Exhibit 99.1

RISK FACTORS

Investing in Yumanity’s securities involves a high degree of risk. You should carefully consider the risk factors set forth below and under “Risk Factors” in (i) Yumanity’s Annual Report on Form 10-K for the year ended December 31, 2019 and (ii) Yumanity’s Quarterly Reports on Form 10-Q for the three months ended March 31, 2020, June 30, 2020 and September 30, 2020 as updated by Yumanity’s subsequent filings under the Securities Exchange Act of 1934, as amended, before deciding whether to purchase our securities. The risks and uncertainties Yumanity describes below and in the documents mentioned above are not the only ones Yumanity faces. Additional risks and uncertainties not presently known to Yumanity could adversely affect its business, operating results and financial condition, as well as adversely affect the value of an investment in Yumanity’s securities, and the occurrence of any of these risks might cause you to lose all or part of your investment.

Summary of the Material Risks Associated with Yumanity’s Business

Yumanity Therapeutics, Inc., or Yumanity, is subject to various risks associated with its businesses and its industries. These risks include the following:

 

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Yumanity’s historical operating results indicate substantial doubt exists related to its ability to continue as a going concern;

 

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Yumanity has incurred significant operating losses since its inception and anticipates it will incur continued losses for the foreseeable future;

 

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Yumanity will need additional funding to advance YTX-7739 through clinical development, which funding may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force Yumanity to delay, limit, or terminate its product development efforts or other operations;

 

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Yumanity has concentrated its research and development efforts on the treatment of neurodegenerative diseases, a field that has seen limited success in drug development. Further, its product candidates are based on new approaches and novel technology, which makes it difficult to predict the time and cost of product candidate development and subsequently obtaining regulatory approval;

 

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Yumanity depends on its collaboration with Merck and may in the future depend on other collaborations with third parties for the research, development and commercialization of certain of the product candidates Yumanity may develop. If any such collaborations are not successful, Yumanity may not be able to realize the market potential of those product candidates;

 

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Yumanity may encounter difficulties in enrolling subjects in its clinical trials, thereby delaying or preventing development of its product candidates;

 

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Yumanity’s clinical trials may fail to demonstrate adequate safety and efficacy of its product candidates, which would prevent, delay, or limit the scope of regulatory approval and commercialization;

 

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Yumanity’s product candidates may cause serious adverse events or other undesirable side effects that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any;

 

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Yumanity faces significant competition in an environment of rapid technological and scientific change, and there is a possibility that its competitors may achieve regulatory approval before it does or develop therapies that are safer, more advanced, or more effective, which may negatively impact its ability to successfully market or commercialize any product candidates Yumanity may develop and ultimately harm its financial condition;

 

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The current pandemic of COVID-19 and the future outbreak of other highly infectious or contagious diseases could seriously harm Yumanity’s research, development and potential future commercialization efforts, increase Yumanity’s costs and expenses and have a material adverse effect on Yumanity’s business, financial condition and results of operations;

 

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The regulatory approval processes of the FDA and comparable foreign regulatory authorities are lengthy, time-consuming, and inherently unpredictable. If Yumanity is ultimately unable to obtain regulatory approval for its product candidates, Yumanity will be unable to generate product revenue and its business will be substantially harmed; and

 

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Yumanity may not seek to protect its intellectual property rights in all jurisdictions throughout the world and Yumanity may not be able to adequately enforce its intellectual property rights even in the jurisdictions where Yumanity seeks protection.

 

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Risks Related to Yumanity’s Business, Financial Position, and Need for Additional Capital

Yumanity is a clinical stage biopharmaceutical company with a very limited operating history and no products approved for commercial sale, which may make it difficult to evaluate its current business and predict its future success and viability.

Yumanity is a clinical stage biopharmaceutical company with a limited operating history, focused on developing therapeutics for neurodegenerative diseases. Yumanity was initially formed as a limited liability company in 2014 and converted into a corporation in 2015, has no products approved for commercial sale, and has not generated any revenue from product sales to date. Yumanity began human clinical trials for YTX-7739 at the end of 2019, and has not initiated clinical trials for any of its other current product candidates. Yumanity’s operations to date have been limited primarily to organizing and staffing, raising capital, and conducting research and development activities for its product candidates.

To date, Yumanity has not initiated or completed a pivotal clinical trial, obtained marketing approval for any product candidates, manufactured a commercial scale product, or arranged for a third party to do so on its behalf, or conducted sales and marketing activities necessary for successful product commercialization. Yumanity’s short operating history as a company makes any assessment of its future success and viability subject to significant uncertainty. Yumanity will encounter risks and difficulties frequently experienced by early-stage biopharmaceutical companies in rapidly evolving fields, and it has not yet demonstrated an ability to successfully overcome such risks and difficulties. If Yumanity does not address these risks and difficulties successfully, its business will suffer.

Yumanity’s historical operating results indicate substantial doubt exists related to its ability to continue as a going concern. Holdings’ financial statements have been prepared assuming that it will continue as a going concern.

Yumanity has incurred net losses and used significant cash in operating activities since inception. Yumanity has an accumulated members’ deficit of approximately $111.1 million and has cash and cash equivalents of $27.4 million as of September 30, 2020. These factors raise substantial doubt about Yumanity’s ability to continue as a going concern and satisfying its estimated liquidity needs 12 months from the issuance of the financial statements.

If Yumanity continues to experience operating losses, and it is not able to generate additional liquidity through a capital raise or other cash infusion, Yumanity might need to secure additional sources of funds, which may or may not be available to it. Additionally, a failure to generate additional liquidity could negatively impact Yumanity’s ability to operate its business.

Yumanity has incurred significant operating losses since its inception and anticipates it will incur continued losses for the foreseeable future.

Yumanity has funded its operations to date through proceeds from collaborations and sales of preferred units. From its inception through September 30, 2020, Yumanity has received gross proceeds of $125.5 million from such transactions. As of September 30, 2020, its cash and cash equivalents were $27.4 million. Yumanity has incurred net losses in each year since its inception, and it has an accumulated members’ deficit of $111.1 million as of September 30, 2020.

 

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Substantially all of Yumanity’s operating losses have resulted from costs incurred in connection with general and administrative costs associated with its operations, and its research and development programs, including for its preclinical and clinical product candidates and its discovery engine platform. Yumanity expects to incur increasing levels of operating losses over the next several years and for the foreseeable future. Yumanity’s prior losses, combined with expected future losses, have had and will continue to have an adverse effect on its stockholders’ deficit and working capital. In any particular quarter or quarters, Yumanity’s operating results could be below the expectations of securities analysts or investors, which could cause its stock price to decline.

Yumanity expects its research and development expenses to significantly increase in connection with its clinical trials of its product candidates. In addition, if Yumanity obtains marketing approval for its product candidates, it will incur significant sales and marketing, legal, and outsourced-manufacturing expenses. As a public company, Yumanity expects to continue to incur significant and increasing operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, Yumanity is also unable to predict the extent of any future losses or when it will become profitable, if at all. Even if Yumanity does become profitable, it may not be able to sustain or increase its profitability on a quarterly or annual basis.

Drug development is a highly uncertain undertaking and involves a substantial degree of risk. Yumanity has never generated any revenue from product sales, and it may never generate revenue or be profitable.

Yumanity’s ability to become profitable depends upon the ability of its product candidates to generate revenue. To date, Yumanity has not generated any revenue from its product candidates and it does not know when, or if, it will do so. Yumanity does not anticipate generating any revenue from product sales until after it has successfully completed clinical development and received regulatory approval for the commercial sale of a product candidate, if ever. Yumanity’s ability to generate revenue depends on a number of factors, including, but not limited to:

 

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successfully completing preclinical and clinical development of its product candidates;

 

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identifying, assessing, and/or developing new product candidates from its discovery engine platform;

 

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developing a sustainable and scalable manufacturing process for its product candidates, as well as establishing and maintaining commercially viable supply relationships with third parties that can provide adequate products and services to support clinical activities and commercial demand for its product candidates;

 

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negotiating favorable terms in any collaboration, licensing, or other arrangements into which it may enter;

 

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obtaining regulatory approvals for product candidates for which it successfully completes clinical development;

 

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launching and successfully commercializing product candidates for which it obtains regulatory approval, either by establishing a sales, marketing, and distribution infrastructure or collaborating with a partner;

 

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negotiating and maintaining an adequate price for its product candidates, both in the United States and in foreign countries where its products are commercialized;

 

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obtaining market acceptance of its product candidates as viable treatment options;

 

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building out new facilities or expanding existing facilities to support its ongoing development activity;

 

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addressing any competing technological and market developments;

 

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maintaining, protecting, expanding, and enforcing its portfolio of intellectual property rights, including patents, trade secrets, and know-how; and

 

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attracting, hiring, and retaining qualified personnel.

Because of the numerous risks and uncertainties associated with drug development, Yumanity is unable to predict the timing or amount of its expenses, or when it will be able to generate any meaningful revenue or achieve or maintain profitability, if ever. In addition, Yumanity’s expenses could increase beyond its current expectations if it is required by the U.S. Food and Drug Administration (the “FDA”), or foreign regulatory agencies, to perform

 

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studies in addition to those that it currently anticipates, or if there are any delays in any of its current or future collaborators’ clinical trials or the development of any of its product candidates. Even if one or more of Yumanity’s product candidates is approved for commercial sale, absent its entering into a collaboration or partnership agreement, Yumanity anticipates incurring significant costs associated with commercializing any approved product candidate and ongoing compliance efforts.

Even if Yumanity is able to generate revenue from the sale of any approved products, it may not become profitable and may need to obtain additional funding to continue operations. Revenue from the sale of any product candidate for which regulatory approval is obtained will be dependent, in part, upon the size of the markets in the territories for which Yumanity gains regulatory approval, the accepted price for the product, the ability to get reimbursement at any price, and whether Yumanity owns the commercial rights for that territory. The precise number of people with Parkinson’s disease, Alzheimer’s disease, and amyotrophic lateral sclerosis (“ALS”) is unknown. Yumanity projections of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with its product candidates, are based on estimates. If the number of addressable patients is not as significant as Yumanity anticipates, the indication approved by regulatory authorities is narrower than Yumanity expects, or the reasonably accepted population for treatment is narrowed by competition, physician choice, or treatment guidelines, Yumanity may not generate significant revenue from sales of its product candidates, even if approved. Even if Yumanity does achieve profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis.

Yumanity’s failure to become and remain profitable would decrease its value and could impair its ability to raise capital, expand its business, maintain its research and development efforts, diversify its pipeline of product candidates, or continue its operations and cause a decline in the value of its common stock, all or any of which may adversely affect its viability.

Due to the significant resources required for the development of Yumanity’s programs, and depending on its ability to access capital, Yumanity must prioritize development of certain product candidates. Moreover, Yumanity may fail to expend its limited resources on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

Yumanity’s current portfolio consists of two programs and two additional potential programs. Yumanity’s lead product candidate, YTX-7739, is in Phase 1 clinical development. Yumanity seeks to maintain a process of prioritization and resource allocation to maintain an optimal balance between aggressively advancing product candidates, such as YTX-7739, and ensuring replenishment of its portfolio.

Due to the significant resources required for the development of its product candidates, Yumanity must focus on specific diseases and disease pathways and decide which product candidates to pursue and advance and the amount of resources to allocate to each. Yumanity’s decisions concerning the allocation of research, development, collaboration, management, and financial resources toward particular product candidates or therapeutic areas may not lead to the development of any viable commercial product and may divert resources away from better opportunities. If Yumanity makes incorrect determinations regarding the viability or market potential of any of its product candidates or misread trends in the biopharmaceutical industry, in particular for neurodegenerative diseases, its business, financial condition, and results of operations could be materially adversely affected. As a result, Yumanity may fail to capitalize on viable commercial products or profitable market opportunities, be required to forego or delay pursuit of opportunities with other product candidates or other diseases and disease pathways that may later prove to have greater commercial potential than those Yumanity choose to pursue, or relinquish valuable rights to such product candidates through collaboration, licensing, or other royalty arrangements in cases in which it would have been advantageous for Yumanity to invest additional resources to retain sole development and commercialization rights.

Yumanity will need additional funding to advance YTX-7739 through clinical development, which funding may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force Yumanity to delay, limit, or terminate its product development efforts or other operations.

As of September 30, 2020, Yumanity’s cash and cash equivalents were $27.4 million. Yumanity will require additional funding to advance YTX-7739 beyond Phase 1 clinical trials and other planned early development of

 

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other programs generated by its discovery engine platform. Yumanity’s ability to secure this additional funding may be adversely impacted by negative or ambiguous results in its Phase 1 clinical trial for YTX-7739. Developing small-molecule products is expensive, and Yumanity expects its discovery, research, and development expenses to increase substantially in connection with its ongoing activities, particularly as Yumanity advances its product candidates in clinical trials. Yumanity may also need additional funds sooner if Yumanity chooses to pursue additional indications and/or geographies for its product candidates or otherwise expand more rapidly than Yumanity presently anticipates.

In addition, Yumanity has identified conditions and events that raise substantial doubt as to its ability to continue as a going concern.

