merger will be completed; and

 

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Versartis may not be able to pursue an alternate merger transaction if the proposed merger with Aravive is not completed.

Risks Related to Aravive

Risks Related to Aravive’s Financial Position and Capital Requirements

Aravive has a limited operating history and has never generated any product revenue.

Aravive is a clinical-stage biopharmaceutical company with a limited operating history and has never generated any product revenue. Aravive was founded in April 2007 and its operations to date have been primarily limited to organizing and staffing its company, and developing its clinical product candidate, AVB-S6-500. Aravive has not yet successfully completed any clinical trials in the target patient population, obtained marketing approval, manufactured AVB-S6-500 product at commercial scale, or conducted sales and marketing activities that will be necessary to successfully commercialize AVB-S6-500. Consequently, predictions about Aravive’s future success or viability may not be as accurate as they could be if it had a longer operating history or a history of successfully developing and commercializing product candidates.

Even if Aravive receives regulatory approval for the sale of any of its clinical product candidate, it does not know when it will begin to generate revenue, if at all. Aravive’s ability to generate revenue depends on a number of factors, including its ability to:

 

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set an acceptable price for its clinical product candidate and obtain coverage and adequate reimbursement from third-party payors;

 

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establish sales, marketing, manufacturing and distribution systems;

 

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

 

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develop manufacturing capabilities for bulk materials and manufacture commercial quantities of its clinical product candidate at acceptable cost levels;

 

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achieve broad market acceptance of its clinical product candidate in the medical community and with third-party payors and consumers;

 

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attract and retain an experienced management and advisory team;

 

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launch commercial sales of Aravive’s clinical product candidate, whether alone or in collaboration with others; and

 

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maintain, expand and protect Aravive’s intellectual property portfolio.

Because of the numerous risks and uncertainties associated with development and manufacturing, Aravive is unable to predict if it will generate revenue. If Aravive cannot successfully execute on any of the factors listed above, Aravive’s business may not succeed, it may never generate revenue and your investment will be adversely affected.

 

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Aravive has incurred significant losses since its inception and expects to continue to incur significant losses for the foreseeable future and may never achieve or maintain profitability.

Aravive has never generated any product revenues and it expects to continue to incur substantial and increasing losses as it continues to develop its clinical product candidate. To become and remain profitable, Aravive or its partners must succeed in developing its clinical product candidate, obtaining regulatory approval for it, and manufacturing, marketing and selling those products for which it or its partners may obtain regulatory approval. Aravive or its partners may not succeed in these activities, and Aravive may never generate revenue from product sales that is significant enough to achieve profitability. Aravive’s clinical product candidate has not been approved for marketing in the United States or any foreign jurisdiction and may never receive such approval. As a result, Aravive is uncertain when or if it will achieve profitability and, if so, whether it will be able to sustain it. Aravive’s ability to generate revenue and achieve profitability is dependent on its ability to complete development, obtain necessary regulatory approvals, manufacture and successfully market its clinical product candidate. Aravive cannot assure you that it will be profitable even if it successfully commercializes its clinical product candidate. If Aravive does successfully obtain regulatory approval to market its clinical product candidate, its revenues will be dependent, in part, upon, the size of the markets in the territories for which regulatory approval is received, the number of competitors in such markets, the price at which Aravive can offer its clinical product candidate and whether Aravive owns the commercial rights for that territory. If the indication approved by regulatory authorities is narrower than Aravive expects, or the treatment population is narrowed by competition, physician choice or treatment guidelines, Aravive may not generate significant revenue from sales of its clinical product candidate in order to achieve profitability, even if approved. Even if Aravive does achieve profitability, Aravive may not be able to sustain or increase profitability on a quarterly or annual basis. If Aravive fails to become and remain profitable the market price of its common stock and Aravive’s ability to raise capital and continue operations will be adversely affected.

To date, Aravive’s only clinical trial has been its recently completed Phase 1 clinical trial with 42 dosed subjects. Aravive expects research and development expenses to increase significantly for its products as they advance in the clinical trial and as Aravive conducts larger clinical trials. Because of numerous risks and uncertainties involved in its business, the timing or amount of increased development expenses cannot be accurately predicted and, Aravive’s expenses could increase beyond expectations if it is required by the U.S. Food and Drug Administration, or the FDA, or comparable non-U.S. regulatory authorities, to perform studies or clinical trials in addition to those it currently anticipates. Even if Aravive’s clinical product candidate is approved for commercial sale, it anticipates incurring significant costs associated with the commercial launch of and the related commercial-scale manufacturing requirements for its clinical product candidate. As a result, Aravive expects to continue to incur significant and increasing operating losses and negative cash flows for the foreseeable future. Because of the numerous risks and uncertainties associated with biopharmaceutical product development and commercialization, Aravive is unable to accurately predict the timing or amount of future expenses or when, or if, it will be able to achieve or maintain profitability. These losses have had and will continue to have an adverse effect on its financial position and working capital. As of December 31, 2017, Aravive had an accumulated deficit of $12.0 million and as of June 30, 2018, Aravive had an accumulated deficit of $13.8 million.

Aravive will require additional capital to fund its operations, and if Aravive fails to obtain necessary financing, it may not be able to complete the development and commercialization of its clinical product candidate.

Aravive expects to spend substantial amounts to complete the development of, seek regulatory approvals for and commercialize Aravive’s clinical product candidate. Even with the expected cash reserves of the combined company, Aravive will require substantial additional capital to complete the development and potential commercialization of its clinical product candidate and the development of other product candidates, if any. If Aravive is unable to raise capital or find appropriate partnering or licensing collaborations, when needed or on acceptable terms, it could be forced to delay, reduce or eliminate one or more of its development programs or any future commercialization efforts. In addition, attempting to secure additional financing may divert the time and attention of its management from day-to-day activities and harm its development efforts.

 

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Based upon its current operating plan, Aravive believes that the expected cash reserves of the combined company will enable it to fund its currently planned Phase 1b/2 clinical trial for ovarian cancer and potentially one or two additional clinical trials in different indications. Aravive’s estimate as to what it will be able to accomplish is based on assumptions that may prove to be inaccurate, and it could exhaust its available capital resources sooner than is currently expected. Because the length of time and activities associated with successful development of its clinical product candidate is highly uncertain, Aravive is unable to estimate the actual funds it will require for development and any approved marketing and commercialization activities. Aravive’s future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

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the initiation, progress, timing, costs and results of Aravive’s planned clinical trials;

 

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the number of product candidates it pursues;

 

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the outcome, timing and cost of meeting regulatory requirements established by the FDA, the European Medicines Agency, or EMA, and other comparable foreign regulatory authorities;

 

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

 

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the cost of defending potential intellectual property disputes, including any patent infringement actions brought by third parties against Aravive now or in the future;

 

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the effect of competing technological and market developments;

 

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the cost of establishing sales, marketing and distribution capabilities in regions where Aravive chooses to commercialize its clinical product candidate on its own; and

 

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the initiation, progress, timing and results of the commercialization of its clinical product candidate, if approved, for commercial sale.

Additional funding may not be available on acceptable terms, or at all. If Aravive is unable to raise additional capital in sufficient amounts or on terms acceptable to it, Aravive may have to significantly delay, scale back or discontinue the development or commercialization of its clinical product candidate or potentially discontinue operations. Aravive may also seek collaborators for one or more of its current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available. Any of these events could significantly harm its business, financial condition and prospects.

Raising additional funds by issuing securities may cause dilution to existing stockholders, and raising funds through lending and licensing arrangements may restrict Aravive’s operations or require it to relinquish proprietary rights.

Aravive expects that significant additional capital will be needed in the future to continue its planned operations and commercialize its clinical product candidate. Until such time, if ever, as Aravive can generate substantial product revenues, Aravive expects to finance its cash needs through a combination of equity offerings, debt financings, strategic alliances and license and development agreements in connection with any collaborations. Neither Aravive nor Versartis currently have any committed external source of funds. To the extent that Versartis raises additional capital by issuing equity securities, existing stockholders’ ownership may experience substantial dilution, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting Aravive’s or Versartis’ ability to take specific actions, such as incurring additional debt, making capital expenditures, declaring dividends, creating liens, redeeming its stock or making investments.

 

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If Aravive or Versartis raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, it may have to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to Aravive. If either Aravive or Versartis is unable to raise additional funds through equity or debt financings when needed, or through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties on acceptable terms, Aravive may be required to delay, limit, reduce or terminate its product development or future commercialization efforts or grant rights to develop and market product candidates that it would otherwise develop and market.

Risks Related To Aravive’s Business

Reliance on government funding for Aravive’s programs may impose requirements that limit Aravive’s ability to take certain actions, and subject it to potential financial penalties, which could materially and adversely affect its business, financial condition and results of operations.

A significant portion of Aravive’s funding has been through a grant it received from the Cancer Prevention and Research Institute of Texas, or CPRIT. The CPRIT Grant (as defined below) includes provisions that reflect the government’s substantial rights and remedies, many of which are not typically found in commercial contracts, including powers of the government to potentially require repayment of all or a portion of the grant award proceeds, in certain cases with interest, in the event Aravive violates certain covenants pertaining to various matters that include any potential relocation outside of the State of Texas. The CPRIT Grant contract terminates on May 31, 2019. After the termination date, Aravive is not permitted to retain any unused grant award proceeds without CPRIT’s approval, but Aravive’s royalty and other obligations, including its obligation to repay the disbursed grant proceeds under certain circumstances, survive the termination of the agreement.

Aravive’s award from CPRIT requires it to pay CPRIT a portion of its revenues from sales of certain products by it, or received from its licensees or sublicensees, at tiered percentages of revenue in the low- to mid-single digits until the aggregate amount of such payments equals 400% of the grant award proceeds, and thereafter at a rate of less than one percent for as long as Aravive maintains government exclusivity, subject to Aravive’s right, under certain circumstances, to make a one-time payment in a specified amount to CPRIT to terminate such payment obligations. In addition, the grant contract also contains a provision that provides for repayment to CPRIT of some amount not to exceed the full amount of the grant proceeds under certain specified circumstances involving relocation of Aravive’s principal place of business outside Texas.