Yumanity’s operating plan may also change as a result of many factors currently unknown, and Yumanity may need to seek additional funds sooner than planned, through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements, or a combination of these approaches. In any event, Yumanity will require additional capital to obtain regulatory approval for, and, if approved, to commercialize its product candidates. Raising funds in the current economic environment may present additional challenges. Even if Yumanity believes that is has sufficient funds for its current or future operating plans, Yumanity may seek additional capital if market conditions are favorable or if Yumanity has specific strategic considerations.

Any additional fundraising efforts may divert its management from their day-to-day activities, which may adversely affect its ability to develop and, if approved, commercialize its product candidates. In addition, Yumanity cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to it, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of its stockholders and the issuance of additional securities, whether equity or debt, by Yumanity, or the possibility of such issuance, may cause the market price of its shares to decline. The sale of additional equity or convertible securities would dilute all of its stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and Yumanity may be required to agree to certain restrictive covenants, such as limitations on its ability to incur additional debt, limitations on its ability to acquire, sell or license intellectual property rights, and other operating restrictions that could adversely impact its ability to conduct its business. Yumanity could also be required to seek funds through arrangements with collaborative partners or otherwise at an earlier stage than otherwise would be desirable and Yumanity may be required to relinquish rights to some of its technologies or product candidates or otherwise agree to terms unfavorable to it, any of which may have a material adverse effect on its business, operating results, and prospects.

If Yumanity is unable to obtain funding on a timely basis, Yumanity may be required to significantly curtail, delay, or discontinue one or more of its research or development programs or the commercialization of any approved product candidate or be unable to expand its operations or otherwise capitalize on its business opportunities, as desired, which could materially affect its business, financial condition, and results of operations.

Risks Related to Yumanity’s Product Development and Commercialization

Research and development of biopharmaceutical products is inherently risky.

Yumanity is at an early stage of development of the product candidates currently in its pipeline and is continuing to discover additional potential product candidates leveraging its discovery engine platform. To date, Yumanity has devoted substantially all of its efforts and financial resources to identify, secure intellectual property for, and develop its discovery engine platform and its product candidates, including conducting multiple preclinical studies, and providing general and administrative support for these operations. Its business depends heavily on the successful clinical development, regulatory approval, and commercialization of its lead product candidate, YTX-7739 which is in clinical development. None of its product candidates have advanced into late-stage development or a pivotal clinical study and it may be years before any such study is initiated, if at all. YTX-7739 will require substantial additional clinical development, testing, and regulatory approval before Yumanity is permitted to commence its commercialization. Further, Yumanity cannot be certain that any of its product candidates will be successful in clinical trials or obtain regulatory approval.

 

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Its future success is dependent on its ability to successfully develop, obtain regulatory approval for, and then successfully commercialize its product candidates, and Yumanity may fail to do so for many reasons, including the following:

 

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its product candidates may not successfully complete preclinical studies or clinical trials;

 

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a product candidate may, upon further study, be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;

 

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its competitors may develop therapeutics that render its product candidates obsolete or less attractive;

 

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its competitors may develop platform technologies that render its platform technology obsolete or less attractive;

 

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the product candidates that Yumanity develops and its discovery engine platform may not be sufficiently covered by intellectual property for which Yumanity holds exclusive rights;

 

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the market for a product candidate may change so that the continued development of that product candidate is no longer reasonable or commercially attractive;

 

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a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all;

 

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Yumanity may not be able to establish manufacturing capabilities or arrangements with third-party manufacturers for clinical and, if approved, commercial study;

 

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even if a product candidate obtains regulatory approval, Yumanity may be unable to establish sales and marketing capabilities, or successfully market such approved product candidate, to gain market acceptance; and

 

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a product candidate may not be accepted as safe or effective by patients, the medical community or third-party payors, if applicable.

If any of these events occur, Yumanity may be forced to abandon its development efforts for a product candidate or candidates, which would have a material adverse effect on its business and could potentially cause Yumanity to cease operations. For instance, if Yumanity observes harmful side effects or other characteristics that indicate one product candidate is unlikely to be effective or otherwise does not meet applicable regulatory criteria, these findings may implicate the discovery engine platform as a whole.

Yumanity may not be successful in its efforts to further develop its discovery engine platform technology and current product candidates. Yumanity is not permitted to market or promote any of its product candidates before Yumanity receives regulatory approval from the FDA or comparable foreign regulatory authorities, and Yumanity may never receive such regulatory approval for any of its product candidates. Each of its product candidates is in the early stages of development and will require significant additional clinical development, management of preclinical, clinical, and manufacturing activities, regulatory approval, adequate manufacturing supply, a commercial organization, and significant marketing efforts before Yumanity could generate any revenue from product sales, if at all.

The preclinical and clinical product candidates and current clinical trials are, and the future clinical trials and the manufacturing and marketing of its product candidates will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United States, and in other countries where Yumanity intends to test and, if approved, market any product candidate. Before obtaining regulatory approvals for the commercial sale of any product candidate, Yumanity must, among other requirements, demonstrate through preclinical studies and clinical trials that the product candidate is safe and effective for use in each target indication. Drug development is a long, expensive, and uncertain process, and delay or failure can occur at any stage of any of its clinical trials. This process can take many years and may include post-marketing studies and surveillance, which will require the expenditure of substantial resources. Of the large number of drugs in development in the United States, only a small percentage will successfully complete the FDA regulatory approval process and will be commercialized. Accordingly, even if Yumanity is able to obtain the requisite financing to continue to fund its development and preclinical studies and clinical trials, Yumanity cannot assure you that any of its product candidates will be successfully developed or commercialized.

 

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If any of its product candidates successfully complete clinical trials, Yumanity generally plans to seek regulatory approval to market its product candidates in the United States, the European Union (“EU”), and in additional foreign countries where Yumanity believes there is a viable commercial opportunity and significant patient need. Yumanity has never commenced, compiled, or submitted an application seeking regulatory approval to market any product candidate. Yumanity may never receive regulatory approval to market any product candidates even if such product candidates successfully complete clinical trials, which would adversely affect its viability. To obtain regulatory approval in countries outside the United States, Yumanity must comply with numerous and varying regulatory requirements of such other countries regarding safety, efficacy, chemistry, manufacturing and controls, clinical trials, commercial sales, pricing, and distribution of its product candidates. Yumanity may also rely on collaborators or partners to conduct the required activities to support an application for regulatory approval, and to seek approval, for one or more of its product candidates. Yumanity cannot be sure that any collaborators or partners will conduct these activities or do so within the timeframe Yumanity desires. Even if Yumanity (or any collaborators or partners) are successful in obtaining approval in one jurisdiction, Yumanity cannot ensure that Yumanity (or any collaborators or partners) will obtain approval in any other jurisdictions. If Yumanity is unable to obtain approval for its product candidates in multiple jurisdictions, its revenue and results of operations could be negatively affected.

Even if Yumanity receives regulatory approval to market any of its product candidates, Yumanity cannot assure you that any such product candidate will be successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives.

Investment in biopharmaceutical product development involves significant risk that any product candidate will fail to demonstrate adequate efficacy or an acceptable safety profile, gain regulatory approval, and become commercially viable. Yumanity cannot provide any assurance that Yumanity will be able to successfully advance any of its product candidates through the development process or, if approved, successfully commercialize any of its product candidates.

Yumanity may not be successful in its efforts to continue to create a pipeline of product candidates or to develop commercially successful products. If Yumanity fails to successfully identify and develop additional product candidates, its commercial opportunity may be limited.

One of Yumanity’s strategies is to identify and pursue clinical development of additional product candidates. Its portfolio currently consists of four programs, one of which is in clinical development and the rest of which are in research, discovery and preclinical stages of development. Identifying, developing, obtaining regulatory approval, and commercializing additional product candidates for the treatment of neurodegenerative diseases will require substantial additional funding and is prone to the risks of failure inherent in drug development. Yumanity cannot provide you any assurance that Yumanity will be able to successfully identify or acquire additional product candidates, advance any of these additional product candidates through the development process, successfully commercialize any such additional product candidates, if approved, or assemble sufficient resources to identify, acquire, develop or, if approved, commercialize additional product candidates. If Yumanity is unable to successfully identify, acquire, develop, and commercialize additional product candidates, its commercial opportunity may be limited.

Yumanity may not be able to conduct, or contract others to conduct, animal testing in the future, which could harm its research and development activities.

Certain laws and regulations relating to drug development require Yumanity to test its product candidates on animals before initiating clinical trials involving humans. Animal testing activities have been the subject of controversy and adverse publicity. Animal rights groups and other organizations and individuals have attempted to stop animal testing activities by pressing for legislation and regulation in these areas and by disrupting these activities through protests and other means. To the extent the activities of these groups are successful, Yumanity’s research and development activities may be interrupted or delayed.

 

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Yumanity has concentrated its research and development efforts on the treatment of neurodegenerative diseases, a field that has seen limited success in drug development. Further, its product candidates are based on new approaches and novel technology, which makes it difficult to predict the time and cost of product candidate development and subsequently obtaining regulatory approval.

Yumanity has focused its research and development efforts on addressing neurodegenerative diseases, including Parkinson’s disease, ALS and Alzheimer’s disease. Efforts by biopharmaceutical companies in the field of neurodegenerative diseases have seen limited successes in drug development. There are few effective therapeutic options available for patients with Parkinson’s disease, ALS or Alzheimer’s disease. Yumanity’s future success is highly dependent on the successful development of its discovery engine platform technology and its product candidates for treating neurodegenerative diseases. Developing and, if approved, commercializing its product candidates for treatment of neurodegenerative diseases subjects Yumanity to a number of challenges, including engineering product candidates and obtaining regulatory approval from the FDA and other regulatory authorities who have only a limited set of precedents to rely on.

Yumanity’s approach is centered on the key insight that human protein misfolding, a phenomenon at the root of virtually all neurodegenerative diseases, can be modeled effectively in yeast cells. Discoveries from the yeast system are then translated to diseased human cell lines created by adult stem cells using induced pluripotent stem cell technology (“iPSC”). This strategy may not prove to be successful. Yumanity cannot be sure that its approach will yield satisfactory therapeutic products that are safe and effective, scalable, or profitable.

Moreover, public perception of drug safety issues, including adoption of new therapeutics or novel approaches to treatment, may adversely influence the willingness of subjects to participate in clinical trials, or if approved, of physicians to prescribe Yumanity’s products.

Yumanity may encounter difficulties in enrolling subjects in its clinical trials, thereby delaying or preventing development of its product candidates.

There is no precise method of establishing the actual number of people with neurodegenerative diseases in any geography over any time period. It is estimated that more than 60 million people worldwide suffer from neurodegenerative diseases. If the actual number of people with neurodegenerative diseases is lower than Yumanity believes, Yumanity may experience difficulty in enrolling subjects in its clinical trials, thereby delaying development of its product candidates. Furthermore, Yumanity may experience difficulties in subject enrollment in its clinical trials for a variety of other reasons, including:

 

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the subject eligibility criteria defined in the protocol, including biomarker-driven identification and/or certain highly-specific criteria related to stage of disease progression, which may limit the patient populations eligible for its clinical trials to a greater extent than competing clinical trials for the same indication that do not have biomarker-driven patient eligibility criteria;

 

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eligibility requirements mandated by regulatory agencies which may limit the number of eligible patients in a given disorder;

 

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the size of the study population required for analysis of the study’s primary endpoints;

 

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the proximity of subjects to a study site;

 

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the design of the study;

 

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its use of academic sites, which may be less accustomed to running clinical trials and managing enrollment;

 

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public perception of drug safety issues;

 

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its ability to recruit clinical study investigators with the appropriate competencies and experience;

 

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competing clinical trials for similar therapies or targeting patient populations meeting its patient eligibility criteria;

 

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clinicians’ and patients’ perceptions as to the potential advantages and side effects of the product candidate being studied in relation to other available therapies and product candidates;

 

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its ability to obtain and maintain patient consents;

 

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the risk that subjects enrolled in clinical trials will not complete such studies, for any reason; and

 

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the impact of the COVID-19 pandemic on patient enrollment and retention.

Yumanity’s clinical trials may fail to demonstrate adequate safety and efficacy of its product candidates, which would prevent, delay, or limit the scope of regulatory approval and commercialization.

Before obtaining regulatory approvals for the commercial sale of any of its product candidates, Yumanity must, among other requirements, demonstrate through lengthy, complex, and expensive preclinical studies and clinical trials that its product candidates are both safe and effective for use in each target indication. Each product candidate must demonstrate an adequate risk versus benefit profile in its intended patient population and for its intended use.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical study process. The results of preclinical studies of Yumanity’s product candidates may not be predictive of the results of early-stage or later-stage clinical trials, and results of early-stage clinical trials of its product candidates may not be predictive of the results of later-stage clinical trials. The results of clinical trials in one set of subjects or disease indications may not be predictive of those obtained in another. In some instances, there can be significant variability in safety or efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in study procedures set forth in protocols, differences in the size and type of the patient populations, changes in and lack of adherence to the dosing regimen and other clinical study protocols, and the rate of dropout among clinical study participants. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy profile despite having progressed through preclinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in later-stage clinical trials due to lack of efficacy or safety issues, notwithstanding promising results in early-stage studies. This is particularly true in neurodegenerative diseases, where failure rates historically have been higher than in other disease areas. Most product candidates that begin clinical trials are never approved by regulatory authorities for commercialization.