The CPRIT Grant requires Aravive, as a Texas-based company, to meet certain criteria, including among other things, that Aravive maintain its headquarters in Texas and use certain vendors, consultants and employees that are located in Texas. As Aravive expands its operations, it will need to hire additional qualified personnel with expertise in preclinical testing, clinical research and testing, government regulation, formulation and manufacturing, sales and marketing and accounting and financing located in Texas. Aravive will compete for qualified individuals with numerous biopharmaceutical companies, universities and other research institutions. Competition for such individuals is intense, and there can be no assurance that the search for such personnel will be successful, especially in light of the territorial restrictions imposed by CPRIT. Attracting and retaining qualified personnel will be critical to Aravive’s access to the CPRIT Grant.

If Aravive fails to maintain compliance with any such requirements that may apply to it now or in the future, it may be subject to potential liability and to termination of its contracts, including potentially the CPRIT Grant.

 

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Aravive relies on licenses to use various technologies that are material to its business and if the agreements underlying the licenses were to be terminated or if other rights that may be necessary for commercializing its intended products cannot be obtained, it would halt Aravive’s ability to market its products and technology, as well as have an immediate material adverse effect on Aravive’s business, operating results and financial condition.

Aravive’s prospects are significantly dependent upon its license with Stanford University, or the Stanford License. The Stanford License grants Aravive exclusive, worldwide rights to certain existing patents and related intellectual property that cover Aravive-S6-500, the lead development candidate selected from the AVB-S6 family of proteins. If Aravive breaches the terms of the Stanford License, including any failure to make minimum royalty payments required thereunder or failure to reach certain developmental milestones and by certain deadlines or other factors, including but not limited to, the failure to comply with material terms of the Stanford License, the licensor has the right to terminate the license. If Aravive were to lose or otherwise be unable to maintain the license on acceptable terms, or find that it is necessary or appropriate to secure new licenses from other third parties, Aravive would not be able to market Aravive’s products and technology, which would likely require it to cease its current operations which would have an immediate material adverse effect on its business, operating results and financial condition.

Aravive currently only has one clinical product candidate in clinical development and is dependent on the success of this product candidate, which requires significant additional clinical testing before seeking regulatory approval. If its clinical product candidate does not receive regulatory approval or is not successfully commercialized, Aravive’s business may be harmed.

Aravive currently is developing one clinical product candidate, AVB-S6-500, as a potential treatment for several types of cancer and fibrosis. AVB-S6-500 is currently being tested in clinical trials and to date, Aravive has not had any product candidate that has been in late-stage clinical development or approved for commercial sale. It is possible that Aravive may never be able to develop a marketable product candidate. Aravive’s main focus and the investment of a significant portion of its efforts and financial resources has been in the development of AVB-S6-500, for which it has recently completed a Phase 1 clinical trial. Aravive expects that a substantial portion of its efforts and expenditures over the next few years will be devoted to AVB-S6-500, which is initially being developed for the treatment of ovarian cancer. Accordingly, Aravive’s business currently depends heavily on the successful development, regulatory approval and commercialization of AVB-S6-500. Aravive’s clinical product candidate may not receive regulatory approval or be successfully commercialized even if regulatory approval is received. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of product candidates are and will remain subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries that each have differing regulations. Aravive is not permitted to market its product in the United States until it receives approval of a biologics license application, or BLA, from the FDA, or in any foreign countries until it receives the requisite approval from such countries. Aravive has never submitted a BLA to the FDA or comparable applications to other regulatory authorities and does not expect to be in a position to do so for the foreseeable future. Obtaining approval of a BLA is an extensive, lengthy, expensive and inherently uncertain process, and the FDA may delay, limit or deny approval of its product for many reasons.

Aravive’s success depends largely upon its ability to advance its clinical product candidate, which is in early stages of development, through the various stages of drug development. If Aravive is unable to successfully advance or develop its clinical product candidate, its business will be materially harmed.

Aravive’s clinical product candidate is in early stages of clinical development and its commercial viability remains subject to the successful outcome of future preclinical studies, clinical trials, manufacturing processes, regulatory approvals and the risks generally inherent in the development of pharmaceutical product candidates. Failure to advance the development of Aravive’s clinical product candidate may have a material adverse effect on Aravive’s business. The long-term success of Aravive’s business ultimately depends upon Aravive’s ability to

 

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advance the development of its clinical product candidate through clinical trials, appropriately formulate and consistently manufacture them in accordance with strict specifications and regulations, obtain approval of Aravive’s clinical product candidate for sale by the FDA or similar regulatory authorities in other countries, and ultimately have its clinical product candidate successfully commercialized by Aravive or a strategic partner or licensee. Aravive cannot assure you that the results of its ongoing or future research, preclinical studies or clinical trials will support or justify the continued development of Aravive’s clinical product candidate, or that Aravive will ultimately receive approval from the FDA, or similar regulatory authorities in other countries, to advance the development of its clinical product candidate .

Aravive’s clinical product candidate must satisfy rigorous regulatory standards of safety, efficacy and manufacturing before Aravive can advance or complete their development and before they can be approved for sale by the FDA or similar regulatory authorities in other countries. To satisfy these standards, Aravive must engage in expensive and lengthy studies and clinical trials, develop acceptable and cost effective manufacturing processes, and obtain regulatory approval of Aravive’s clinical product candidate. Despite these efforts, Aravive’s clinical product candidate may not:

 

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demonstrate clinically meaningful therapeutic or other medical benefits as compared to a patient receiving no treatment or over existing drugs or other product candidates in development to treat the same patient population;

 

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be shown to be safe and effective in future preclinical studies or clinical trials;

 

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have the desired therapeutic or medical effects;

 

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be tolerable or free from undesirable or unexpected side effects;

 

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meet applicable regulatory standards;

 

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be capable of being appropriately formulated and manufactured in commercially suitable quantities or scale and at an acceptable cost; or

 

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be successfully commercialized by Aravive or by its licensees or collaborators.

Even if Aravive demonstrates favorable results in preclinical studies and early-stage clinical trials, it cannot assure you that the results of late-stage clinical trials will be sufficient to support the continued development of Aravive’s clinical product candidate. Many, if not most, companies in the pharmaceutical and biopharmaceutical industries have experienced significant delays, setbacks and failures in all stages of development, including late-stage clinical trials, even after achieving promising results in preclinical testing or early-stage clinical trials. Accordingly, results from completed preclinical studies and early-stage clinical trials of Aravive’s clinical product candidate may not be predictive of the results Aravive may obtain in future late-stage trials. Furthermore, even if the data collected from preclinical studies and clinical trials involving any of Aravive’s clinical product candidate demonstrate a satisfactory safety, tolerability and efficacy profile, such results may not be sufficient to obtain regulatory approval from the FDA in the United States, or other similar regulatory agencies in other jurisdictions, which is required to market and sell the product.

Clinical trials are risky, lengthy and expensive. Aravive incurs substantial expense for, and devotes significant time and resources to, preclinical testing and clinical trials, yet cannot be certain that these tests and trials will demonstrate that a product candidate is effective and well-tolerated, or will ever support its approval and commercial sale. For example, clinical trials require adequate supplies of clinical trial material and sufficient patient enrollment to power the study. Delays in patient enrollment can result in increased costs and longer development times. Even if Aravive, or a licensee or collaborator, if applicable, successfully complete clinical trials for Aravive’s clinical product candidate, Aravive or they might not file the required regulatory submissions in a timely manner and may not receive marketing approval for the clinical product candidate. Aravive cannot assure you that its clinical product candidate will successfully progress further through the drug development process, or ultimately will result in an approved and commercially viable product.

 

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Aravive has limited experience as a company conducting clinical trials.

Aravive is an early stage clinical stage company and its success is dependent upon its ability to obtain regulatory approval for and commercialization of its clinical product candidate, and it has not demonstrated an ability to perform the functions necessary for the approval or successful commercialization of any product candidate. The successful commercialization of any product candidate may require Aravive to perform a variety of functions, including:

 

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continuing to undertake preclinical development and successfully enroll subjects in clinical trials;

 

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participating in regulatory approval processes;

 

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formulating and manufacturing products; and

 

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conducting sales and marketing activities.

Aravive has limited experience conducting and enrolling subjects in clinical trials. While certain members of Aravive’s management and staff have significant experience in conducting clinical trials, to date, Aravive has not successfully completed any clinical trials as a company. Until recently, Aravive’s operations have been limited primarily to organizing and staffing its company, acquiring, developing and securing its proprietary technology and preparing for clinical trials of Aravive’s clinical product candidate. These operations provide a limited basis to assess Aravive’s ability to develop and commercialize its clinical product candidate.

Although Aravive has recruited a team that has significant experience with managing clinical trials, it has limited experience as a company in conducting its own clinical trials. In part because of this lack of experience, Aravive cannot guarantee that planned clinical trials will be completed on time, if at all. Large-scale trials require significant additional financial and management resources, monitoring and oversight, and reliance on third-party clinical investigators, consultants or contract research organizations, or CROs. Relying on third-party clinical investigators, CROs and manufacturers, which are all also subject to governmental oversight and regulations, may also cause Aravive to encounter delays that are outside of its control.

If Aravive fails to continue to develop and refine the dosage of its clinical product candidate, it may not obtain regulatory approvals, and even if approved, the commercial acceptance of its clinical product candidate would likely be limited.

In Aravive’s Phase 1 trial, it used doses ranging from 1 mg per kg per week to 10 mg per kg per week. Aravive believes that in order for its clinical product candidate to be commercially successful it may need to continue to refine its dosage. Increasing the dosage of the clinical product candidate may affect the safety profile of the clinical product candidate and manufacturing needs.

If the actual or perceived therapeutic benefits, or the safety or tolerability profile of Aravive’s clinical product candidate is not equal to or superior to other competing treatments approved for sale or in clinical development, Aravive may terminate the development of its clinical product candidate at any time, and Aravive’s business prospects and potential profitability could be harmed.

Aravive is aware of a number of companies marketing or developing product candidates for the treatment of patients with cancer that are either approved for sale or further advanced in clinical development than Aravive’s, such that their time to approval and commercialization may be shorter than that for Aravive’s clinical product candidate.

Currently, there are no approved biological drugs related to GAS6/AXL inhibition. However, if ever approved, Aravive’s clinical product candidate would indirectly compete with drugs approved to treat various types of cancer, such as those that regulate T-cell proliferation, including nivolumab, pembrolizumab, atezolizumab and other small molecule chemically manufactured drugs that target this pathway or other classes of drugs that are used for the clinical indications that Aravive is currently pursuing in clinic.