Yumanity has limited experience in designing clinical trials and may be unable to design and execute a clinical study to support marketing approval. Yumanity cannot be certain that its current clinical trials or any other future clinical trials will be successful. Additionally, any safety concerns observed in any one of its clinical trials in its targeted indications could limit the prospects for regulatory approval of its product candidates in those, and other indications, which could have a material adverse effect on its business, financial condition, and results of operations.

In addition, even if such clinical trials are successfully completed, Yumanity cannot guarantee that the FDA or foreign regulatory authorities will interpret the results as Yumanity does, and more studies could be required before Yumanity submits its product candidates for approval. To the extent that the results of the studies are not satisfactory to the FDA or foreign regulatory authorities for support of a marketing application, Yumanity may be required to expend significant resources, which may not be available to it, to conduct additional studies in support of potential approval of its product candidates. Even if regulatory approval is secured for any of its product candidates, the terms of such approval may limit the scope and use of its product candidates, which may also limit their commercial potential.

Yumanity’s product candidates may cause serious adverse events or other undesirable side effects that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

Serious adverse events or other undesirable side effects caused by its product candidates could cause Yumanity or regulatory authorities to interrupt, delay, or halt clinical trials, and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities.

 

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Further, clinical trials by their nature utilize a sample of the potential patient population for a limited duration of exposure. Rare and severe side effects of a product candidate may only be uncovered with a significantly larger number of patients exposed to the product candidate. If its product candidates receive marketing approval and Yumanity or others identify undesirable side effects caused by such product candidates (or any other similar products) after such approval, a number of potentially significant negative consequences could result, including:

 

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regulatory authorities may suspend, withdraw, or limit their approval of such products;

 

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regulatory authorities may require the addition of labeling statements, such as a “boxed” warning or a contraindication;

 

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Yumanity may be required to change the way such products are distributed or administered;

 

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Yumanity may be required to conduct additional post-marketing studies and surveillance;

 

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Yumanity may be required to implement a risk evaluation and mitigation strategy (“REMS”), or create a medication guide outlining the risks of such side effects for distribution to patients;

 

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Yumanity may be subject to regulatory investigations and government enforcement actions;

 

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subjects in a clinical study may experience severe or unexpected drug-related side effects;

 

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Yumanity may decide, or regulatory authorities may require it, to conduct additional clinical trials or abandon product development programs;

 

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Yumanity may decide to remove such products from the marketplace;

 

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Yumanity could be sued and held liable for injury caused to individuals exposed to or taking its products;

 

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the product may become less competitive; and

 

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its reputation may suffer.

Any of these events could prevent Yumanity from achieving or maintaining market acceptance of the affected product candidates, could substantially increase the costs of commercializing its product candidates, and could significantly impact its ability to successfully commercialize its product candidates and generate revenues.

Failures or delays in the commencement or completion of, or ambiguous or negative results from, its planned clinical trials of its product candidates could result in increased costs to Yumanity and could delay, prevent, or limit its ability to generate revenue and continue its business.

Yumanity does not know whether any of its planned clinical trials will begin or be completed on schedule, if at all, as the commencement and completion of clinical trials can be delayed or prevented for a number of reasons, including, among others:

 

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the FDA or other regulatory bodies may not authorize Yumanity or its investigators to commence its planned clinical trials or any other clinical trials Yumanity may initiate, or may suspend its clinical trials, for example, through imposition of a clinical hold;

 

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delays in filing or receiving approvals of additional investigational new drug (“IND”) applications that may be required;

 

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lack of adequate funding to continue its clinical trials and preclinical studies;

 

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negative results from its ongoing preclinical studies and clinical trials;

 

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delays in reaching or failing to reach agreement on acceptable terms with prospective contract research organizations (“CROs”) and clinical study sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and study sites;

 

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inadequate quantity or quality of a product candidate or other materials necessary to conduct clinical trials, for example delays in the manufacturing of sufficient supply of finished drug product;

 

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•

difficulties obtaining ethics committee or Institutional Review Board (“IRB”) approval to conduct a clinical study at a prospective site or sites;

 

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challenges in recruiting and enrolling subjects to participate in clinical trials, the proximity of subjects to study sites, eligibility criteria for the clinical study, the nature of the clinical study protocol, the availability of approved effective treatments for the relevant disease, and competition from other clinical study programs for similar indications;

 

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severe or unexpected drug-related side effects experienced by subjects in a clinical study;

 

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Yumanity may decide, or regulatory authorities may require it, to conduct additional clinical trials or abandon product development programs;

 

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delays in validating, or inability to validate, any endpoints utilized in a clinical study;

 

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the FDA may disagree with its clinical study design and its interpretation of data from clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for its clinical trials;

 

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reports from preclinical or clinical testing of other alpha-synuclein-dependent therapies that raise safety or efficacy concerns; and

 

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difficulties retaining subjects who have enrolled in a clinical study but may be prone to withdraw due to rigors of the clinical trial, lack of efficacy, side effects, personal issues, or loss of interest.

Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical study may be suspended or terminated by Yumanity, the FDA, the IRBs at the sites where the IRBs are overseeing a clinical study, a data and safety monitoring board (“DSMB”) overseeing the clinical study at issue or other regulatory authorities due to a number of factors, including, among others:

 

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failure to conduct the clinical study in accordance with regulatory requirements or its clinical protocols;

 

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inspection of the clinical study operations or study sites by the FDA or other regulatory authorities that reveals deficiencies or violations that require Yumanity to undertake corrective action, including in response to the imposition of a clinical hold;

 

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unforeseen safety issues, including any that could be identified in its ongoing preclinical studies or clinical trials, adverse side effects or lack of effectiveness;

 

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changes in government regulations or administrative actions;

 

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problems with clinical supply materials; and

 

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lack of adequate funding to continue clinical trials.

Changes in regulatory requirements, FDA guidance, or unanticipated events during Yumanity’s preclinical studies and clinical trials of its product candidates may occur, which may result in changes to preclinical or clinical study protocols or additional preclinical or clinical study requirements, which could result in increased costs to Yumanity and could delay its development timeline.

Changes in regulatory requirements, FDA guidance, or unanticipated events during its preclinical studies and clinical trials may force Yumanity to amend preclinical studies and clinical trial protocols or the FDA may impose additional preclinical studies and clinical trial requirements. Amendments or changes to its clinical study protocols would require resubmission to the FDA and IRBs for review and approval, which may adversely impact the cost, timing, or successful completion of clinical trials. Similarly, amendments to its preclinical studies may adversely impact the cost, timing, or successful completion of those preclinical studies. If Yumanity experiences delays completing, or if Yumanity terminates, any of its preclinical studies or clinical trials, or if Yumanity is required to conduct additional preclinical studies or clinical trials, the commercial prospects for its product candidates may be harmed and its ability to generate product revenue will be delayed.

 

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If, in the future, Yumanity is unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market any product candidates Yumanity may develop, Yumanity may not be successful in commercializing those product candidates if and when they are approved.

Yumanity does not currently have an infrastructure for the sales, marketing, and distribution of pharmaceutical products. In order to market its product candidates, if approved by the FDA or any other regulatory body, Yumanity must build its sales, marketing, managerial, and other non-technical capabilities, or make arrangements with third parties to perform these services. There are risks involved with both establishing its own commercial capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force or reimbursement specialists is expensive and time-consuming and could delay any product launch. If the commercial launch of a product candidate for which Yumanity recruits a sales force and establish marketing and other commercialization capabilities is delayed or does not occur for any reason, Yumanity would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and its investment would be lost if Yumanity cannot retain or reposition its commercialization personnel.

If Yumanity enters into arrangements with third parties to perform sales, marketing, commercial support, and distribution services, its product revenue or the profitability of product revenue may be lower than if Yumanity were to market and sell any products Yumanity may develop itself. In addition, Yumanity may not be successful in entering into arrangements with third parties to commercialize its product candidates or may be unable to do so on terms that are favorable to us. Yumanity may have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market its products effectively. If Yumanity does not establish commercialization capabilities successfully, either on its own or in collaboration with third parties, Yumanity will not be successful in commercializing its product candidates if approved.

If Yumanity is unable to establish adequate sales, marketing, and distribution capabilities, whether independently or with third parties, or if Yumanity is unable to do so on commercially reasonable terms, its business, results of operations, financial condition, and prospects will be materially adversely affected.

Even if Yumanity receives marketing approval for its product candidates, its product candidates may not achieve broad market acceptance by physicians, patients, healthcare payors, or others in the medical community, which would limit the revenue that Yumanity generate from their sales.

The commercial success of its product candidates, if approved by the FDA or other applicable regulatory authorities, will depend upon the awareness and acceptance of its product candidates among the medical community, including physicians, patients, and healthcare payors. If any of its product candidates are approved but do not achieve an adequate level of acceptance by physicians, patients, healthcare payors, and others in the medical community, Yumanity may not generate sufficient revenue to become or remain profitable. Market acceptance of its product candidates, if approved, will depend on a number of factors, including, among others:

 

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the safety, efficacy, and other potential advantages of its approved product candidates compared to other available therapies;

 

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

 

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any restrictions on the use of its products together with other medications;

 

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the prevalence and severity of any adverse effects associated with its products;

 

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inability of certain types of patients to take its products;

 

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the clinical indications for which its product candidates are approved;

 

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availability of alternative treatments already approved or expected to be commercially launched in the near future;

 

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the potential and perceived advantages of its approved product candidates over current treatment options or alternative treatments, including future alternative treatments;

 

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

 

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the strength of marketing and distribution support and timing of market introduction of competitive products;

 

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publicity concerning its products or competing products and treatments;

 

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pricing and cost effectiveness;

 

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the effectiveness of its sales and marketing strategies;

 

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its ability to increase awareness of its products through sales and marketing efforts;

 

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its ability to obtain sufficient third-party payor coverage or reimbursement; or

 

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the willingness of patients to pay out-of-pocket in the absence of third-party payor coverage.

If its product candidates are approved but do not achieve an adequate level of acceptance by patients, physicians, and payors, Yumanity may not generate sufficient revenue from its approved product candidates to become or remain profitable. Before granting reimbursement approval, healthcare payors may require Yumanity to demonstrate that its product candidates, in addition to treating these target indications, also provide incremental health benefits to patients. Its efforts to educate the medical community and third-party payors about the benefits of its product candidates may require significant resources and may never be successful.

Yumanity faces significant competition in an environment of rapid technological and scientific change, and there is a possibility that its competitors may achieve regulatory approval before it does or develop therapies that are safer, more advanced, or more effective, which may negatively impact its ability to successfully market or commercialize any product candidates Yumanity may develop and ultimately harm its financial condition.

The development and commercialization of new drug products is highly competitive. Moreover, the neurodegenerative field is characterized by strong and increasing competition, with a strong emphasis on intellectual property. Yumanity may face competition with respect to any product candidates that Yumanity seeks to develop or commercialize in the future from major pharmaceutical companies, specialty pharmaceutical companies, and biotechnology companies worldwide. Potential competitors also include academic institutions, government agencies, and other public and private research organizations that conduct research, seek patent protection, and establish collaborative arrangements for research, development, manufacturing, and commercialization.

There are a number of large pharmaceutical and biotechnology companies that are currently pursuing the development of products for the treatment of the neurodegenerative disease indications for which Yumanity has research programs, including Parkinson’s disease, ALS and Alzheimer’s disease. Companies that Yumanity is aware of are developing therapeutics in the neurodegenerative disease area include large companies with significant financial resources, such as AbbVie, AstraZeneca, Biogen, Bristol-Myers Squibb, Lilly, GlaxoSmithKline, Johnson & Johnson, Novartis, Roche, Sanofi, and Takeda. In addition to competition from other companies targeting neurodegenerative indications, any products Yumanity may develop may also face competition from other types of therapies, such as gene-editing therapies.

Many of its current or potential competitors, either alone or with their strategic partners, have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals, and marketing approved products than Yumanity does. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of its competitors. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with Yumanity in recruiting and retaining qualified scientific and management personnel and establishing clinical study sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, its programs. Its commercial opportunity could be reduced or eliminated if its competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient, or are less expensive than any products that Yumanity may develop. Furthermore, currently approved products could be discovered to have application for treatment of neurodegenerative disease indications, which could give such products significant regulatory and market timing

 

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advantages over any of its product candidates. Its competitors also may obtain FDA or other regulatory approval for their products more rapidly than Yumanity may obtain approval for its product candidates and may obtain orphan product exclusivity from the FDA for indications its product candidates are targeting, which could result in its competitors establishing a strong market position before Yumanity is able to enter the market. Additionally, products or technologies developed by its competitors may render its potential product candidates uneconomical or obsolete, and Yumanity may not be successful in marketing any product candidates Yumanity may develop against competitors.

In addition, Yumanity could face litigation or other proceedings with respect to the scope, ownership, validity and/or enforceability of its patents relating to its competitors’ products and its competitors may allege that its products infringe, misappropriate, or otherwise violate their intellectual property. The availability of its competitors’ products could limit the demand, and the price Yumanity is able to charge, for any products that Yumanity may develop and commercialize. See “Risks Related to Yumanity’s Intellectual Property Rights.”

The current pandemic of COVID-19 and the future outbreak of other highly infectious or contagious diseases could seriously harm Yumanity’s research, development and potential future commercialization efforts, increase Yumanity’s costs and expenses and have a material adverse effect on Yumanity’s business, financial condition and results of operations.