 

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If at any time Aravive believes that its clinical product candidate may not provide meaningful or differentiated therapeutic benefits, perceived or real, equal to or better than its competitor’s products or product candidates, or Aravive believes that its clinical product candidate may not have as favorable a safety or tolerability profile as potentially competitive compounds, Aravive may delay or terminate the future development of its clinical product candidate. Aravive cannot provide any assurance that the future development of its clinical product candidate will demonstrate any meaningful therapeutic benefits over potentially competitive compounds currently approved for sale or in development, or an acceptable safety or tolerability profile sufficient to justify its continued development.

For its planned Phase 1b/2 clinical trial testing AVB-S6-500 in patients with ovarian cancer, Aravive intends to administer its clinical product candidate in combination with other approved standard of care drugs. Any problems obtaining the standard of care drugs could result in a delay or interruption in its clinical trials.

For its planned Phase 1b/2 clinical trial of AVB-S6-500 for the treatment of patients with ovarian cancer, Aravive intends to administer its clinical product candidate in combination with already approved standard of care drugs. Therefore, Aravive’s success will be dependent upon the continued use of these other standard of care drugs. Aravive expects that in any other clinical trials it conducts for additional indications, its clinical product candidate will also be administered in combination with drugs owned by third parties. If any of the standard of care drugs that are used in Aravive’s clinical trials are unavailable while the trials are continuing, the timeliness and commercialization costs could be impacted. In addition, if any of these other drugs are determined to have safety of efficacy problems, Aravive’s clinical trials and commercialization efforts would be adversely affected.

Aravive’s clinical product candidate may exhibit undesirable side effects when used alone or in combination with other approved pharmaceutical products, which may delay or preclude its development or regulatory approval, or limit its use if ever approved.

Throughout the drug development process, Aravive must continually demonstrate the activity, safety and tolerability of its clinical product candidate in order to obtain regulatory approval to further advance its clinical development, or to eventually market it. Even if Aravive’s clinical product candidate demonstrates adequate biologic activity and clear clinical benefit, any unacceptable side effects or adverse events, when administered alone or in the presence of other pharmaceutical products, may outweigh these potential benefits. Aravive may observe adverse or serious adverse events or drug-drug interactions in preclinical studies or clinical trials of Aravive’s clinical product candidate, which could result in the delay or termination of its development, prevent regulatory approval, or limit its market acceptance if it is ultimately approved.

For its clinical product candidate, Aravive relies upon one third party to manufacture its drug substance. Any problems experienced by either its third-party manufacturer or its vendors could result in a delay or interruption in the supply of its clinical product candidate to Aravive until the third-party manufacturer or its vendor cures the problem or until Aravive locates and qualifies an alternative source of manufacturing and supply.

For its clinical product candidate, Aravive currently relies on one third-party manufacturer located in China to manufacture its clinical product candidate for its clinical studies and that manufacturer purchases from its third-party vendors and transports the materials necessary to produce its clinical product candidate, such as the required reagents and containers. If the third-party manufacturer were to experience any prolonged disruption for Aravive’s manufacturing, Aravive could be forced to seek additional third-party manufacturing contracts, thereby increasing its development costs and negatively impacting its timelines and any commercialization costs.

If Aravive’s manufacturer is not able to manufacture sufficient quantities of its clinical product candidate, Aravive’s development activities would be impaired. In addition, the manufacturing facility where Aravive’s clinical product candidate is manufactured is subject to ongoing, periodic inspection by the FDA or other comparable regulatory agencies to ensure compliance with current Good Manufacturing Practice, or cGMP. Any

 

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failure to follow and document the manufacturer’s adherence to such cGMP regulations or other regulatory requirements may lead to significant delays in the availability of clinical bulk drug substance and finished product for clinical trials, which may result in the termination of or a hold on a clinical trial, or may delay or prevent filing or approval of marketing applications for Aravive’s clinical product candidate. Aravive also may encounter problems with the following:

 

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achieving adequate or clinical-grade materials that meet FDA or other comparable regulatory agency standards or specifications with consistent and acceptable production yield and costs;

 

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Aravive’s contract manufacturers failing to develop an acceptable formulation to support late-stage clinical trials for, or the commercialization of, Aravive’s clinical product candidate;

 

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Aravive’s contract manufacturer being unable to increase the scale of or the capacity for, or reformulate the form of Aravive’s clinical product candidate, which may cause Aravive to experience a shortage in supply, or cause the cost to manufacture Aravive’s clinical product candidate to increase. Aravive cannot assure you that Aravive’s contract manufacturers will be able to manufacture Aravive’s clinical product candidate at a suitable commercial scale, or that Aravive will be able to find alternative manufacturers acceptable to Aravive that can do so;

 

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Aravive’s contract manufacturer placing a priority on the manufacture of other customers’ or its own products, rather than Aravive’s products;

 

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Aravive’s contract manufacturer or its vendors failing to perform as agreed, including failing to properly package, transport or store Aravive’s clinical product candidate or its reagents, or exiting from the contract manufacturing business;

 

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Aravive’s contract manufacturers’ plants being closed as a result of regulatory sanctions or a natural disaster;

 

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shortages of qualified personnel, raw materials or key contractors;

 

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Aravive’s contract manufacturers failing to obtain FDA approval for commercial scale manufacturing; and

 

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ongoing compliance with cGMP regulations and other requirements of the FDA or other comparable regulatory agencies.

If Aravive encounters any of these problems or is otherwise delayed, or if the cost of manufacturing in the China facility is not economically feasible or Aravive cannot find another third-party manufacturer, Aravive may not be able to produce its clinical product candidate in a sufficient quantity to meet future demand.

In addition, since Aravive relies on a third-party manufacturer located in China, its business is subject to risks associated with doing business in China, including:

 

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adverse political and economic conditions, particularly those potentially negatively affecting the trade relationship between the United States and China;

 

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trade protection measures, such as tariff increases, and import and export licensing and control requirements;

 

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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;

 

•

historically lower protection of intellectual property rights;

 

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changes and volatility in currency exchange rates;

 

•

unexpected or unfavorable changes in regulatory requirements;

 

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•

possible patient or physician preferences for more established pharmaceutical products and medical devices manufactured in the United States; and

 

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difficulties in managing foreign relationships and operations generally.

These risks are likely to be exacerbated by Aravive’s limited experience with its current products and manufacturing processes. If demand for Aravive products materializes, it may have to invest additional resources to purchase materials, hire and train employees, and enhance its manufacturing processes. It may not be possible for Aravive to manufacture its clinical product candidate at a cost or in quantities sufficient to make its clinical product candidate commercially viable. Any of these factors may affect Aravive’s ability to manufacture its products and could reduce gross margins and profitability.

Reliance on third-party manufacturers and suppliers entails risks to which Aravive would not be subject if Aravive manufactured its clinical product candidate itself, including:

 

•

reliance on the third parties for regulatory compliance and quality assurance;

 

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the possible breach of the manufacturing agreements by the third parties because of factors beyond Aravive’s control or the insolvency of any of these third parties or other financial difficulties, labor unrest, natural disasters or other factors adversely affecting their ability to conduct their business; and

 

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possibility of termination or non-renewal of the agreements by the third parties, at a time that is costly or inconvenient for us, because of Aravive’s breach of the manufacturing agreement or based on their own business priorities.

If Aravive’s contract manufacturer or its suppliers fail to deliver the required commercial quantities of Aravive’s clinical product candidate required for Aravive’s clinical trials and, if approved, for commercial sale, on a timely basis and at commercially reasonable prices, and Aravive is unable to find one or more replacement manufacturers or suppliers capable of production at a substantially equivalent cost, in substantially equivalent volumes and quality, and on a timely basis, Aravive would likely be unable to meet demand for Aravive’s products and would have to delay or terminate Aravive’s pre-clinical or clinical trials, and Aravive would lose potential revenue. It may also take a significant period of time to establish an alternative source of supply for Aravive’s clinical product candidate and to have any such new source approved by the FDA or any applicable foreign regulatory authorities. Furthermore, any of the above factors could cause the delay or suspension of initiation or completion of clinical trials, regulatory submissions or required approvals of Aravive’s clinical product candidate, cause it to incur higher costs and could prevent us from commercializing Aravive’s clinical product candidate successfully.

Aravive may not be able to manufacture its clinical product candidate in sufficient quantities to commercialize Aravive’s clinical product candidate.

In order to receive FDA approval of its clinical product candidate, Aravive will need to manufacture such clinical product candidate in larger quantities. Aravive’s third party manufacturer may not be willing or able to increase successfully the manufacturing capacity for its clinical product candidate in a timely or economic manner, or at all. In the event FDA approval is received, Aravive will need to increase production of its clinical product candidate. Significant scale-up of manufacturing may require additional validation studies, which the FDA must review and approve. If Aravive is unable to successfully increase the manufacturing capacity for its clinical product candidate, the clinical trials as well as the regulatory approval or commercial launch of Aravive’s clinical product candidate may be delayed or there may be a shortage in supply. Aravive’s clinical product candidate requires precise, high quality manufacturing. Failure to achieve and maintain high quality manufacturing, including the incidence of manufacturing errors, could result in patient injury or death, delays or failures in testing or delivery, cost overruns or other problems that could harm Aravive’s business, financial condition and results of operations.

 

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In the event that Aravive needs to change its third-party contract manufacturer, its preclinical studies or its clinical trials, the commercialization of its clinical product candidate could be delayed, adversely affected or terminated, or such a change may result in the need for Aravive to incur significantly higher costs, which could materially harm Aravive’s business.

Due to various regulatory restrictions in the United States and many other countries, as well as potential capacity constraints on manufacturing that occur from time-to-time in Aravive’s industry, various steps in the manufacture of Aravive’s clinical product candidate is solely-sourced from certain contract manufacturers. In accordance with cGMPs, changing manufacturers may require the re-validation of manufacturing processes and procedures, and may require further preclinical studies or clinical trials to show comparability between the materials produced by different manufacturers. Changing Aravive’s current or future contract manufacturers may be difficult, if not impossible for Aravive, and could be extremely costly if Aravive does make such a change, which could result in Aravive’s inability to manufacture its clinical product candidate for an extended period of time and a delay in the development of its clinical product candidate. Further, in order to maintain its development timelines in the event of a change in a third-party contract manufacturer, Aravive may incur significantly higher costs to manufacture its clinical product candidate.

If third-party vendors, upon whom Aravive relies to conduct its preclinical studies or clinical trials, do not perform or fail to comply with strict regulations, these studies or trials may be delayed, terminated, or fail, or Aravive could incur significant additional expenses, which could materially harm its business.

Aravive has limited resources dedicated to designing, conducting and managing Aravive’s preclinical studies and clinical trials. Aravive has historically relied on, and intends to continue to rely on, third parties, including clinical research organizations, or CROs, consultants and principal investigators, to assist it in designing, managing, conducting, monitoring and analyzing the data from its preclinical studies and clinical trials. Aravive relies on these vendors and individuals to perform many facets of the clinical development process on its behalf, including conducting preclinical studies, the recruitment of sites and subjects for participation in Aravive’s clinical trials, maintenance of good relations with the clinical sites, and ensuring that these sites are conducting Aravive’s trials in compliance with the trial protocol and applicable regulations. If these third parties fail to perform satisfactorily, or do not adequately fulfill their obligations under the terms of Aravive’s agreements with them, Aravive may not be able to enter into alternative arrangements without undue delay or additional expenditures, and therefore the preclinical studies and clinical trials of Aravive’s clinical product candidate may be delayed or prove unsuccessful.

Further, the FDA, the EMA, or similar regulatory authorities in other countries, may inspect some of the clinical sites participating in Aravive’s clinical trials or Aravive’s third-party vendors’ sites to determine if Aravive’s clinical trials are being conducted according to good clinical practices, or GCPs, or similar regulations. If Aravive or a regulatory authority determine that Aravive’s third-party vendors are not in compliance with, or have not conducted Aravive’s clinical trials according to applicable regulations, Aravive may be forced to exclude certain data from the results of the trial, or delay, repeat or terminate such clinical trials.

Aravive relies on third parties to conduct, supervise and monitor Aravive’s clinical trials, and if those third parties perform in an unsatisfactory manner, it may harm Aravive’s business.

Aravive relies on CROs and clinical trial sites to ensure the proper and timely conduct of its clinical trials, and Aravive expects to have limited influence over their actual performance.

Aravive also relies upon CROs to monitor and manage data for its clinical programs, as well as the execution of future nonclinical studies. Aravive expects to control only certain aspects of its CROs’ activities. Nevertheless, Aravive will be responsible for ensuring that each of its studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards and Aravive’s reliance on the CROs does not relieve Aravive of its regulatory responsibilities.

 

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Aravive and its CROs will be required to comply with the Good Laboratory Practices and GCPs, which are regulations and guidelines enforced by the FDA and are also required by the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities in the form of International Conference on Harmonization of Technical Requirements for Pharmaceuticals for Human Use guidelines for any of Aravive’s product candidates that are in preclinical and clinical development. The Regulatory authorities enforce GCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. If Aravive or its CROs fail to comply with GCPs, the clinical data generated in its clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require Aravive to perform additional clinical trials before approving Aravive’s marketing applications. Accordingly, if Aravive’s CROs fail to comply with these regulations or fail to recruit a sufficient number of subjects, Aravive may be required to repeat clinical trials, which would delay the regulatory approval process.

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

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

Aravive may seek to selectively establish collaborations, and, if it is unable to establish them on commercially reasonable terms, it may have to alter its development and commercialization plans.

Aravive’s product development programs and the potential commercialization of its clinical product candidate will require substantial additional cash to fund expenses. For some of its product candidates Aravive may decide to collaborate with governmental entities or additional pharmaceutical and biotechnology companies for the development and potential commercialization of its product candidates.

Aravive faces significant competition in seeking appropriate collaborators. Whether Aravive reaches a definitive agreement for a collaboration will depend, among other things, upon its assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to Aravive’s ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. The collaborator may also consider alternative product candidates for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with Aravive for its product candidate.

 

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Aravive’s future success depends on its ability to retain executive officers and attract, retain and motivate qualified personnel.

Aravive is highly dependent on its executive officers and the other principal members of the executive and scientific teams. The employment of Aravive’s executive officers are at-will and Aravive’s executive officers may terminate their employment at any time. The loss of the services of any of Aravive’s senior executive officers could impede the achievement of Aravive’s research, development and commercialization objectives. Aravive does not maintain “key person” insurance for any executive officer or employee.

Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel is also critical to Aravive’s success. Aravive may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel especially in light of the CPRIT Grant requirements, including the requirement that Aravive maintain its headquarters in Texas and use certain vendors, consultants and employees that are located in Texas. Aravive also experiences competition for the hiring of scientific and clinical personnel from universities and research institutions. Aravive’s industry has experienced an increasing rate of turnover of management and scientific personnel in recent years. In addition, Aravive relies on consultants and advisors, including scientific and clinical advisors, to assist it in devising Aravive’s research and development and commercialization strategy. Aravive’s consultants and advisors may be employed by third parties and have commitments under consulting or advisory contracts with other entities that may limit their availability to advance Aravive’s strategic objectives. If any of these advisors or consultants can no longer dedicate a sufficient amount of time to the company, Aravive’s business may be harmed.

Many of the other pharmaceutical companies that Aravive competes against for qualified personnel and consultants have greater financial and other resources, different risk profiles and a longer history in the industry than Aravive. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates and consultants than what it has to offer. If Aravive is unable to continue to attract and retain high-quality personnel and consultants, the rate and success at which it can select and develop its clinical product candidate and its business will be limited.

Aravive will need to expand its organization, and may experience difficulties in managing this growth, which could disrupt operations.

Aravive’s future financial performance, its ability to commercialize its clinical product candidate, and its ability to compete effectively will depend, in part, on Aravive’s ability to effectively manage any future growth. As of August 1, 2018, Aravive had five full time employees. Aravive expects to hire additional employees for Aravive’s managerial, clinical, scientific and engineering, operational, manufacturing, sales and marketing teams. Aravive may have operational difficulties in connection with identifying, hiring and integrating new personnel, especially in light of the CPRIT Grant requirements, including the requirement that Aravive maintain its headquarters in Texas and use certain vendors, consultants and employees that are located in Texas. Future growth would impose significant additional responsibilities on its management, including the need to identify, recruit, maintain, motivate and integrate additional employees, consultants and contractors. Also, Aravive’s management may need to divert a disproportionate amount of its attention away from Aravive’s day-to-day activities and devote a substantial amount of time to managing these growth activities. Aravive may not be able to effectively manage the expansion of its operations, which may result in weaknesses in its infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Aravive’s expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of its clinical product candidate. If Aravive is unable to effectively manage its growth, its expenses may increase more than expected, its ability to generate and/or grow revenues could be reduced, and Aravive may not be able to implement its business strategy.

 

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Risks Related to Clinical Development, Regulatory Approval and Commercialization

If the results from preclinical studies or clinical trials of Aravive’s clinical product candidate are unfavorable, Aravive could be delayed or precluded from the further development or commercialization of its clinical product candidate, which could materially harm Aravive’s business.

In order to further advance the development of, and ultimately receive marketing approval to sell Aravive’s clinical product candidate, Aravive must conduct extensive preclinical studies and clinical trials to demonstrate its safety and efficacy to the satisfaction of the FDA or similar regulatory authorities in other countries, as the case may be. Preclinical studies and clinical trials are expensive, complex, can take many years to complete, and have highly uncertain outcomes. Delays, setbacks, or failures can and do occur at any time, and in any phase of preclinical or clinical testing, and can result from concerns about safety, tolerability, toxicity, a lack of demonstrated biologic activity or improved efficacy over similar products that have been approved for sale or are in more advanced stages of development, poor study or trial design, and issues related to the formulation or manufacturing process of the materials used to conduct the trials. The results of prior preclinical studies or early-stage clinical trials are not predictive of the results Aravive may observe in late-stage clinical trials. In many cases, product candidates in clinical development may fail to show the desired tolerability, safety and efficacy characteristics, despite having favorably demonstrated such characteristics in preclinical studies or early-stage clinical trials.

In addition, Aravive may experience numerous unforeseen events during, or as a result of, preclinical studies and the clinical trial process, which could delay or impede Aravive’s ability to advance the development of, receive marketing approval for, or commercialize its clinical product candidate, including, but not limited to:

 

•

communications with the FDA, or similar regulatory authorities in different countries, regarding the scope or design of a trial or trials, or placing the development of a product candidate on clinical hold or delaying the next phase of development until questions or issues are satisfactorily resolved, including performing additional studies to answer their queries;

 

•

regulatory authorities or institutional review boards, or IRBs, not authorizing Aravive to commence or conduct a clinical trial at a prospective trial site;

 

•

enrollment in Aravive’s clinical trials being delayed, or proceeding at a slower pace than Aravive expected, because Aravive has difficulty recruiting participants or participants drop out of Aravive’s clinical trials at a higher rate than Aravive anticipated;

 

•

Aravive’s third-party contractors, upon whom Aravive relies to conduct preclinical studies, clinical trials and the manufacturing of Aravive’s clinical trial materials, failing to comply with regulatory requirements or meet their contractual obligations to Aravive in a timely manner;

 

•

having to suspend or ultimately terminate a clinical trial if participants are being exposed to unacceptable health or safety risks;

 

•

regulatory authorities or IRBs requiring that Aravive hold, suspend or terminate its preclinical studies and clinical trials for various reasons, including non-compliance with regulatory requirements; and

 

•

the supply or quality of material necessary to conduct Aravive’s preclinical studies or clinical trials being insufficient, inadequate or unavailable.

Even if the data collected from preclinical studies or clinical trials involving Aravive’s clinical product candidate demonstrate a satisfactory tolerability, safety and efficacy profile, such results may not be sufficient to support the submission of an NDA to obtain regulatory approval from the FDA in the United States, or other similar regulatory authorities in other foreign jurisdictions, which is required for Aravive to market and sell its clinical product candidate.

 

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Clinical trials are very expensive, time-consuming, difficult to design and implement and involve an uncertain outcome, and if they fail to demonstrate safety and efficacy to the satisfaction of the FDA, or similar regulatory authorities, Aravive will be unable to commercialize its clinical product candidate.

Aravive’s clinical product candidate is still in early-stage clinical development and will require extensive additional clinical testing before Aravive is prepared to submit a Biologics License Application, or BLA, for regulatory approval for any indication or for any other treatment regime. Aravive cannot predict with any certainty if or when it might submit a BLA for regulatory approval for its clinical product candidate, which has recently completed a Phase 1 clinical trial, or whether any such BLA will be approved by the FDA. Human clinical trials are very expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. For instance, the FDA may not agree with Aravive’s proposed endpoints for any clinical trial it proposes, which may delay the commencement of its clinical trials. The clinical trial process is also time-consuming. Furthermore, failure can occur at any stage of the trials, and it could encounter problems that cause it to abandon or repeat clinical trials. A product candidate 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, and the results of its Phase 1 clinical trial of the clinical product candidate as well as the pre-clinical results may not be predictive of the results of its planned Phase 2 trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials.