Broad-based business or economic disruptions could adversely affect Yumanity’s ongoing or planned research and development activities. For example, in December 2019, an outbreak of a novel strain of coronavirus originated in Wuhan, China, and has since spread to a number of other countries, including the United States. To date, the COVID-19 pandemic has caused significant disruptions to the U.S. and global economy and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak is continually evolving and, as additional cases of the virus are identified, many countries, including the U.S., have reacted by instituting quarantines, restrictions on travel and mandatory closures of businesses. Certain states and cities, including where Yumanity or the third parties with whom it engages operate, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to operate, and/or restrictions on the types of construction projects that may continue.

The extent to which COVID-19 may impact Yumanity’s preclinical studies or clinical trial operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, the severity of COVID-19, or the effectiveness of actions to contain and treat COVID-19. The continued spread of COVID-19 globally could adversely impact Yumanity’s preclinical studies or clinical trial operations in the United States, including Yumanity’s ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19 if an outbreak occurs in their geography. COVID-19 may also affect employees of third-party CROs located in affected geographies that Yumanity relies upon to carry out its clinical trials. Any negative impact COVID-19 has to patient enrollment or treatment or the execution of Yumanity’s current product candidates and any future product candidates could cause costly delays to clinical trial activities, which could adversely affect Yumanity’s ability to obtain regulatory approval for and to commercialize its current product candidate and any future product candidates, increase its operating expenses, and have a material adverse effect on its financial results.

Further, the COVID-19 outbreak caused delays in Yumanity’s Phase 1 single ascending dose trial of YTX-7739 and may cause delays in Yumanity’s other clinical trials, including delays in enrollment, due to diversion or prioritization of trial site resources away from the conduct of clinical trials and toward the COVID-19 pandemic. Key clinical trial activities, such as site monitoring, may be interrupted due to restrictions in travel, and some patients may be unwilling to enroll in Yumanity’s trials or be unable to comply with clinical trial protocols if quarantines or travel restrictions impede patient movement or interrupt healthcare services, which would delay Yumanity’s ability to conduct clinical trials or release clinical trial results. The spread of COVID-19, or another infectious disease, could also negatively affect the operations at Yumanity’s third-party manufacturers, which could result in delays or disruptions in the supply of Yumanity’s current product candidates and any future product candidates. In addition, Yumanity may take temporary precautionary measures intended to help minimize the risk of the virus to its employees, including temporarily requiring all employees to work remotely, suspending all non-essential travel worldwide for its employees, and discouraging employee attendance at industry events and in-person work-related meetings, which could negatively affect Yumanity’s business.

 

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Yumanity cannot presently predict the scope and severity of any potential business shutdowns or disruptions. If Yumanity or any of the third parties with whom it engages, however, were to experience shutdowns or other business disruptions, Yumanity’s ability to conduct its business in the manner and on the timelines presently planned could be materially and negatively affected, which could have a material adverse impact on its business and its results of operation and financial condition.

Risks Related to Yumanity’s Regulatory Approval and Other Legal Compliance Matters

The regulatory approval processes of the FDA and comparable foreign regulatory authorities are lengthy, time-consuming, and inherently unpredictable. If Yumanity is ultimately unable to obtain regulatory approval for its product candidates, Yumanity will be unable to generate product revenue and its business will be substantially harmed.

The time required to obtain approval by the FDA and comparable foreign regulatory authorities is unpredictable, typically takes many years following the commencement of clinical trials, and depends upon numerous factors, including the type, complexity, and novelty of the product candidates involved. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions, which may cause delays in the approval or the decision not to approve an application. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that its data are insufficient for approval and require additional preclinical, clinical or other studies. Moreover, the FDA or other regulatory authorities may fail to clear or approve companion diagnostics that Yumanity contemplates using with its therapeutic product candidates. Yumanity has not submitted for, or obtained regulatory approval for any product candidate, and it is possible that none of its existing product candidates or any product candidates Yumanity may seek to develop in the future will ever obtain regulatory approval.

Applications for its product candidates could fail to receive regulatory approval for many reasons, including but not limited to the following:

 

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the FDA or comparable foreign regulatory authorities may disagree with the design, implementation, or results of its clinical trials;

 

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the FDA or comparable foreign regulatory authorities may determine that its product candidates are not safe and effective, only moderately effective, or have undesirable or unintended side effects, toxicities, or other characteristics that preclude its obtaining marketing approval or prevent or limit commercial use;

 

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the population studied in the clinical program may not be sufficiently broad or representative to assure efficacy and safety in the full population for which Yumanity seek approval;

 

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the FDA or comparable foreign regulatory authorities may disagree with its interpretation of data from preclinical studies or clinical trials;

 

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the data collected from clinical trials of its product candidates may not be sufficient to support the submission of an NDA or other submission, or to obtain regulatory approval in the United States or elsewhere;

 

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Yumanity may be unable to demonstrate to the FDA or comparable foreign regulatory authorities that a product candidate’s risk-benefit ratio for its proposed indication is acceptable;

 

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the FDA or comparable foreign regulatory authorities may find deficiencies with or fail to approve the manufacturing processes, test procedures and specifications, or facilities of third-party manufacturers with which Yumanity contract for clinical and commercial supplies; and

 

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

This lengthy approval process, as well as the unpredictability of the results of clinical trials, may result in Yumanity’s failing to obtain regulatory approval to market any of its product candidates, which would significantly harm its business, results of operations, and prospects.

 

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Even if Yumanity obtains regulatory approval for its product candidates, its products will remain subject to extensive regulatory scrutiny.

Even if Yumanity receives marketing approval for its product candidates, regulatory authorities may still impose significant restrictions on its product candidates, indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies. If any of its product candidates are approved, they will be subject to ongoing regulatory requirements, including for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies, and submission of safety, efficacy, and other post-marketing information, including both federal and state requirements in the United States and requirements of comparable foreign regulatory authorities.

Manufacturers and manufacturers’ facilities are required to comply with extensive requirements imposed by the FDA and comparable foreign regulatory authorities, including, for example, ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practice (“cGMP”) regulations. As such, Yumanity and its contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any new drug application (“NDA”) or comparable marketing approval. Accordingly, Yumanity and others with whom Yumanity works must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control.

The FDA has significant post-marketing authority, including, for example, the authority to require labeling changes based on new safety information and to require post-marketing studies or clinical trials to evaluate serious safety risks related to the use of a drug. The FDA also has the authority to require, as part of an NDA or post-approval, the submission of a REMS. Any REMS required by the FDA may lead to increased costs to assure compliance with new post-approval regulatory requirements and potential requirements or restrictions on the sale of approved products, all of which could lead to lower sales volume and revenue.

Any regulatory approvals that Yumanity receives for its product candidates will be subject to limitations on the approved indicated uses for which the product may be marketed and promoted or to the conditions of approval (including the requirement to implement a REMS), or contain requirements for potentially costly post-marketing testing. Yumanity will be required to report certain adverse reactions and production problems, if any, to the FDA and comparable foreign regulatory authorities. Any new legislation addressing drug safety issues could result in delays in product development or commercialization, or increased costs to assure compliance. The FDA and other agencies, including the U.S. Department of Justice, closely regulate and monitor the post-approval marketing and promotion of products to ensure that they are manufactured, marketed, and distributed only for the approved indications and in accordance with the provisions of the approved labeling. Yumanity will have to comply with requirements concerning advertising and promotion for its products. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved label. As such, Yumanity may not promote its products for indications or uses for which they do not have approval. The holder of an approved NDA or comparable marketing approval must submit new or supplemental applications and obtain approval for certain changes to the approved product, product labeling, or manufacturing process. Yumanity could also be asked to conduct post-marketing studies or clinical trials to verify the safety and efficacy of its products in general or in specific patient subsets.

If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, such regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If Yumanity fails to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may, among other things:

 

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issue warning or untitled letters that would result in adverse publicity;

 

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impose civil or criminal penalties;

 

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suspend or withdraw regulatory approvals;

 

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suspend any of its ongoing clinical trials;

 

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refuse to approve pending applications or supplements to approved applications submitted by Yumanity;

 

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•

impose restrictions on its operations, including closing its contract manufacturers’ facilities;

 

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seize or detain products; or

 

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request that Yumanity initiate a product recall.

Any government investigation of alleged violations of law could require Yumanity to expend significant time and resources in response, and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect its ability to commercialize and generate revenue from its products, if approved. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of the company and its operating results will be adversely affected.

Yumanity is subject to healthcare laws and regulations, which could expose Yumanity to criminal sanctions, civil penalties, contractual damages, reputational harm, and diminished profits and future earnings.

Although Yumanity does not currently have any products on the market, if Yumanity obtains FDA approval for any of its product candidates and begins commercializing its products, Yumanity may be subject to additional healthcare statutory and regulatory requirements and enforcement by the federal government and the states and foreign governments in which Yumanity conducts its business. Healthcare providers, physicians, third-party payors, and others play a primary role in the recommendation and prescription of its product candidates, if approved. Its future arrangements with third-party payors will expose Yumanity to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which Yumanity markets, sells, and distributes its product candidates, if Yumanity obtains marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:

 

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the federal Anti-Kickback Statute (“AKS”) prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving, or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order, or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid. The term “remuneration” has been broadly interpreted to include anything of value. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. A person or entity does not need to have actual knowledge of the federal AKS or specific intent to violate it to have committed a violation. The AKS has been interpreted to apply to arrangements between biopharmaceutical manufacturers on the one hand and prescribers, purchasers, and formulary managers, among others, on the other;

 

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the federal False Claims Act imposes criminal and civil penalties, including those from civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government. Manufacturers can be held liable under the False Claims Act even when they do not submit claims directly to government payors if they are deemed to “cause” the submission of false or fraudulent claims. When an entity is determined to have violated the False Claims Act, the government may impose civil fines and penalties for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs;

 

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

 

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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, which also impose obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security, and transmission of individually identifiable health information on health plans, healthcare clearing houses, and certain healthcare providers and their business associates, defined as independent contractors or agents of covered entities that create, receive or obtain protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, there may be additional federal, state and non-U.S. laws which govern the privacy and security of health and other personal information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts;

 

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the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact, or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items, or services;

 

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the federal transparency requirements, sometimes referred to as the “Sunshine Act,” under the Patient Protection and Affordable Care Act (the “ACA”) require manufacturers of drugs, devices, biologics, and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to the CMS information related to payments and other transfers of value to physicians, as defined by the law, and teaching hospitals and physician ownership and investment interests, and requires applicable manufacturers and group purchasing organizations to report annually the ownership and investment interests held by such physicians and their immediate family members and payments or other “transfers of value” to such physician owners. Effective January 1, 2022, these reporting obligations will extend to include transfers of value made in the previous year to certain non-physician providers such as physician assistants and nurse practitioners; and

 

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analogous state laws and regulations, such as state anti-kickback and false claims laws and transparency laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures and drug pricing.

Pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of promotional and marketing activities, such as: providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in off-label promotion; and submitting inflated best price information to the Medicaid Rebate Program to reduce liability for Medicaid rebates. Ensuring that Yumanity’s internal operations and future business arrangements with third parties comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that its business practices do not comply with current or future statutes, regulations, or case law involving applicable fraud and abuse or other healthcare laws and regulations. If its operations, including anticipated activities to be conducted by its sales team, were found to be in violation of any of these laws or any other governmental regulations that may apply to us, Yumanity may be subject to significant civil, criminal, and administrative penalties, damages, fines, and exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of its operations, any of which could substantially disrupt its operations. If any of the physicians or other providers or entities with whom Yumanity expect to do business is found not to be in compliance with applicable laws, they may be subject to criminal, civil, or administrative sanctions, including exclusions from government funded healthcare programs.

 

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If any of Yumanity’s product candidates obtain regulatory approval, additional competitors could enter the market with generic or other versions of such drugs, which may result in a material decline in sales of affected products.

Under the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”) a pharmaceutical manufacturer may file an abbreviated new drug application (“ANDA”) seeking approval of a generic copy of an approved, small-molecule innovator product. Under the Hatch-Waxman Act, a manufacturer may also submit an NDA under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act that references the FDA’s prior approval of the small-molecule innovator product. A 505(b)(2) NDA product may be for a new or improved version of the original innovator product. The Hatch-Waxman Act also provides for certain periods of regulatory exclusivity, which preclude FDA approval (or in some circumstances, FDA filing and reviewing) of an ANDA or 505(b)(2) NDA. For example, a drug that is granted regulatory approval may be eligible for five years of marketing exclusivity in the United States following regulatory approval if that drug is classified as a new chemical entity (“NCE”). A drug can be classified as a NCE if the FDA has not previously approved any other drug containing the same active moiety.

In addition to the benefits of regulatory exclusivity, an innovator NDA holder may have patents claiming the active ingredient, product formulation or an approved use of the drug, which would be listed with the product in the FDA publication, “Approved Drug Products with Therapeutic Equivalence Evaluations,” known as the “Orange Book.” If there are patents listed in the Orange Book, a generic or 505(b)(2) applicant that seeks to market its product before expiration of the patents must include in the ANDA or 505(b)(2) NDA a “Paragraph IV certification,” challenging the validity or enforceability of, or claiming non-infringement of, the listed patent or patents. Appropriate notice of the certification must be given to the innovator, too, and if within 45 days of receiving such notice the innovator sues to protect its patents, approval of the ANDA or 505(b)(2) is stayed for 30 months, or as lengthened or shortened by the court.