Moreover, preclinical and clinical data are often susceptible to multiple interpretations and analyses. Many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products. Success in preclinical testing and early clinical trials does not ensure that later clinical trials, which involve many more subjects and the results of later clinical trials may not replicate the results of prior clinical trials and preclinical testing.

Aravive may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent its ability to receive marketing approval or commercialize its clinical product candidate, including that:

 

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regulators or institutional review boards may not authorize Aravive or its investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

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it may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

 

•

clinical trials of Aravive’s clinical product candidate may produce negative or inconclusive results, and Aravive may decide, or regulators may require it, to conduct additional clinical trials or abandon product development programs;

 

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the number of subjects required for clinical trials of its clinical product candidate may be larger than Aravive anticipates; enrollment in these clinical trials may be slower than Aravive anticipates, or participants may drop out of these clinical trials at a higher rate than Aravive anticipates;

 

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Aravive third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to it in a timely manner, or at all;

 

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regulators or institutional review boards may require that Aravive or Aravive’s investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;

 

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the cost of clinical trials of its clinical product candidate may be greater than it anticipates; and

 

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the supply or quality of its clinical product candidate or other materials necessary to conduct clinical trials of Aravive’s clinical product candidate may be insufficient or inadequate.

If Aravive is required to conduct additional clinical trials or other testing of its clinical product candidate beyond those that it currently contemplates, if it is unable to successfully complete clinical trials of its clinical product

 

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candidate or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, Aravive may:

 

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be delayed in obtaining marketing approval for its clinical product candidate require additional funding not budgeted for;

 

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not obtain marketing approval at all;

 

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obtain approval for indications or patient populations that are not as broad as intended or desired;

 

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obtain approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings;

 

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be subject to additional post-marketing testing requirements; or

 

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have the product removed from the market after obtaining marketing approval.

Product development costs will also increase if Aravive experiences delays in testing or in receiving marketing approvals. Aravive does 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 Aravive may have the exclusive right to commercialize Aravive’s clinical product candidate, could allow its competitors to bring products to market before it does, and could impair its ability to successfully commercialize its clinical product candidate, any of which may harm its business and results of operations.

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

Aravive may encounter delays in enrolling, or be unable to enroll, a sufficient number of participants to complete any of its clinical trials. Once enrolled, Aravive may be unable to retain a sufficient number of participants to complete any of its trials. Late-stage clinical trials of its clinical product candidate may require the enrollment and retention of large numbers of subjects. Subject enrollment and retention in clinical trials depends on many factors, including the size of the subject population, the nature of the trial protocol, the existing body of safety and efficacy data with respect to the study drug, the number and nature of competing treatments and ongoing clinical trials of competing drugs for the same indication, the proximity of subjects to clinical sites and the eligibility criteria for the study.

Furthermore, any negative results Aravive may report in clinical trials of Aravive’s clinical product candidate may make it difficult or impossible to recruit and retain participants in other clinical trials of that same clinical product candidate. Delays or failures in planned subject enrollment or retention may result in increased costs, program delays or both, which could have a harmful effect on its ability to develop its clinical product candidate, or could render further development impossible. In addition, Aravive expects to rely on CROs and clinical trial sites to ensure proper and timely conduct of its future clinical trials and, while Aravive intends to enter into agreements governing their services, it will be limited in its ability to compel their actual performance in compliance with applicable regulations. Enforcement actions brought against these third parties may cause further delays and expenses related to its clinical development programs.

Aravive faces significant competition from other biotechnology and pharmaceutical companies, and its operating results will suffer if it fails to compete effectively.

Development of cancer treatments is highly competitive and subject to rapid and significant technological advancements. In particular, Aravive faces competition from various sources, including larger and better funded pharmaceutical, specialty pharmaceutical and biotechnology companies, as well as academic institutions, governmental agencies and public and private research institutions. These competitors are focused on delivering therapeutics for the treatment of various cancers with products that are available and have gained market acceptance as the standard treatment protocol. Further, it is likely that additional drugs or other treatments will become available in the future for the treatment of certain cancers.

 

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Many of Aravive’s existing or potential competitors have substantially greater financial, technical and human resources than it does and significantly greater experience in the discovery and development of products for the treatment of cancer, as well as in obtaining regulatory approvals of those products in the United States and in foreign countries. Aravive’s current and potential future competitors also have significantly more experience commercializing drugs that have been approved for marketing. Mergers and acquisitions in the pharmaceutical and biotechnology industries could result in even more resources being concentrated among a small number of its competitors.

Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Aravive’s competitors may succeed in developing, acquiring or licensing, on an exclusive basis, drugs that are more effective or less costly than any product candidate that it may develop.

Aravive will face competition from other drugs currently approved or that will be approved in the future for the treatment of the other infectious diseases it is currently targeting. Therefore, its ability to compete successfully will depend largely on its ability to:

 

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

 

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demonstrate through its clinical trials that its clinical product candidate is differentiated from existing and future therapies;

 

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attract qualified scientific and commercial personnel;

 

•

obtain patent or other proprietary protection for its clinical product candidate;

 

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obtain required regulatory approvals;

 

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

 

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successfully develop and commercialize, independently or with collaborators, new product candidates.

The availability of Aravive’s competitors’ products could limit the demand, and the price it is able to charge, for any product candidate it develops. The inability to compete with existing or subsequently introduced therapies would have an adverse impact on Aravive’s business, financial condition and prospects.

Established pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make its product candidate less competitive. In addition, any new products that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome price competition and to be commercially successful. Accordingly, Aravive’s competitors may succeed in obtaining patent protection, discovering, developing, receiving the FDA’s approval for or commercializing medicines before Aravive does, which would have an adverse impact on its business and results of operations.

Aravive’s clinical product candidate may cause adverse effects or have other properties that could delay or prevent their regulatory approval or limit the scope of any approved label or market acceptance.

Adverse events caused by Aravive’s clinical product candidate could cause reviewing entities, clinical trial sites or regulatory authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval. If an unacceptable frequency or severity of adverse events are reported in its clinical trials for its clinical product candidate, its ability to obtain regulatory approval for such clinical product candidate may be negatively impacted.

 

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Furthermore, if any of its products are approved and then cause serious or unexpected side effects, a number of potentially significant negative consequences could result, including:

 

•

regulatory authorities may withdraw their approval of the product candidate or impose restrictions on its distribution or other risk management measures;

 

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regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;

 

•

Aravive may be required to conduct additional clinical trials;

 

•

Aravive could be sued and held liable for injuries sustained by patients;

 

•

Aravive could elect to discontinue the sale of its product candidate; and

 

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Aravive’s reputation may suffer.

Any of these events could prevent Aravive from achieving or maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercialization.

Aravive’s employees, independent contractors, principal investigators, consultants, commercial collaborators, service providers and other vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have an adverse effect on Aravive’s results of operations.

Aravive is exposed to the risk that its employees and contractors, including principal investigators, consultants, commercial collaborators, service providers and other vendors may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or other unauthorized activities that violate the laws and regulations of the FDA and other similar regulatory bodies, including those laws that require the reporting of true, complete and accurate information to such regulatory bodies, manufacturing standards, federal and state healthcare fraud and abuse and health regulatory laws and other similar foreign fraudulent misconduct laws, or laws that require the true, complete and accurate reporting of financial information or data. Misconduct by these parties may also involve the improper use or misrepresentation of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to Aravive’s reputation. It is not always possible to identify and deter third-party misconduct, and the precautions Aravive takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting it from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against Aravive, and it is not successful in defending Aravive or asserting its rights, those actions could have a significant impact on Aravive’s business and financial results, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, reputational harm, diminished profits and future earnings, and curtailment of its operations, any of which could adversely affect Aravive’s ability to operate its business and Aravive’s results of operations.

Aravive’s business and operations would suffer in the event of system failures.

Aravive’s computer systems and those of its service providers, including its CROs, are vulnerable to damage from computer viruses, unauthorized access, natural disasters (including hurricanes), terrorism, war and telecommunication and electrical failures. If such an event were to occur and cause interruptions in Aravive’s or their operations, it could result in a material disruption of its development programs. For example, the loss of preclinical or clinical trial data from completed, ongoing or planned trials could result in delays in its regulatory approval efforts and significantly increase Aravive’s costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of or damage to data or applications, or inappropriate disclosure of personal, confidential or proprietary information, Aravive could incur liability and the further development of its clinical product candidate could be delayed.

 

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If Aravive is not able to obtain, or if there are delays in obtaining, required regulatory approvals, it will not be able to commercialize, or will be delayed in commercializing, its clinical product candidate, and its ability to generate revenue will be impaired.

Aravive’s clinical product candidate and the activities associated with its development and commercialization, including its design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. Failure to obtain marketing approval for a clinical product candidate will prevent Aravive from commercializing the clinical product candidate. Aravive has not received approval to market its clinical product candidate from regulatory authorities in any jurisdiction. Aravive has only limited experience in filing and supporting the applications necessary to gain marketing approvals and expect to rely on CROs to assist it in this process. Securing regulatory approval requires the submission of extensive preclinical and clinical data and supporting information to the various regulatory authorities for each therapeutic indication to establish the clinical product candidate’s safety and efficacy. Securing regulatory approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the relevant regulatory authority. Aravive’s clinical product candidate may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude it obtaining marketing approval or prevent or limit commercial use.

The process of obtaining marketing approvals, both in the United States and elsewhere, is expensive, may take many years and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidate involved. Aravive cannot assure you that it will ever obtain any marketing approvals in any jurisdiction. The fact that the FDA has designated the investigation of Aravive’s lead development candidate for platinum-resistant recurrent ovarian cancer as a Fast Track development program, while potentially favorable, provides no assurance as to the timing or outcome of any FDA regulatory process. Fast Track status may be withdrawn if the conditions for such designation are no longer met. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations or changes in regulatory review for each submitted product application may cause delays in the approval or rejection of an application. The FDA and comparable authorities in other countries have substantial discretion in the approval process and may refuse to accept any application or may decide that Aravive’s data is insufficient for approval and require additional preclinical or other studies, and clinical trials. In addition, varying interpretations of the data obtained from preclinical testing and clinical trials could delay, limit or prevent marketing approval of a product candidate. Additionally, any marketing approval Aravive ultimately obtains may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

Even if Aravive obtains FDA approval in the United States, it may never obtain approval for or commercialize its clinical product candidate in any other jurisdiction, which would limit its ability to realize each product’s full market potential.

In order to market Aravive’s clinical product candidate in a particular jurisdiction, Aravive must establish and comply with numerous and varying regulatory requirements on a country-by-country basis regarding safety and efficacy. Approval by the FDA in the United States does not ensure approval by regulatory authorities in other countries or jurisdictions. In addition, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not guarantee regulatory approval in any other country. Approval processes vary among countries and can involve additional product candidate testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for Aravive and require additional preclinical studies or clinical trials which could be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of its clinical product candidate in those countries. Aravive does not have any product candidates approved for sale in any jurisdiction, including in international markets, and it does not have experience in obtaining regulatory approval in international markets. If Aravive fails to comply with regulatory

 

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requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are delayed, Aravive’s target market will be reduced and Aravive’s ability to realize the full market potential of any product candidate Aravive develops will be unrealized.

Even if Aravive obtains regulatory approval, it will still face extensive ongoing regulatory requirements and its clinical product candidate may face future development and regulatory difficulties.

Any product candidate for which Aravive obtains marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, packaging, distribution, adverse event reporting, storage, recordkeeping, export, import, advertising and promotional activities for such product candidate, among other things, will be subject to extensive and ongoing requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety, efficacy and other post-marketing information and reports, establishment registration and drug listing requirements, continued compliance with current Good Manufacturing Practice, or cGMP, requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping and current GCP requirements for any clinical trials that Aravive conducts post-approval. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product candidate may be marketed or to the conditions of approval. If its clinical product candidate receives marketing approval, the accompanying label may limit the approved use of Aravive’s product, which could limit sales.

The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety and/or efficacy of its clinical product candidate. The FDA closely regulates the post-approval marketing and promotion of drugs to ensure drugs are marketed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and if Aravive does not market Aravive’s clinical product candidate for its approved indications, Aravive may be subject to enforcement action for off-label marketing. Violations of the Federal Food, Drug, and Cosmetic Act relating to the promotion of prescription drugs may lead to FDA enforcement actions and investigations alleging violations of federal and state health care fraud and abuse laws, as well as state consumer protection laws.

In addition, later discovery of previously unknown adverse events or other problems with Aravive’s clinical product candidate, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

 

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restrictions on manufacturing such clinical product candidate;

 

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restrictions on the labeling or marketing of such clinical product candidate;

 

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restrictions on product distribution or use;

 

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requirements to conduct post-marketing studies or clinical trials;

 

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warning letters;

 

•

withdrawal of the clinical product candidate from the market;

 

•

refusal to approve pending applications or supplements to approved applications that Aravive submits;

 

•

recall of such clinical product candidate;

 

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fines, restitution or disgorgement of profits or revenues;

 

•

suspension or withdrawal of marketing approvals;

 

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refusal to permit the import or export of such clinical product candidate;

 

•

clinical product candidate seizure; or

 

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injunctions or the imposition of civil or criminal penalties.

 

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The FDA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of its clinical product candidate. If Aravive is slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if Aravive is not able to maintain regulatory compliance, it may lose any marketing approval that it may have obtained.

Even if Aravive’s clinical product candidate receives marketing approval, it may fail to achieve market acceptance by physicians, patients, third-party payors or others in the medical community necessary for commercial success.

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

 

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the efficacy and potential advantages compared to alternative treatments;

 

•

effectiveness of sales and marketing efforts;

 

•

the cost of treatment in relation to alternative treatments;

 

•

Aravive’s ability to offer its clinical product candidate for sale at competitive prices;

 

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the convenience and ease of administration compared to alternative treatments;

 

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

 

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the willingness of the medical community to offer customers its product candidate option in addition to or in the place of Aravive’s clinical product candidate;

 

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the strength of marketing and distribution support;

 

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the availability of third-party coverage and adequate reimbursement;

 

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the prevalence and severity of any side effects; and

 

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any restrictions on the use of its product together with other medications.

Because Aravive expects sales of its clinical product candidate to be based on the same mechanism of action, the failure of its first product candidate to achieve market acceptance would harm its business and could require it to seek additional financing sooner than it otherwise plans.

If Aravive fails to obtain or maintain adequate coverage and reimbursement for its clinical product candidate, its ability to generate revenue could be limited.

The availability and extent of reimbursement by governmental and private payors is essential for most patients to be able to afford expensive treatments. Sales of Aravive’s clinical product candidate that receive marketing approval will depend substantially, both in the United States and internationally, on the extent to which the costs of its clinical product candidate will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government health administration authorities, private health coverage insurers and other third-party payors. If reimbursement is not available, or is available only on a limited basis, Aravive may not be able to successfully commercialize Aravive’s clinical product candidate. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow Aravive to establish or maintain adequate pricing that will allow it to realize a sufficient return on Aravive’s investment.

Outside the United States, international operations are generally subject to extensive governmental price controls and other market regulations, and Aravive believes the increasing emphasis on cost-containment initiatives in

 

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Europe, Canada and other countries may cause Aravive to price Aravive’s clinical product candidate on less favorable terms that it currently anticipates. In many countries, particularly the countries of the European Union, the prices of medical products are subject to varying price control mechanisms as part of national health systems. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, Aravive may be required to conduct a clinical trial that compares the cost-effectiveness of its clinical product candidate to other available therapies. In general, the prices of products under such systems are substantially lower than in the United States. Other countries allow companies to fix their own prices for products, but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that it is able to charge for its clinical product candidate. Accordingly, in markets outside the United States, the reimbursement for its products may be reduced compared with the United States and may be insufficient to generate commercially reasonable revenues and profits.

Moreover, increasing efforts by governmental and third-party payors, in the United States and internationally, to cap or reduce healthcare costs may cause such organizations to limit both coverage and level of reimbursement for newly approved products and, as a result, they may not cover or provide adequate payment for its clinical product candidate. Aravive expects to experience pricing pressures in connection with the sale of its clinical product candidate due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs and surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected for new products entering the marketplace.

If Aravive fails to comply with state and federal healthcare regulatory laws, it could face substantial penalties, damages, fines, disgorgement, exclusion from participation in governmental healthcare programs, and the curtailment of its operations, any of which could harm its business.

Although Aravive does not provide healthcare services or submit claims for third-party reimbursement, it is subject to healthcare fraud and abuse regulation and enforcement by federal and state governments which could significantly impact its business. The laws that may affect its ability to operate include, but are not limited to:

 

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the federal anti-kickback statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering, or paying remuneration, directly or indirectly, in cash or in kind, in exchange for or to induce either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of this statute or specific intent to violate it;

 

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the civil False Claims Act, or FCA, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent; knowingly making using, or causing to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government; or knowingly making, using, or causing to be made or used, a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

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the criminal FCA, which imposes criminal fines or imprisonment against individuals or entities who make or present a claim to the government knowing such claim to be false, fictitious or fraudulent;

 

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HIPAA, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

 

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the federal civil monetary penalties statute, which prohibits, among other things, the offering or giving of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular supplier of items or services reimbursable by a Federal or state governmental program;

 

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•

the federal physician sunshine requirements under the Affordable Care Act, which require certain manufacturers of drugs, devices, biologics, and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members; and

 

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state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require pharmaceutical companies to comply with the device industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; and state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures.

Further, the Affordable Care Act, among other things, amended the intent requirements of the federal anti-kickback statute and certain criminal statutes governing healthcare fraud. A person or entity can now be found guilty of violating the statute without actual knowledge of the statute or specific intent to violate it. In addition, the Affordable Care Act provided 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 FCA. Moreover, while it does not submit claims and its customers make the ultimate decision on how to submit claims, from time to time, Aravive may provide reimbursement guidance to its customers. If a government authority were to conclude that Aravive provided improper advice to its customers or encouraged the submission of false claims for reimbursement, it could face action against it by government authorities. Any violations of these laws, or any action against Aravive for violation of these laws, even if Aravive successfully defends against it, could result in a material adverse effect on its reputation, business, results of operations and financial condition.

Aravive has entered into consulting and scientific advisory board arrangements with physicians and other healthcare providers. Compensation for some of these arrangements includes the provision of stock options. While Aravive has worked to structure Aravive’s arrangements to comply with applicable laws, because of the complex and far-reaching nature of these laws, regulatory agencies may view these transactions as prohibited arrangements that must be restructured, or discontinued, or for which it could be subject to other significant penalties. Aravive could be adversely affected if regulatory agencies interpret Aravive’s financial relationships with providers who influence the ordering of and use Aravive’s products to be in violation of applicable laws.

The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal and state enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry.

Responding to investigations can be time- and resource-consuming and can divert management’s attention from the business. Additionally, as a result of these investigations, healthcare providers and entities may have to agree to additional onerous compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase Aravive’s costs or otherwise have an adverse effect on its business.

Product liability lawsuits against Aravive could cause it to incur substantial liabilities and could limit the commercialization of any product candidates it may develop.

Aravive faces an inherent risk of product liability exposure related to the testing of its clinical product candidate in human clinical trials and will face an even greater risk if it commercially sells any products that it may develop

 

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after approval. For instance, since Aravive’s Phase 1 clinical trial was conducted in healthy human volunteers, any adverse reactions will be deemed to be related to its clinical product candidate and could result in claims from these injuries and Aravive could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

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decreased demand for any product candidates that it may develop;

 

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injury to Aravive’s reputation and significant negative media attention;

 

•

withdrawal of clinical trial participants;

 

•

significant costs to defend any related litigation;

 

•

substantial monetary awards to trial subjects or patients;

 

•

loss of revenue; and

 

•

the inability to commercialize any products it may develop.

Although Aravive maintains product liability insurance coverage in the amount of up to $10 million per claim and in the aggregate, it may not be adequate to cover all liabilities that it may incur. Aravive anticipates that it will need to increase its insurance coverage as it continues clinical trials and if it successfully commercializes any products. Insurance coverage is increasingly expensive. Aravive may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

If Aravive is unable to establish sales, marketing and distribution capabilities either on its own or in collaboration with third parties, it may not be successful in commercializing Aravive’s clinical product candidate, if approved.