Accordingly, if any of Yumanity’s product candidates are approved, competitors could file ANDAs for generic versions of its small-molecule drug products or 505(b)(2) NDAs that reference its small-molecule drug products, respectively. If there are patents listed for its small-molecule drug products in the Orange Book, those ANDAs and 505(b)(2) NDAs would be required to include a certification as to each listed patent indicating whether the ANDA or 505(b)(2) NDA applicant does or does not intend to challenge the patent. Yumanity cannot predict which, if any, patents in its current portfolio or patents Yumanity may obtain in the future will be eligible for listing in the Orange Book, how any generic competitor would address such patents, whether Yumanity would sue on any such patents, or the outcome of any such suit.

Yumanity may not be successful in securing or maintaining proprietary patent protection for products and technologies Yumanity develops or licenses. Moreover, if any of its owned or in-licensed patents that are listed in the Orange Book are successfully challenged by way of a Paragraph IV certification and subsequent litigation, the affected product could immediately face generic competition and its sales would likely decline rapidly and materially. See “Risks Related to Yumanity’s Intellectual Property Rights.”

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

The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products, such as YTX-7739, if approved. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. For example, if Yumanity receives marketing approval for YTX-7739 as a treatment for Parkinson’s disease, physicians may nevertheless prescribe YTX-7739 to their patients in a manner that is inconsistent with the approved label. If Yumanity is found to have promoted such off-label uses, Yumanity may become subject to significant liability. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed. If Yumanity cannot successfully manage the promotion of its product candidates, if approved, Yumanity could become subject to significant liability, which would materially adversely affect its business and financial condition.

 

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Even if approved, reimbursement policies could limit its ability to sell its product candidates.

Sales of Yumanity’s drugs will depend, in part, on the extent to which Yumanity’s drugs will be covered by third-party payors, such as government health programs, commercial insurance, and managed healthcare organizations. Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which Yumanity may obtain regulatory approval.

Market acceptance and sales of its product candidates will depend on reimbursement policies and may be affected by healthcare reform measures. Coverage and adequate reimbursement from governmental healthcare programs, such as Medicare and Medicaid in the United States, and commercial payors are critical to new product acceptance. Third-party payors decide which drugs they will pay for and establish reimbursement levels. In the United States, the principal decisions about reimbursement for new medicines are typically made by CMS. CMS decides whether and to what extent Yumanity’s products will be covered and reimbursed under Medicare and private payors tend to follow CMS to a substantial degree. Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a therapeutic is:

 

•

a covered benefit under its health plan;

 

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safe, effective and medically necessary;

 

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appropriate for the specific patient;

 

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cost-effective; and

 

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neither experimental nor investigational.

Government authorities and other third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels for those medications. Cost containment is a primary concern in the U.S. healthcare industry and elsewhere. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Yumanity cannot be sure that reimbursement will be available for its product candidates and, if reimbursement is available, the level of such reimbursement. Reimbursement may impact the demand for, or the price of, its product candidates. If reimbursement is not available or is available only at limited levels, Yumanity may not be able to successfully commercialize its product candidates. Limited coverage and less than adequate reimbursement may reduce the demand for, or the price of, any product for which Yumanity obtains regulatory approval.

In some foreign countries, particularly in Canada and European countries, the pricing of prescription pharmaceuticals is subject to strict governmental control. In these countries, pricing negotiations with governmental authorities can take six to 12 months or longer after the receipt of regulatory approval and product launch. To obtain favorable reimbursement for the indications sought or pricing approval in some countries, Yumanity may be required to conduct a clinical study that compares the cost-effectiveness of its product candidates with other available therapies. If reimbursement for its product candidates is unavailable in any country in which Yumanity seeks reimbursement, if it is limited in scope or amount, if it is conditioned upon its completion of additional clinical trials, or if pricing is set at unsatisfactory levels, its operating results could be materially adversely affected.

Recently enacted and future legislation may increase the difficulty and cost for Yumanity to obtain marketing approval of and commercialize its product candidates and affect the prices Yumanity 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 prevent or delay regulatory approval of its product candidates, restrict or regulate post-approval activities, and affect its ability to profitably sell any product candidates for which Yumanity obtains marketing approval.

 

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Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality, and/or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. In March 2010, President Obama signed into law the ACA, a sweeping law intended 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 the healthcare and health insurance industries, impose new taxes and fees on the health industry, and impose additional health policy reforms.

Among the provisions of the ACA of importance to its product candidates are the following:

 

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an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs;

 

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a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted, or injected;

 

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an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13.0% of the average manufacturer price for branded and generic drugs, respectively;

 

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expansion of healthcare fraud and abuse laws, including the False Claims Act and the AKS, which include, among other things, new government investigative powers and enhanced penalties for non-compliance;

 

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a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% (increased to 70% in 2019 pursuant to subsequent legislation) point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D;

 

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extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

 

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expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals, thereby potentially increasing manufacturers’ Medicaid rebate liability;

 

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expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;

 

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the requirements under the federal open payments program and its implementing regulations;

 

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a requirement to annually report drug samples that manufacturers and distributors provide to physicians; and

 

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a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

Since its enactment, some of the provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial, congressional, and executive challenges. As a result, there have been delays in the implementation of, and action taken to repeal or replace, certain aspects of the ACA. The U.S. Supreme Court has upheld certain key aspects of the legislation, including a tax-based shared responsibility payment imposed on certain individuals who fail to maintain qualifying health coverage for all or part of a year, which is commonly known as the requirement that all individuals maintain health insurance coverage or pay a penalty, referred to as the “individual mandate.” However, as a result of tax reform legislation passed in late December 2017, the Tax Cuts and Jobs Act of 2017, or the TCJA, the individual mandate has been eliminated effective January 1, 2019. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas ruled that the individual mandate is a critical and inseverable feature of the ACA, and therefore, because it was repealed as part of the TCJA, the remaining provisions of the ACA are invalid as well. On December 18, 2019, the U.S. Court of Appeals for the 5th Circuit ruled that the individual mandate was unconstitutional but remanded the case back to the District Court to

 

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determine whether the remaining provisions of the ACA are invalid as well. On March 2, 2020, the U.S. Supreme Court granted the petitions for writs of certiorari to review the case, although it is unclear when a decision will be made or how the Supreme Court will rule. According to the Congressional Budget Office, the repeal of the individual mandate will cause 13 million fewer Americans to be insured in 2027 and premiums in insurance markets may rise.

Since January 2017, President Trump has signed various Executive Orders designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. One Executive Order directs federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Another Executive Order terminates the cost-sharing subsidies (“CSR”) that reimburse insurers under the ACA. Several state Attorneys General filed suit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25, 2017. The loss of the CSR payments is expected to increase premiums on certain policies issued by qualified health plans under the ACA. In addition, the CMS has recently published a final rule that would give states greater flexibility, starting in 2020, in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces. Litigation and legislation over the ACA are likely to continue, with unpredictable and uncertain results. Yumanity continues to evaluate the effect that the ACA and its possible repeal and replacement has on its business.

In addition, other legislative changes have been proposed and adopted since the ACA was enacted. These changes included aggregate reductions to Medicare payments to providers of 2% per fiscal year through 2030. However, pursuant to the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, these Medicare sequester reductions will be suspended from May 1, 2020 through December 31, 2020 due to the COVID-19 pandemic. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Yumanity expects that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and in additional downward pressure on the price that Yumanity receives for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers. The implementation of cost containment measures or other healthcare reforms may prevent Yumanity from being able to generate revenue, attain profitability, or commercialize its products.

Yumanity cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of its product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject Yumanity to more stringent labeling and post-marketing testing and other requirements.

It is likely that federal and state legislatures within the United States and foreign governments will continue to consider changes to existing healthcare legislation. Yumanity cannot predict the reform initiatives that may be adopted in the future or whether initiatives that have been adopted will be repealed or modified. The continuing efforts of the government, insurance companies, managed care organizations, and other healthcare payors of to contain or reduce costs of healthcare may adversely affect the demand for any product candidates for which Yumanity may obtain regulatory approval, its ability to set a price that Yumanity believes is fair for its products, its ability to obtain coverage and reimbursement approval for a product, its ability to generate revenue and achieve or maintain profitability; and the level of taxes that Yumanity is required to pay.

 

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Yumanity’s future growth may depend, in part, on its ability to commercialize its product candidates in foreign markets, where Yumanity would be subject to additional regulatory burdens and other risks and uncertainties.

Its future profitability may depend, in part, on its ability to commercialize its product candidates in foreign markets for which Yumanity may rely on collaboration with third parties. If Yumanity commercializes its product candidates in foreign markets, Yumanity would be subject to additional risks and uncertainties, including:

 

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its customers’ ability to obtain reimbursement for its product candidates in foreign markets;

 

•

its inability to directly control commercial activities because Yumanity is relying on third parties;

 

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

 

•

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

 

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import or export licensing requirements;

 

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longer accounts receivable collection times;

 

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longer lead times for shipping;

 

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language barriers for technical training;

 

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reduced protection of intellectual property rights in some foreign countries;

 

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the existence of additional potentially relevant third-party intellectual property rights;

 

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foreign currency exchange rate fluctuations; and

 

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

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

Obtaining and maintaining regulatory approval of Yumanity’s product candidates in one jurisdiction does not mean that Yumanity will be successful in obtaining regulatory approval of its product candidates in other jurisdictions.

In order to market any product outside of the United States, however, Yumanity must establish and comply with the numerous and varying safety, efficacy, and other regulatory requirements of other countries. Obtaining and maintaining regulatory approval of its product candidates in one jurisdiction does not guarantee that Yumanity will be able to obtain or maintain regulatory approval in any other jurisdiction, but a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. For example, even if the FDA or other comparable foreign regulatory authority grants marketing approval of a product candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing, and promotion of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from those in the United States, including additional preclinical studies or clinical trials as clinical trials conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. The marketing approval processes in other countries may implicate all of the risks detailed above regarding FDA approval in the United States, as well as other risks. In many jurisdictions outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that Yumanity intends to charge for its products is also subject to approval.

Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties, and costs for Yumanity and could delay or prevent the introduction of its products in certain countries. Failure to obtain marketing approval in other countries or any delay or other setback in obtaining such approval would impair its ability to market its product candidates in such foreign markets. Any such impairment would reduce the size of its potential market, which could have a material adverse impact on its business, results of operations, and prospects.

 

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Yumanity’s employees, independent contractors, consultants, commercial partners, and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

Yumanity is exposed to the risk of fraud, misconduct, or other illegal activity by its employees, independent contractors, consultants, commercial partners, and vendors. Misconduct by these parties could include intentional, reckless, and negligent conduct that fails to: comply with the laws of the FDA and other comparable foreign regulatory authorities; provide true, complete and accurate information to the FDA and other comparable foreign regulatory authorities; comply with manufacturing standards Yumanity has established; comply with healthcare fraud and abuse laws in the United States and similar foreign fraudulent misconduct laws; or report financial information or data accurately or to disclose unauthorized activities to us. If Yumanity obtains FDA approval of any of its product candidates and begins commercializing those products in the United States, its potential exposure under such laws will increase significantly, and its costs associated with compliance with such laws are also likely to increase. In particular, sales, marketing, and other business arrangements in the healthcare industry are subject to extensive laws designed to prevent fraud, kickbacks, self-dealing, and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales and commission, certain customer incentive programs, and other business arrangements generally. Activities subject to these laws also involve the improper use of information obtained in the course of patient recruitment for clinical trials, which could result in regulatory sanctions and cause serious harm to its reputation. Yumanity has adopted a code of business conduct and ethics, but it is not always possible to identify and deter misconduct by employees and third parties, and the precautions Yumanity take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting Yumanity from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws. If any such actions are instituted against us, and Yumanity is not successful in defending itself or asserting its rights, those actions could have a significant impact on its business, including the imposition of significant fines or other sanctions.

If Yumanity or any contract manufacturers and suppliers Yumanity engages fails to comply with environmental, health, and safety laws and regulations, Yumanity could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of its business.

Yumanity and any contract manufacturers and suppliers Yumanity engages are subject to numerous federal, state, and local environmental, health, and safety laws, regulations, and permitting requirements, including those governing laboratory procedures; the generation, handling, use, storage, treatment, and disposal of hazardous and regulated materials and wastes; the emission and discharge of hazardous materials into the ground, air, and water; and employee health and safety. Under certain environmental laws, Yumanity could be held responsible for costs relating to any contamination at its current or past facilities and at third-party facilities. Yumanity also could incur significant costs associated with civil or criminal fines and penalties.

Yumanity could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other worldwide anti-bribery laws.