Aravive does not have any infrastructure for the sales, marketing or distribution of its clinical product candidate, and the cost of establishing and maintaining such an organization may exceed the cost-effectiveness of doing so. In order to market any product candidate that may be approved, it must build Aravive’s sales, distribution, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. To achieve commercial success for any product candidate for which it has obtained marketing approval, it will need a sales and marketing organization. Aravive expects to build a focused sales, distribution and marketing infrastructure to market any other product candidates in the United States, if approved. There are significant expenses and risks involved with establishing its own sales, marketing and distribution capabilities, including its ability to hire, retain and appropriately incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel, and effectively manage a geographically dispersed sales and marketing team. Any failure or delay in the development of its internal sales, marketing and distribution capabilities could delay any product candidate launch, which would adversely impact commercialization.

Factors that may inhibit Aravive’s efforts to commercialize Aravive’s clinical product candidate on its own include:

 

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Aravive’s inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;

 

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the inability of sales personnel to obtain access to physicians or attain adequate numbers of physicians to administer its products; and

 

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unforeseen costs and expenses associated with creating an independent sales and marketing organization.

Aravive intends to pursue collaborative arrangements regarding the sale and marketing of its clinical product candidate, if approved, for certain international markets; however, it may not be able to establish or maintain

 

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such collaborative arrangements, if able to do so, that its collaborators may not have effective sales. To the extent that Aravive depends on third parties for marketing and distribution, any revenues it receives will depend upon the efforts of such third parties, and there can be no assurance that such efforts will be successful.

If Aravive is unable to build its own sales force in the United States or negotiate a collaborative relationship for the commercialization of its clinical product candidate outside the United States it may be forced to delay the potential commercialization or reduce the scope of its sales or marketing activities. Aravive could have to enter into arrangements with third parties or otherwise at an earlier stage than it would otherwise choose and it may be required to relinquish rights to its intellectual property or otherwise agree to terms unfavorable to it, any of which may have an adverse effect on its business, operating results and prospects.

Aravive may be competing with many companies that currently have extensive and well-funded marketing and sales operations. Without an internal team or the support of a third-party to perform marketing and sales functions, it may be unable to compete successfully against these more established companies.

If Aravive obtains approval to commercialize its clinical product candidate outside of the United States, a variety of risks associated with international operations could harm its business.

If its clinical product candidate is approved for commercialization, Aravive intends to enter into agreements with third parties to market them in certain jurisdictions outside the United States. Aravive expects that it will be subject to additional risks related to international operations or entering into international business relationships, including:

 

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

 

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reduced protection for intellectual property rights;

 

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unexpected changes in tariffs, trade barriers and regulatory requirements;

 

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

 

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

 

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foreign reimbursement, pricing and insurance regimes;

 

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foreign taxes;

 

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

 

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

 

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potential noncompliance with the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.K. Bribery Act 2010 and similar anti-bribery and anticorruption laws in other jurisdictions;

 

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

 

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

Aravive has no prior experience in these areas. In addition, there are complex regulatory, tax, labor and other legal requirements imposed by both the European Union and many of the individual countries in Europe with which it will need to comply.

 

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Recently enacted and future legislation may increase the difficulty and cost for Aravive to obtain marketing approval of and commercialize Aravive’s clinical product candidate and affect the prices Aravive may obtain.

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of Aravive’s clinical product candidate, restrict or regulate post-approval activities and affect Aravive’s ability to profitably sell any product candidate for which it obtains marketing approval.

For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act, collectively the Affordable Care Act, was enacted to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for health care and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Although the full effect of the Affordable Care Act may not yet be fully understood, the law has continued the downward pressure on pharmaceutical pricing, especially under the Medicare program, and increased the industry’s regulatory burdens and operating costs.

Moreover, the Drug Supply Chain Security Act imposes obligations on manufacturers of prescription drugs in finished dosage forms. Aravive has not yet adopted the significant measures that will be required to comply with this law. Aravive is not sure whether additional legislative changes will be enacted, or whether the current regulations, guidance or interpretations will be changed, or what the impact of such changes on Aravive’s business, if any, may be.

Aravive expects that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products, which could result in reduced demand for its clinical product candidate or additional pricing pressures.

Risks Related to Aravive’s Intellectual Property

If Aravive is unable to obtain and maintain patent protection for its clinical product candidate or if the scope of the patent protection obtained is not sufficiently broad, it may not be able to compete effectively in its markets.

Aravive relies upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to its drug development programs and clinical product candidate. Aravive’s success depends in large part on its ability to obtain and maintain patent protection in the United States and other countries. Aravive seeks to protect its proprietary position by filing patent applications in the United States and abroad related to its development programs and clinical product candidate. The patent prosecution process is expensive and time-consuming, and Aravive 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 Aravive will fail to identify patentable aspects of its research and development output before it is too late to obtain patent protection. The patent applications that Aravive owns or in-licenses may fail to result in issued patents with claims that cover its product candidates in the United States or in other countries. There is no assurance that the entire potentially relevant prior art relating to its patents and patent applications has been found, which can invalidate a patent or prevent a patent from issuing from a pending patent application. Even if patents do successfully issue, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed, invalidated, or held unenforceable. Any successful challenge to these patents or any other patents owned by or licensed to Aravive could deprive it of rights necessary for the successful commercialization of its product candidates or companion diagnostic that it may develop. Further, if Aravive encounters delays in regulatory approvals, the period of time during which Aravive could market a product candidate and companion diagnostic under patent protection could be reduced.

If the patent applications Aravive holds with respect to its platform technology and clinical product candidate fail to issue, if their breadth or strength of protection is threatened, or if they fail to provide meaningful exclusivity

 

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for its clinical product candidate, it could dissuade companies from collaborating with Aravive to develop future product candidates, and threaten Aravive’s ability to commercialize future drugs. Any such outcome could harm its business.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. In addition, the laws of foreign countries may not protect its rights to the same extent as the laws of the United States. For example, European patent law restricts the patentability of methods of treatment of the human body more than U.S. law does. Publications of discoveries in scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, Aravive cannot know with certainty whether it was the first to make the inventions claimed in its owned or licensed patents or pending patent applications, or that it was the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, enforceability and commercial value of its patent rights are highly uncertain. Aravive’s pending and future patent applications may not result in patents being issued which protect its technology or product candidates, in whole or in part, or which effectively prevent others from commercializing competitive technologies. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of Aravive’s patents or narrow the scope of its patent protection.

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of its patent applications and the enforcement or defense of its issued patents. On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications are prosecuted and may also affect patent litigation. The U.S. Patent Office recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of Aravive’s business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of Aravive’s patent applications and the enforcement or defense of Aravive’s issued patents, all of which could have an adverse effect on Aravive’s business and financial condition.

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

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and its owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit its ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of its technology and product candidates. Moreover, patents have a limited lifespan. In the United States and other countries, the natural expiration of a patent is generally 20 years after it is filed. Various extensions may be available; however the life of a patent, and the protection it affords, is limited. Without patent protection for its current or future product candidates, Aravive may be open to competition from generic versions of such product candidates. Given the amount of time required

 

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for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, Aravive’s owned and licensed patent portfolio may not provide it with sufficient rights to exclude others from commercializing product candidates similar or identical to Aravive’s.

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

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

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

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of Aravive’s confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have an adverse effect on the price of its common stock.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing Aravive’s ability to protect Aravive’s clinical product candidate.

The United States has recently enacted and implemented wide-ranging patent reform legislation. The United States Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to Aravive’s ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on actions by the

 

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U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken Aravive’s ability to obtain new patents or to enforce patents that it has licensed or that it might obtain in the future.

If a third-party claims Aravive is infringing on its intellectual property rights, Aravive could incur significant expenses, or be prevented from further developing or commercializing its clinical product candidate, which could materially harm Aravive’s business.

Aravive’s success will also depend on Aravive’s ability to operate without infringing the patents and other proprietary intellectual property rights of third parties. This is generally referred to as having the “freedom to operate.” Aravive has only conducted routine searches related to third party patent filings and publications and has not conducted an in depth freedom to operate search which is extremely time consuming and costly. The biotechnology and pharmaceutical industries are characterized by extensive litigation regarding patents and other intellectual property rights. The defense and prosecution of intellectual property claims, interference proceedings and related legal and administrative proceedings, both in the United States and internationally, involve complex legal and factual questions. As a result, such proceedings are lengthy, costly and time-consuming, and their outcome is highly uncertain. Aravive may become involved in protracted and expensive litigation in order to determine the enforceability, scope and validity of the proprietary rights of others, or to determine whether Aravive has the freedom to operate with respect to the intellectual property rights of others.

Patent applications in the United States are, in most cases, maintained in secrecy until approximately 18 months after the patent application is filed. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made. Therefore, patent applications relating to product candidates similar to Aravive’s may have already been filed by others without Aravive’s knowledge. In the event that a third-party has also filed a patent application covering Aravive’s clinical product candidate or other claims, Aravive may have to participate in an adversarial proceeding, known as an interference proceeding, in the U.S. Patent and Trademark Office, or USPTO, or similar proceedings in other countries, to determine the priority of invention. In the event an infringement claim is brought against Aravive, Aravive may be required to pay substantial legal fees and other expenses to defend such a claim and, if Aravive is unsuccessful in defending the claim, Aravive may be prevented from pursuing the development and commercialization of a product candidate and may be subject to injunctions and/or damage awards.

In the future, the USPTO or a foreign patent office may grant patent rights to Aravive’s clinical product candidate or other claims to third parties. Subject to the issuance of these future patents, the claims of which will be unknown until issued, Aravive may need to obtain a license or sublicense to these rights in order to have the appropriate freedom to further develop or commercialize them. Any required licenses may not be available to Aravive on acceptable terms, if at all. If Aravive needs to obtain such licenses or sublicenses, but is unable to do so, Aravive could encounter delays in the development of Aravive’s clinical product candidate, or be prevented from developing, manufacturing and commercializing Aravive’s clinical product candidate at all. If it is determined that Aravive has infringed an issued patent and does not have the freedom to operate, Aravive could be subject to injunctions, and/or compelled to pay significant damages, including punitive damages. In cases where Aravive has in-licensed intellectual property, Aravive’s failure to comply with the terms and conditions of such agreements could harm Aravive’s business.