Its business activities may be subject to the FCPA and similar anti-bribery or anti-corruption laws, regulations or rules of other countries in which Yumanity operates, including the U.K. Bribery Act. The FCPA generally prohibits offering, promising, giving, or authorizing others to give anything of value, either directly or indirectly, to a non-U.S. government official in order to influence official action, or otherwise obtain or retain business. The FCPA also requires public companies to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls. Its business is heavily regulated and therefore involves significant interaction with public officials, including officials of non-U.S. governments. Additionally, in many other countries, the healthcare providers who prescribe pharmaceuticals are employed by their government, and the purchasers of pharmaceuticals are government entities; therefore, its dealings with these prescribers and purchasers are subject to regulation under the FCPA. Recently the SEC and Department of Justice have increased their FCPA enforcement activities with respect to biotechnology and pharmaceutical companies. There is no certainty that all of its employees, agents, contractors, or collaborators, or those of its affiliates, will comply with all applicable laws and regulations, particularly given the high level of complexity of these laws. Violations of these laws and regulations could result in fines, criminal sanctions against us, its officers, or its employees, the closing down of its facilities, requirements to obtain export licenses, cessation of business activities in sanctioned countries, implementation of compliance programs, and prohibitions on the conduct of its business. Any such violations could include prohibitions on its ability to offer its products in one or more countries and could materially damage its reputation, its brand, its international expansion efforts, its ability to attract and retain employees, and its business, prospects, operating results, and financial condition.

 

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Risks Related to Yumanity’s Reliance on Third Parties

Yumanity depends on its collaboration with Merck and may in the future depend on other collaborations with third parties for the research, development and commercialization of certain of the product candidates Yumanity may develop. If any such collaborations are not successful, Yumanity may not be able to realize the market potential of those product candidates.

Yumanity has entered into a collaboration agreement with Merck and may seek other third-party collaborators for the research, development, and commercialization of certain of the product candidates Yumanity may develop. Its likely collaborators for any other collaboration arrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies, biotechnology companies and academic institutions. Under its collaboration with Merck, Yumanity has, and if Yumanity enters into any such arrangements with any other third parties, Yumanity will likely have, shared or limited control over the amount and timing of resources that its collaborators dedicate to the development or potential commercialization of any product candidates Yumanity may seek to develop with them. Yumanity’s ability to generate revenue from these arrangements with commercial entities will depend on its collaborators’ abilities to successfully perform the functions assigned to them in these arrangements. Yumanity cannot predict the success of any collaboration that Yumanity enters into.

Collaborations involving its research programs, or any product candidates Yumanity may develop, pose the following risks to Yumanity:

 

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collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations;

 

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collaborators may not properly obtain, maintain, enforce, or defend intellectual property or proprietary rights relating to its product candidates or research programs or may use its proprietary information in such a way as to expose Yumanity to potential litigation or other intellectual property related proceedings, including proceedings challenging the scope, ownership, validity and enforceability of its intellectual property;

 

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collaborators may own or co-own intellectual property covering its product candidates or research programs that results from its collaboration with them, and in such cases, Yumanity may not have the exclusive right to commercialize such intellectual property or such product candidates or research programs;

 

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Yumanity may need the cooperation of its collaborators to enforce or defend any intellectual property Yumanity contribute to or that arises out of its collaborations, which may not be provided to us;

 

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disputes may arise between the collaborators and Yumanity that result in the delay or termination of the research, development, or commercialization of its product candidates or research programs or that result in costly litigation or arbitration that diverts management attention and resources;

 

•

collaborators may decide to not pursue development and commercialization of any product candidates Yumanity develops or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborator’s strategic focus or available funding or external factors such as an acquisition that diverts resources or creates competing priorities;

 

•

collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials, or require a new formulation of a product candidate for clinical testing;

 

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collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with its product candidates or research programs if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than Yumanity’s;

 

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•

collaborators with marketing and distribution rights to one or more product candidates may not commit sufficient resources to the marketing and distribution of such product candidates;

 

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Yumanity may lose certain valuable rights under circumstances identified in its collaborations, including if Yumanity undergoes a change of control;

 

•

collaborators may undergo a change of control and the new owners may decide to take the collaboration in a direction which is not in its best interest;

 

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collaborators may become bankrupt, which may significantly delay its research or development programs, or may cause Yumanity to lose access to valuable technology, know-how or intellectual property of the collaborator relating to its products, product candidates or research programs;

 

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key personnel at its collaborators may leave, which could negatively impact its ability to productively work with its collaborators;

 

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collaborations may require Yumanity to incur short and long-term expenditures, issue securities that dilute its stockholders, or disrupt its management and business;

 

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collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates or its discovery engine platform; and

 

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collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. If a present or future collaborator of Yumanity were to be involved in a business combination, the continued pursuit and emphasis on its development or commercialization program under such collaboration could be delayed, diminished, or terminated.

Yumanity may face significant competition in seeking appropriate collaborations. Recent business combinations among biotechnology and pharmaceutical companies have resulted in a reduced number of potential collaborators. In addition, the negotiation process is time-consuming and complex, and Yumanity may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If Yumanity is unable to do so, Yumanity may have to curtail the development of the product candidate for which Yumanity is seeking to collaborate, reduce or delay its development program or one or more of its other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase its expenditures and undertake development or commercialization activities at its own expense. If Yumanity elects to increase its expenditures to fund development or commercialization activities on its own, Yumanity may need to obtain additional capital, which may not be available to it on acceptable terms or at all. If Yumanity does not have sufficient funds, Yumanity may not be able to further develop product candidates or bring them to market and generate product revenue.

Under its collaboration with Merck, and if Yumanity enters into other collaborations to develop and potentially commercialize any product candidates, Yumanity may not be able to realize the benefit of such transactions if Yumanity or its collaborator elects not to exercise the rights granted under the agreement or if Yumanity or its collaborator are unable to successfully integrate a product candidate into existing operations and company culture. In addition, if Yumanity’s agreement with any of its collaborators terminates, its access to technology and intellectual property licensed to Yumanity by that collaborator may be restricted or terminate entirely, which may delay its continued development of its product candidates utilizing the collaborator’s technology or intellectual property or require Yumanity to stop development of those product candidates completely. Yumanity may also find it more difficult to find a suitable replacement collaborator or attract new collaborators, and its development programs may be delayed or the perception of Yumanity in the business and financial communities could be adversely affected. Many of the risks relating to product development, regulatory approval, and commercialization described in this “Risk Factors” section also applies to the activities of its collaborators and any negative impact on its collaborators may adversely affect Yumanity.

Yumanity’s drug development programs and the potential commercialization of its product candidates will require substantial additional cash to fund expenses. For some of its product candidates, Yumanity may decide to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of those product candidates, such as those that may result from its collaboration with Merck.

 

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Whether Yumanity 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 studies, 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 its 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 or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with Yumanity for its product candidate. The terms of any collaborations or other arrangements that Yumanity may establish may not be favorable to it.

In addition, Yumanity’s collaboration with Merck and any future collaborations that Yumanity enters into may not be successful. The success of its collaboration arrangements will depend heavily on the efforts and activities of its collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations. Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters can lead to delays in the development process or commercializing the applicable product candidate and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision-making authority. Collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party. Termination of Yumanity’s collaboration with Merck or any such termination or expiration of future collaborations would adversely affect Yumanity financially and could harm its business reputation.

Yumanity relies, and expects to continue to rely, on third parties to conduct any preclinical studies and clinical trials for its product candidates. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, Yumanity may not be able to obtain regulatory approval for or commercialize its product candidates and its business could be substantially harmed.

Yumanity does not have the ability to independently conduct preclinical studies and clinical trials. Yumanity relies on medical institutions, clinical investigators, contract laboratories, and other third parties, such as CROs, to conduct preclinical studies and clinical trials on its product candidates. Yumanity enters into agreements with third-party CROs to provide monitors for and to manage data for its ongoing clinical trials. Yumanity will rely heavily on these parties for execution of clinical trials for its product candidates and control only certain aspects of their activities. As a result, Yumanity will have less direct control over the conduct, timing, and completion of these clinical trials and the management of data developed through clinical trials than would be the case if Yumanity were relying entirely upon its own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside parties may:

 

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have staffing difficulties;

 

•

fail to comply with contractual obligations;

 

•

experience regulatory compliance issues;

 

•

undergo changes in priorities or become financially distressed; or

 

•

form relationships with other entities, some of which may be its competitors.

These factors may materially adversely affect the willingness or ability of third parties to conduct its clinical trials and may subject Yumanity to unexpected cost increases that are beyond its control. Nevertheless, Yumanity is responsible for ensuring that each of its clinical trials is conducted in accordance with the applicable protocol, legal, regulatory, and scientific requirements and standards, and its reliance on CROs does not relieve Yumanity of its regulatory responsibilities. Yumanity and its CROs are required to comply with regulations and guidelines, including Good Clinical Practices (“GCPs”) for conducting, monitoring, recording, and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the study patients are adequately informed of the potential risks of participating in clinical trials. These regulations are enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA enforces GCP regulations through periodic

 

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inspections of clinical study sponsors, principal investigators and study sites. If Yumanity or its CROs fail to comply with applicable GCPs, the clinical data generated in its clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require Yumanity to perform additional clinical trials before approving its marketing applications. Yumanity cannot assure you that, upon inspection, the FDA will determine that any of its clinical trials comply with GCPs. In addition, its clinical trials must be conducted with product candidates produced under cGMP regulations and will require a large number of test patients. Its failure or the failure of its CROs to comply with these regulations may require Yumanity to repeat clinical trials, which would delay the regulatory approval process and could also subject it to enforcement action up to and including civil and criminal penalties.

Although Yumanity does design its clinical trials for its product candidates, CROs conduct all of the clinical trials. As a result, many important aspects of its drug development programs are outside of its direct control. In addition, the CROs may not perform all of their obligations under arrangements with Yumanity or in compliance with regulatory requirements, but Yumanity remains responsible and is subject to enforcement action that may include civil penalties and criminal prosecution for any violations of FDA laws and regulations during the conduct of its clinical trials. If the CROs do not perform clinical trials in a satisfactory manner, breach their obligations to Yumanity, or fail to comply with regulatory requirements, the development and commercialization of its product candidates may be delayed or its development program materially and irreversibly harmed. Yumanity cannot control the amount and timing of resources these CROs devote to its program or its clinical products. If Yumanity is unable to rely on clinical data collected by its CROs, Yumanity could be required to repeat, extend the duration of, or increase the size of its clinical trials and this could significantly delay commercialization and require significantly greater expenditures.

If any of its relationships with these third-party CROs terminate, Yumanity may not be able to enter into arrangements with alternative CROs. For example, the sponsored research agreement with Northwestern may be terminated by either party upon 60 days’ written notice to the other party. If its collaboration is delayed or terminated or its ability to continue to use the current research space is terminated as a result of conflicts of interest, Yumanity may not be able to continue its planned research projects and related clinical trials on the expected timeline and may need to spend significant time and efforts to secure alternative lab facilities and equipment. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to its clinical protocols, regulatory requirements or for other reasons, any clinical trials such CROs are associated with may be extended, delayed, or terminated, and Yumanity may not be able to obtain regulatory approval for or successfully commercialize its product candidates. As a result, Yumanity believes that its financial results and the commercial prospects for its product candidates in the subject indication would be harmed, its costs could increase and its ability to generate revenue could be delayed.

The manufacture of Yumanity’s product candidates, particularly those that utilize its discovery engine platform, is complex and Yumanity may encounter difficulties in production. If Yumanity or any of its third-party manufacturers encounter such difficulties, or fail to meet rigorously enforced regulatory standards, its ability to provide supply of its product candidates for preclinical studies and clinical trials or its products for patients, if approved, could be delayed or stopped, or Yumanity may be unable to maintain a commercially viable cost structure.

The processes involved in manufacturing its drug product candidates, particularly those that utilize its discovery engine platform, are complex, expensive, highly-regulated, and subject to multiple risks. Further, as product candidates are developed through preclinical studies to late-stage clinical trials towards approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods, are altered along the way in an effort to optimize processes and results. Such changes carry the risk that they will not achieve these intended objectives, and any of these changes could cause its product candidates to perform differently and affect the results of planned clinical trials or other future clinical trials.

In addition, the manufacturing process for any products that Yumanity may develop is subject to FDA and other comparable foreign regulatory authority approval processes and continuous oversight, and Yumanity will need to contract with manufacturers who can meet all applicable FDA and foreign regulatory authority requirements, including, for example, complying with cGMPs, on an ongoing basis. If Yumanity or its third-party manufacturers

 

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are unable to reliably produce products to specifications acceptable to the FDA or other regulatory authorities, Yumanity may not obtain or maintain the approvals Yumanity needs to commercialize such products. Even if Yumanity obtains regulatory approval for any of its product candidates, there is no assurance that either Yumanity or its contract manufacturers will be able to manufacture the approved product to specifications acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the product, or to meet potential future demand. Any of these challenges could delay completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical study costs, delay approval of its product candidate, impair commercialization efforts, increase its cost of goods, and have an adverse effect on its business, financial condition, results of operations, and growth prospects.

Yumanity relies completely on third-party suppliers to manufacture its clinical drug supplies for its product candidates, and Yumanity intends to rely on third parties to produce preclinical, clinical, and commercial supplies of any future product candidates.

Yumanity does not currently have, nor does Yumanity plan to acquire, the infrastructure or capability to internally manufacture its clinical drug supply of its product candidates, or any future product candidates, for use in the conduct of its preclinical studies and clinical trials, and Yumanity lacks the internal resources and the capability to manufacture any product candidates on a clinical or commercial scale. The facilities used by its contract manufacturers to manufacture the active pharmaceutical ingredient and final drug product must complete a pre-approval inspection by the FDA and other comparable foreign regulatory agencies to assess compliance with applicable requirements, including cGMPs, after Yumanity submits its NDA or relevant foreign regulatory submission to the applicable regulatory agency.

Yumanity does not control the manufacturing process of, and is completely dependent on, its contract manufacturers to comply with cGMPs for manufacture of both active drug substances and finished drug products. If its contract manufacturers cannot successfully manufacture material that conforms to its specifications and the strict regulatory requirements of the FDA or applicable foreign regulatory agencies, they will not be able to pass a pre-approval inspection or secure and/or maintain regulatory approval for their manufacturing facilities. In addition, Yumanity has no direct control over its contract manufacturers’ ability to maintain adequate quality control, quality assurance, and qualified personnel. Furthermore, all of its contract manufacturers are engaged with other companies to supply and/or manufacture materials or products for such companies, which exposes its manufacturers to regulatory risks for the production of such materials and products. As a result, failure to satisfy the regulatory requirements for the production of those materials and products may affect the regulatory clearance of its contract manufacturers’ facilities generally. If the FDA or an applicable foreign regulatory agency determines now or in the future that these facilities for the manufacture of its product candidates are noncompliant, Yumanity may need to find alternative manufacturing facilities, which would adversely impact its ability to develop, obtain regulatory approval for or market its product candidates. Its reliance on contract manufacturers also exposes Yumanity to the possibility that they, or third parties with access to their facilities, will have access to and may appropriate its trade secrets or other proprietary information.

Yumanity does not have long-term supply agreements in place with its contractors, and each batch of its product candidates is individually contracted under a quality and supply agreement. If Yumanity engages new contractors, such contractors must complete an inspection by the FDA and other applicable foreign regulatory agencies. Yumanity plans to continue to rely upon contract manufacturers and, potentially, collaboration partners to manufacture commercial quantities of its product candidates, if approved. Its current scale of manufacturing is adequate to support all of its needs for preclinical studies and clinical study supplies.

Risks Related to Yumanity’s Intellectual Property Rights

If Yumanity is unable to adequately protect its proprietary technology, or obtain and maintain issued patents that are sufficient to protect its product candidates, others could compete against Yumanity more directly by developing and commercializing products similar or identical to Yumanity’s, which would have a material adverse impact on its business, results of operations, financial condition, and prospects.

Yumanity’s success will depend significantly on its ability to obtain and maintain patent and other proprietary protection in the United States and other countries for commercially important technology, inventions, and know-

 

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how related to its business, defend and enforce its patents, should they issue, preserve the confidentiality of its trade secrets, and operate without infringing the valid and enforceable patents and proprietary rights of third parties. Yumanity strives to protect and enhance the proprietary technologies that Yumanity believes are important to its business, including seeking patents intended to cover its products and compositions, their methods of use, and any other inventions that are important to the development of its business. Yumanity also relies on trade secrets to protect aspects of its business that are not amenable to, or that Yumanity does not consider appropriate for, patent protection.

Yumanity does not currently have any issued patents covering its clinical-stage product candidate YTX-7739. Yumanity cannot provide any assurances that any of its pending patent applications will mature into issued patents in any particular jurisdiction and, if they do, that such patents will include claims with a scope sufficient to protect its product candidates or otherwise provide any competitive advantage. The patent application and approval process is expensive, complex, and time-consuming. Yumanity 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 Yumanity will fail to identify patentable aspects of its research and development output in time to obtain patent protection. If Yumanity is unable to obtain or maintain patent protection with respect to any of its proprietary products and technology Yumanity develops, its business, financial condition, results of operations, and prospects could be materially harmed.

If the scope of any patent protection Yumanity obtains is not sufficiently broad, or if Yumanity lose any of its patent protection, its ability to prevent its competitors from commercializing similar or identical technology and product candidates would be adversely affected.

The patent positions of biotechnology and pharmaceutical companies, including its patent position, involve complex legal and factual questions, which in recent years have been the subject of much litigation, and, therefore, the issuance, scope, validity, enforceability, and commercial value of any patent claims that Yumanity may obtain cannot be predicted with certainty. No consistent policy regarding the breadth of claims allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of its patents or narrow the scope of its patent protection. The laws of some foreign countries do not protect its proprietary rights to the same extent as the laws of the United States, and Yumanity may encounter significant problems in protecting its proprietary rights in these countries.

Patent applications are generally maintained in confidence until publication. In the United States, for example, patent applications are typically maintained in secrecy for up to 18 months after their filing. Similarly, publication of discoveries in scientific or patent literature often lags behind actual discoveries. Consequently, Yumanity cannot be certain that Yumanity were the first to file patent applications on its product candidates. There is also no assurance that all of the potentially relevant prior art relating to its patents and patent applications has been found, which could be used by a third party to challenge the validity of its patents, should they issue, or prevent a patent from issuing from a pending patent application. Any of the foregoing could harm its competitive position, business, financial condition, results of operations, and prospects.

Moreover, its patents, if issued, may be challenged, deemed unenforceable, invalidated, or circumvented in the United States and abroad. U.S. patents and patent applications may also be subject to interference, derivation, ex parte reexamination, post-grant review, or inter partes review proceedings, supplemental examination and challenges in district court. Patents may also be subjected to opposition, post-grant review, or comparable proceedings lodged in various foreign, both national and regional, patent offices or courts. An adverse determination in any such proceeding could result in either loss of the patent or denial of the patent application, or loss or reduction in the scope of one or more of the claims of the patent or patent application, 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 products. In addition, such proceedings may be costly. Thus, any patents, should they issue, that Yumanity may own or exclusively license may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent right sought by us, which in turn could affect its ability to develop, market, or otherwise commercialize its product candidates.

 

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Furthermore, though a patent, if it were to issue, is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide Yumanity with adequate proprietary protection or competitive advantages against competitors with similar products. Even if a patent issues and is held to be valid and enforceable, competitors may be able to design around or circumvent its patents, such as using pre-existing or newly developed technology or products in a non-infringing manner. Other parties may develop and obtain patent protection for more effective technologies, designs, or methods. If these developments were to occur, they could have a material adverse effect on its business, financial condition, results of operations, and prospects.

Its ability to enforce its patent rights depends on its ability to detect infringement. It is difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. Any litigation to enforce or defend its patent rights, even if Yumanity were to prevail, could be costly and time-consuming and would divert the attention of its management and key personnel from its business operations. Yumanity may not prevail in any lawsuits that Yumanity initiate and the damages or other remedies awarded if Yumanity were to prevail may not be commercially meaningful.

Yumanity will incur significant ongoing expenses in maintaining its patent portfolio. Should Yumanity lack the funds to maintain its patent portfolio or to enforce its rights against infringers, Yumanity could be adversely impacted.

Yumanity may in the future co-own patent rights relating to future product candidates and its discovery engine platform with third parties. Some of its in-licensed patent rights are, and may in the future be, co-owned with third parties. In addition, its licensors may co-own the patent rights Yumanity in-licenses with other third parties with whom Yumanity does not have a direct relationship. Its exclusive rights to certain of these patent rights are dependent, in part, on inter-institutional or other operating agreements between the joint owners of such patent rights, who are not parties to its license agreements. If its licensors do not have exclusive control of the grant of licenses under any such third-party co-owners’ interest in such patent rights or Yumanity is otherwise unable to secure such exclusive rights, such co-owners may be able to license their rights to other third parties, including its competitors, and its competitors could market competing products and technology. In addition, Yumanity may need the cooperation of any such co-owners of its patent rights in order to enforce such patent rights against third parties, and such cooperation may not be provided to it. Any of the foregoing could have a material adverse effect on Yumanity’s competitive position, business, financial conditions, results of operations, and prospects.

Intellectual property rights do not necessarily address all potential threats.

The degree of future protection afforded by Yumanity’s intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect its business or permit it to maintain its competitive advantage. For example, Yumanity does not know whether:

 

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any of its pending patent applications, if issued, will include claims having a scope sufficient to protect its product candidates or any other products or product candidates;

 

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any of its pending patent applications will issue as patents at all;

 

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Yumanity will be able to successfully commercialize its product candidates, if approved, before its relevant patents expire;

 

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Yumanity will be the first to make the inventions covered by each of its patents and pending patent applications;

 

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Yumanity will be the first to file patent applications for these inventions;

 

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others will not develop similar or alternative technologies that do not infringe its patents;

 

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others will not use pre-existing technology to effectively compete against it;

 

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any of its patents, if issued, will be found to ultimately be valid and enforceable;

 

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any patents issued to it will provide a basis for an exclusive market for its commercially viable products, will provide it with any competitive advantages or will not be challenged by third parties;

 

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Yumanity will develop additional proprietary technologies or product candidates that are separately patentable; or

 

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that its commercial activities or products will not infringe upon the patents or proprietary rights of others.

Should any of these events occur, they could have a material adverse effect on Yumanity’s business, financial condition, results of operations and prospects.

If Yumanity fails to comply with its obligations in the agreements under which Yumanity licenses intellectual property rights from third parties or otherwise experience disruptions to its business relationships with its licensors, Yumanity could lose license rights that are important to its business.

Yumanity has entered into license agreements with third parties and may need to obtain additional licenses from others to advance its research or allow commercialization of product candidates Yumanity may develop or its discovery engine platform technology. It is possible that Yumanity may be unable to obtain additional licenses at a reasonable cost or on reasonable terms, if at all. In that event, Yumanity may be required to expend significant time and resources to redesign its technology, product candidates, or the methods for manufacturing them or to develop or license replacement technology, all of which may not be feasible on a technical or commercial basis. If Yumanity is unable to do so, Yumanity may be unable to develop or commercialize the affected product candidates or continue to utilize its existing discovery engine platform, which could harm its business, financial condition, results of operations, and prospects significantly. Yumanity cannot provide any assurances that third-party patents do not exist which might be enforced against its current technology, including its discovery engine platform technology, manufacturing methods, product candidates, or future methods or products resulting in either an injunction prohibiting its manufacture or future sales, or, with respect to its future sales, an obligation on its part to pay royalties and/or other forms of compensation to third parties, which could be significant.

In addition, each of its license agreements, and Yumanity expects its future agreements, will impose various development, diligence, commercialization, and other obligations on it. Certain of its license agreements also require Yumanity to meet development timelines, or to exercise commercially reasonable efforts to develop and commercialize licensed products, in order to maintain the licenses. In spite of its efforts, its licensors might conclude that Yumanity has materially breached its obligations under such license agreements and might therefore terminate the license agreements, thereby removing or limiting its ability to develop and commercialize products and technology covered by these license agreements. If these in-licenses are terminated, or if the underlying patents fail to provide the intended exclusivity, competitors or other third parties would have the freedom to seek regulatory approval of, and to market, products identical to Yumanity’s and Yumanity may be required to cease its development and commercialization of certain of its product candidates or of its current discovery engine platform technology. Any of the foregoing could have a material adverse effect on Yumanity’s competitive position, business, financial conditions, results of operations, and prospects.

Moreover, disputes may arise regarding intellectual property subject to a licensing agreement, including:

 

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the scope of rights granted under the license agreement and other interpretation-related issues;

 

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the extent to which its technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;

 

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the sublicensing of patent and other rights under its collaborative development relationships;

 

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its diligence obligations under the license agreement and what activities satisfy those diligence obligations;

 

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the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property by its licensors and Yumanity and its partners; and

 

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the priority of invention of patented technology.

 

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In addition, the agreements under which Yumanity currently licenses intellectual property or technology from third parties are complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what Yumanity believes to be the scope of its rights to the relevant intellectual property or technology, or increase what Yumanity believes to be its financial or other obligations under the relevant agreement, either of which could have a material adverse effect on its business, financial condition, results of operations, and prospects. Moreover, if disputes over intellectual property that Yumanity has licensed prevent or impair its ability to maintain its current licensing arrangements on commercially acceptable terms, Yumanity may be unable to successfully develop and commercialize the affected product candidates, which could have a material adverse effect on its business, financial conditions, results of operations, and prospects.

If Yumanity is unable to protect the confidentiality of its trade secrets, its business and competitive position may be harmed.

Yumanity may also rely on trade secrets to protect aspects of its business that are not amenable to, or that Yumanity does not consider appropriate for, patent protection. Additionally, Yumanity relies on unpatented know-how, continuing technological innovation to develop, strengthen, and maintain the proprietary and competitive position of its product candidates, which Yumanity seeks to protect, in part, by confidentiality agreements with its employees and its collaborators and consultants. However, trade secrets are difficult to protect. For example, Yumanity may be required to share its trade secrets with third-party licensees, collaborators, consultants, contractors, or other advisors and Yumanity has limited control over the protection of trade secrets used by such third parties. Although Yumanity uses reasonable efforts to protect its trade secrets, including by entering into confidentiality agreements, its employees, consultants, contractors, outside scientific collaborators, and other advisors may unintentionally or willfully disclose its trade secrets and proprietary information to competitors and Yumanity may not have adequate remedies for any such disclosure. Enforcing a claim that a third party illegally obtained and used, disclosed, or misappropriated any of its trade secrets is difficult, expensive, and time-consuming, and the outcome is unpredictable. Furthermore, Yumanity may not obtain these agreements in all circumstances, and the employees and consultants who are parties to these agreements may breach or violate the terms of these agreements, thus Yumanity may not have adequate remedies for any such breach or violation, and Yumanity could lose its trade secrets through such breaches or violations. In addition, trade secret laws in the United States vary, and some U.S. courts as well as courts outside the United States are sometimes less willing or unwilling to protect trade secrets. Moreover, it is possible that technology relevant to its business will be independently developed by a person that is not a party to such an agreement. Further, its trade secrets could otherwise become known or be independently discovered by its competitors or other third parties. Yumanity may not be able to prevent the unauthorized disclosure or use of its technical knowledge or trade secrets by consultants, vendors, former employees, and current employees. If its trade secrets or confidential or proprietary information is divulged to or acquired by third parties, including its competitors, its competitive position in the marketplace, business, financial condition, results of operations, and prospects may be materially adversely affected.