It is becoming common for third parties to challenge patent claims on any successfully developed product candidate or approved drug. If Aravive or its licensees or collaborators become involved in any patent litigation, interference or other legal proceedings, Aravive could incur substantial expense, and the efforts and attention of Aravive’s technical and management personnel could be significantly diverted. A negative outcome of such litigation or proceedings may expose Aravive to the loss of Aravive’s proprietary position or to significant liabilities, or require Aravive to seek licenses that may not be available from third parties on commercially acceptable terms, if at all. Aravive may be restricted or prevented from developing, manufacturing and selling Aravive’s clinical product candidate in the event of an adverse determination in a judicial or administrative proceeding, or if Aravive fails to obtain necessary licenses.

 

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

Filing, prosecuting and defending patents covering Aravive’s clinical product candidate throughout the world would be prohibitively expensive. Competitors may use its technologies in jurisdictions where it has not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where Aravive may obtain patent protection, but where patent enforcement is not as strong as that in the United States. These other products may compete with Aravive’s clinical product candidate in jurisdictions where Aravive does not have any issued or licensed patents and any future patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.

Aravive’s reliance on third parties requires it to share its trade secrets, which increases the possibility that a competitor will discover them or that its trade secrets will be misappropriated or disclosed.

Aravive seeks to protect its proprietary technology in part by entering into confidentiality agreements with third parties and, if applicable, material transfer agreements, consulting agreements or other similar agreements with its advisors, employees, third-party contractors and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose Aravive’s confidential information, including its trade secrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by its competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that Aravive’s proprietary position is based, in part, on its know-how and trade secrets, a competitor’s discovery of Aravive’s trade secrets or other unauthorized use or disclosure would impair its competitive position and may have an adverse effect on its business and results of operations.

In addition, these agreements typically restrict the ability of its advisors, employees, third-party contractors and consultants to publish data potentially relating to its trade secrets, although Aravive’s agreements may contain certain limited publication rights. Despite its efforts to protect its trade secrets, its competitors may discover its trade secrets, either through breach of Aravive’s agreements with third parties, independent development or publication of information by any of its third-party collaborators. A competitor’s discovery of Aravive’s trade secrets would impair its competitive position and have an adverse impact on Aravive’s business.

Obtaining and maintaining Aravive’s patent protection depends on compliance with various procedural, document submissions, fee payment and other requirements imposed by governmental patent agencies, and Aravive’s patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary fee payments and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If Aravive and its licensors fail to maintain the patents and patent applications covering Aravive’s clinical product candidate, Aravive’s competitive position would be adversely affected.

Aravive may be subject to claims that Aravive’s employees have wrongfully used or disclosed alleged trade secrets of their former employers.

Many of Aravive’s employees, including its senior management, were previously employed at other biotechnology or pharmaceutical companies. These employees typically executed proprietary rights,

 

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non-disclosure and non-competition agreements in connection with their previous employment. Although Aravive tries to ensure that Aravive’s employees do not use the proprietary information or know-how of others in their work for Aravive, Aravive may be subject to claims that it or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. Aravive is not aware of any threatened or pending claims related to these matters, but in the future litigation may be necessary to defend against such claims. If Aravive fails in defending any such claims, in addition to paying monetary damages, Aravive may lose valuable intellectual property rights or personnel. Even if Aravive is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

Risks Related to the Combined Company

In determining whether you should approve the issuance of shares of Versartis common stock and other matters related to the merger, as the case may be, you should carefully read the following risk factors in addition to the risks described above, which will also apply to the combined company.

The combined company’s stock price is expected to be volatile, and the market price of its common stock may drop following the merger.

The market price of the combined company’s common stock following the merger could be subject to significant fluctuations following the merger. Market prices for securities of early-stage pharmaceutical, biotechnology and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of the combined company’s common stock to fluctuate include:

 

•

the ability of the combined company or its partners to develop product candidates and conduct clinical trials that demonstrate such product candidates are safe and effective;

 

•

the ability of the combined company or its partners to obtain regulatory approvals for product candidates, and delays or failures to obtain such approvals;

 

•

failure of any of the combined company’s product candidates to demonstrate safety and efficacy, receive regulatory approval and achieve commercial success;

 

•

failure to maintain its existing third-party license, manufacturing and supply agreements;

 

•

failure by the combined company or its licensors to prosecute, maintain, or enforce its intellectual property rights;

 

•

changes in laws or regulations applicable to the combined company’s current or future product candidates;

 

•

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

 

•

adverse regulatory authority decisions;

 

•

introduction of new or competing products by its competitors;

 

•

failure to meet or exceed financial and development projections the combined company may provide to the public;

 

•

the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;

 

•

announcements of significant acquisitions, strategic partnerships, joint ventures, or capital commitments by the combined company or its competitors;

 

•

disputes or other developments relating to proprietary rights, including patents, litigation matters, and the combined company’s ability to obtain intellectual property protection for its technologies;

 

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•

additions or departures of key personnel;

 

•

significant lawsuits, including intellectual property or stockholder litigation;

 

•

if securities or industry analysts do not publish research or reports about the combined company, or if they issue an adverse or misleading opinions regarding its business and stock;

 

•

changes in the market valuations of similar companies;

 

•

general market or macroeconomic conditions;

 

•

sales of its common stock by the combined company or its stockholders in the future;

 

•

trading volume of the combined company’s common stock;

 

•

adverse publicity relating to the combined company’s markets generally, including with respect to other products and potential products in such markets;

 

•

changes in the structure of health care payment systems; and

 

•

period-to-period fluctuations in the combined company’s financial results.

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of the combined company’s common stock.

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm the combined company’s profitability and reputation.

Versartis and Aravive do not anticipate that the combined company will pay any cash dividends in the foreseeable future.

The current expectation is that the combined company will retain its future earnings, if any, to fund the development and growth of the combined company’s business. As a result, capital appreciation, if any, of the common stock of the combined company will be your sole source of gain, if any, for the foreseeable future.

Future sales of shares by existing stockholders could cause the combined company’s stock price to decline.

If existing stockholders of Versartis and Aravive sell, or indicate an intention to sell, substantial amounts of the combined company’s common stock in the public market after legal restrictions on resale discussed in this proxy statement/prospectus/information statement lapse, the trading price of the common stock of the combined company could decline. Based on shares outstanding as of June 30, 2018 and shares expected to be issued upon the closing of the merger, the combined company is expected to have outstanding a total of approximately 67,230,287 shares of common stock (prior to giving effect to the proposed reverse stock split) immediately following the closing of the merger. Approximately 39,601,828 of such shares of common stock (prior to giving effect to the proposed reverse stock split) will be freely tradable, without restriction, in the public market. Approximately 27,628,459 of such shares of common stock (prior to giving effect to the proposed reverse stock split) will be held by directors, executive officers of the combined company and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act and various vesting agreements.

If the ownership of the combined company common stock is highly concentrated, it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause the combined company stock price to decline.

Executive officers and directors of the combined company and their affiliates are expected to beneficially own or control approximately 41% of the outstanding shares of the combined company common stock following the

 

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closing of the merger. Accordingly, these executive officers, directors and their affiliates, acting as a group, will have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of the combined company assets or any other significant corporate transactions. These stockholders may also delay or prevent a change of control of the combined company, even if such a change of control would benefit the other stockholders of the combined company. The significant concentration of stock ownership may adversely affect the trading price of the combined company’s common stock due to investors’ perception that conflicts of interest may exist or arise.

Because the merger will result in an ownership change under Section 382 of the Code for Versartis, pre-merger U.S. net operating loss carryforwards and certain other tax attributes will be subject to limitations.

As of December 31, 2017, Versartis had accumulated federal and state net operating loss carry forwards, or NOLs, of $285.0 million and $320.3 million inclusive of excess tax benefits. The federal and state net operating loss carry forwards will begin to expire in 2029. In general, under Section 382 of the United States Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. An analysis was conducted through December 31, 2017 to determine whether an ownership change had occurred since inception. The analysis indicated that because an ownership change occurred in a prior year, federal and state net operating losses were limited pursuant to IRC 382. This limitation has been accounted for in calculating the available net operating loss carryforwards. If Versartis undergoes an ownership change in connection with this offering, its ability to utilize NOLs could be limited by Section 382 of the Code. Future changes in the combined company’s stock ownership, some of which are outside of Versartis’ control, could result in an ownership change under Section 382 of the Code. Furthermore, Versartis’ ability to utilize NOLs of companies that it has acquired or may acquire in the future may be subject to limitations. For these reasons, the combined company may not be able to utilize a material portion of the NOLs, even if it were to achieve profitability.

The Tax Cuts and Jobs Act, or TCJA, was enacted on December 22, 2017 and significantly reforms the Code. The TCJA, among other things, includes changes to U.S. federal tax rates and the rules governing net operating loss carryforwards. For NOLs arising in tax years beginning after December 31, 2017, the TCJA limits a taxpayer’s ability to utilize NOL carryforwards to 80% of taxable income. In addition, NOLs arising in tax years ending after December 31, 2017 can be carried forward indefinitely, but carryback is generally prohibited. NOLs generated in tax years beginning before January 1, 2018 will not be subject to the taxable income limitation, and NOLs generated in tax years ending before January 1, 2018 will continue to have a two-year carryback and twenty-year carryforward period. Deferred tax assets for NOLs will need to be measured at the applicable tax rate in effect when the NOL is expected to be utilized. The changes in the carryforward/carryback periods as well as the new limitation on use of NOLs may significantly impact the combined company’s valuation allowance assessments for NOLs generated after December 31, 2017.

The recently passed comprehensive tax reform bill could adversely affect the combined company’s business and financial condition.

In December 2017, new legislation significantly revised the Internal Revenue Code of 1986, as amended. The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain and the combined company’s business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will

 

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conform to the newly enacted federal tax law. The impact of this tax reform on holders of common stock of the combined company is also uncertain and could be adverse. Stockholders of the combined company should consult with their legal and tax advisors with respect to this legislation and its potential tax consequences under their particular circumstances.

Anti-takeover provisions under Delaware law could make an acquisition of the combined company more difficult and may prevent attempts by the combined company stockholders to replace or remove the combined company management.

Because the combined company will be incorporated in Delaware, it is governed by the provisions of Section 203 of the Delaware General Corporation Law, or the DGCL, which prohibits stockholders owning in excess of 15% of the outstanding combined company voting stock from merging or combining with the combined company. Although Versartis and Aravive believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirors to negotiate with the combined company’s board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by the combined company’s stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.

 

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