Yumanity may be sued for infringing the intellectual property rights of others, which may be costly and time-consuming and may prevent or delay its product development efforts and stop it from commercializing or increase the costs of commercializing its product candidates, if approved.

Yumanity’s success will depend in part on its ability to operate without infringing, misappropriating, or otherwise violating the intellectual property and proprietary rights of third parties. Yumanity cannot assure you that its business, products, and methods do not or will not infringe the patents or other intellectual property rights of third parties. Yumanity may in the future become party to, or threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to its product candidates and technologies Yumanity uses in its business.

The pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may allege that its product candidates or the use of its technologies infringes or otherwise violates patent claims or other intellectual property rights held by them or that Yumanity is employing their proprietary technology without authorization. As Yumanity continues to develop and, if approved, commercialize its current product candidates and future product candidates, competitors may claim that its technology infringes their intellectual property rights as part of business strategies designed to impede its successful commercialization. There

 

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may be third-party patents or patent applications with claims to compositions, materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of its product candidates. Because patent applications can take many years to issue and may be confidential for 18 months or more after filing, and because patent claims can be revised before issuance, third parties may have currently pending patent applications which may later result in issued patents that its product candidates may infringe, or which such third parties claim are infringed by its technologies. If a patent holder believes one or more of its product candidates infringes its patent rights, the patent holder may sue Yumanity even if Yumanity has received patent protection for its technology. Moreover, Yumanity may face patent infringement claims from non-practicing entities that have no relevant drug revenue and against whom its own patent portfolio may thus have no deterrent effect.

The outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If Yumanity is sued for patent infringement, Yumanity would need to demonstrate that its product candidates, products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid or unenforceable, and Yumanity may not be able to do this. Even if Yumanity is successful in these proceedings, Yumanity may incur substantial costs and the time and attention of its management and scientific personnel could be diverted in pursuing these proceedings, which could have a material adverse effect on its business and operating results. In addition, Yumanity may not have sufficient resources to bring these actions to a successful conclusion.

Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome is uncertain. If Yumanity is found to infringe a third party’s intellectual property rights, Yumanity could be required to obtain a license from such third party to continue developing and marketing its product candidates and technology. However, Yumanity may not be able to obtain any required license on commercially reasonable terms or at all. Even if Yumanity were to obtain a license, it could be granted on non-exclusive terms, thereby providing its competitors and other third parties access to the same technologies licensed to it. In addition, if any such claim were successfully asserted against Yumanity and it could not obtain such a license, Yumanity may be forced to stop or delay developing, manufacturing, selling or otherwise commercializing its product candidates. Any claim relating to intellectual property infringement that is successfully asserted against it may require Yumanity to pay substantial damages, including treble damages and attorney’s fees if Yumanity is found to be willfully infringing another party’s patents, for past use of the asserted intellectual property and royalties and other consideration going forward if Yumanity is forced to take a license.

Even if Yumanity is successful in these proceedings, Yumanity may incur substantial costs and divert management time and attention in pursuing these proceedings, which could have a material adverse effect on it. There could also be public announcements of the results of the hearing, motions, or other interim proceedings or developments and if securities analysts or investors perceive those results to be negative, it could cause the price of shares of its common stock to decline. If Yumanity is unable to avoid infringing the patent rights of others, Yumanity may be required to seek a license, defend an infringement action, or challenge the validity of the patents in court, or redesign its products. Patent litigation is costly and time-consuming. Yumanity may not have sufficient resources to bring these actions to a successful conclusion. In addition, intellectual property litigation or claims could force Yumanity to do one or more of the following:

 

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cease developing, selling or otherwise commercializing its product candidates;

 

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pay substantial damages for past use of the asserted intellectual property;

 

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obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; and

 

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in the case of trademark claims, redesign, or rename, some or all of its product candidates to avoid infringing the intellectual property rights of third parties, which may not be possible and, even if possible, could be costly and time-consuming.

Any of these risks coming to fruition could have a material adverse effect on its business, results of operations, financial condition, and prospects.

 

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

Yumanity enters into confidentiality and intellectual property assignment agreements with its employees, consultants, outside scientific collaborators, sponsored researchers, and other advisors. These agreements generally provide that inventions conceived by the party in the course of rendering services to Yumanity will be its exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to Yumanity. The assignment of intellectual property rights under these agreements may not be automatic upon the creation of the intellectual property or the assignment agreements may be breached, and Yumanity may be forced to bring claims against third parties, or defend claims that they may bring against it, to determine the ownership of what Yumanity regards as its intellectual property. For example, even if Yumanity has a consulting agreement in place with an academic advisor pursuant to which such academic advisor is required to assign any inventions developed in connection with providing services to it, such academic advisor may not have the right to assign such inventions to Yumanity, as it may conflict with his or her obligations to assign all such intellectual property to his or her employing institution.

Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If Yumanity fails in defending any such claims, in addition to paying monetary damages, Yumanity may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on its business. Even if Yumanity is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

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

Periodic maintenance fees, renewal fees, annuity fees, and various other government fees on its owned and in-licensed patents and patent applications are or will be due to be paid to the U.S. Patent and Trademark Office (“USPTO”) in several stages and various government patent agencies outside of the United States over the lifetime of such patents and patent applications and any patent rights Yumanity may own or license in the future. Yumanity has systems in place to remind it to pay these fees, and Yumanity employs outside firms to remind it or its licensors to pay annuity fees due to foreign patent agencies on its foreign patents and pending foreign patent applications. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment, and other similar provisions over the lifetime of its owned patents and applications. In some cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, 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. In such an event, competitors or other third parties might be able to enter the market earlier than would otherwise have been the case and this circumstance could have a material adverse effect on its business, financial condition, results of operations, and prospects.

Yumanity may be involved in lawsuits or other proceedings to protect or enforce its intellectual property, which could be expensive, time-consuming, and unsuccessful.

Even if Yumanity’s patent applications are issued, competitors and other third parties may infringe, misappropriate, or otherwise violate its patents and other intellectual property rights. To counter infringement or unauthorized use, Yumanity may be required to file infringement claims, which can be expensive and time-consuming and divert the attention of its management and key personnel from its business operations.

Furthermore, many of its adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than Yumanity can. Its ability to enforce its patent rights also depends on its ability to detect infringement. It is difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product.

 

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In an infringement proceeding, a court may disagree with its allegations and refuse to stop the other party from using the technology at issue on the grounds that its patents do not cover the technology in question, or may decide that a patent of Yumanity’s is invalid, unenforceable or not infringed. An adverse result in any litigation, defense or post-grant proceedings could result in one or more of its patents being invalidated or interpreted narrowly and could put its patent applications at risk of not issuing. If any of its patents, if and when issued, covering its product candidates are invalidated or found unenforceable, Yumanity’s financial position and results of operations would be materially and adversely impacted. Yumanity may not prevail in any lawsuits that Yumanity initiates and the damages or other remedies awarded if Yumanity were to prevail may not be commercially meaningful.

Interference proceedings provoked by third parties or brought by Yumanity may be necessary to determine the priority of inventions with respect to its patents or patent applications. An unfavorable outcome could require Yumanity to cease using the related technology or to attempt to license rights to it from the prevailing party. Yumanity’s business could be harmed if the prevailing party does not offer it a license on commercially reasonable terms. Yumanity’s involvement in litigation or interference proceedings may fail and, even if successful, may result in substantial costs, and distract its management and other employees. Yumanity may not be able to prevent infringement, misappropriation of, or other violations of its intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of its 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 a material adverse effect on the price of its common stock. Such litigation or proceedings could substantially increase its operating losses and reduce the resources available for development activities or any future sales, marketing, or distribution activities. Yumanity may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of its competitors may be able to sustain the costs of such litigation or proceedings more effectively than Yumanity can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on its ability to compete in the marketplace.

Issued patents covering Yumanity’s discovery engine platform and its product candidates could be found invalid or unenforceable if challenged.

If Yumanity initiated legal proceedings against a third party to enforce a patent, if and when issued, covering its discovery engine platform or one of its product candidates, the defendant could counterclaim that the patent covering its product candidate is invalid and/or unenforceable. The outcome of any such proceeding is generally unpredictable.

In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include alleged failures to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for unenforceability assertions of a patent include allegations that someone connected with prosecution of the patent application that matured into the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution of the patent application. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, inter partes review, post grant review and equivalent proceedings in foreign jurisdictions, e.g., opposition proceedings. Such proceedings could result in revocation or amendment of its patents in such a way that they no longer cover its product candidates or competitive products. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example, Yumanity cannot be certain that there is no invalidating prior art, of which Yumanity and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, Yumanity would lose at least part, and perhaps all, of the patent protection on its product candidates. Such a loss of patent protection would have a material adverse impact on its business.

 

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Yumanity may not seek to protect its intellectual property rights in all jurisdictions throughout the world and Yumanity may not be able to adequately enforce its intellectual property rights even in the jurisdictions where Yumanity seeks protection.

Filing and prosecuting patent applications, and defending patents on its discovery engine platform and product candidates in all countries and jurisdictions throughout the world would be prohibitively expensive, and Yumanity’s intellectual property rights in some countries outside the United States could be less extensive than those in the United States, assuming that rights are obtained in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, Yumanity may not be able to prevent third parties from practicing its inventions in all countries outside the United States, or from selling or importing products made using its inventions in and into the United States or other jurisdictions. In addition, the statutory deadlines for pursuing patent protection in individual foreign jurisdictions are based on the priority date of each of its patent applications and Yumanity may not timely file foreign patent applications. For the patent families related to YTX-7739, as well as for many of the patent families that Yumanity owns, the relevant statutory deadlines have not yet expired. Thus, for each of the patent families that Yumanity believes provides coverage for its lead product candidate, Yumanity will need to decide whether and where to pursue protection outside the United States.

Competitors may use its technologies in jurisdictions where Yumanity does not pursue and obtain patent protection to develop their own products and further, may export otherwise infringing products to territories where Yumanity has patent protection, but enforcement is not as strong as that in the United States. These products may compete with its products and its patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if Yumanity pursues and obtains issued patents in particular jurisdictions, its patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from so competing.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to biotechnology or pharmaceuticals. This could make it difficult for Yumanity to stop the infringement of its patents, if obtained, or the misappropriation of or marketing of competing products in violation of its other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, Yumanity may choose not to seek patent protection in certain countries, and Yumanity will not have the benefit of patent protection in such countries.

Proceedings to enforce its patent rights in foreign jurisdictions could result in substantial costs and divert Yumanity’s efforts and attention from other aspects of its business, could put its patents at risk of being invalidated or interpreted narrowly, could put its patent applications at risk of not issuing, and could provoke third parties to assert claims against it. Yumanity may not prevail in any lawsuits that it initiates and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, Yumanity’s efforts to enforce its intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that Yumanity develops or license.

If Yumanity does not obtain additional protection under the Hatch-Waxman Act and similar foreign legislation by extending the patent terms and obtaining data exclusivity for its product candidates, its business may be materially harmed.

Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest U.S. non-provisional filing date in its chain of priority. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents covering its product candidates are obtained, once the patent life has expired for a product candidate, Yumanity may be open to competition from competitive medications, including generic medications. Given the amount of time required for the development, testing, and regulatory review of new product candidates, patents protecting such product

 

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candidates might expire before or shortly after such product candidates are commercialized. As a result, Yumanity’s patent portfolio may not provide it with sufficient rights to exclude others from commercializing product candidates similar or identical to Yumanity’s.

Depending upon the timing, duration, and specifics of FDA marketing approval of its product candidates, one or more of the U.S. patents Yumanity owns may be eligible for a limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent term extension of up to five years as compensation for patent term lost during the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, only one patent may be extended and only those claims covering the approved drug, a method for using it, or a method for manufacturing it may be extended. However, Yumanity may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than Yumanity requests. If Yumanity is unable to obtain a patent term extension or the term of any such extension is less than Yumanity requests, the duration of patent protection Yumanity obtains for its product candidates may not provide it with any meaningful commercial or competitive advantage, its competitors may obtain approval of competing products earlier than they would otherwise be able to do so, and its ability to generate revenues could be materially adversely affected.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing Yumanity’s ability to protect its products.

As is the case with other biotechnology companies, Yumanity’s success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biotechnology industry involve both technological and legal complexity, and is therefore costly, time-consuming, and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation: the Leahy-Smith America Invents Act. The America Invents Act includes a number of significant changes to U.S. patent law. After March 2013, under the America Invents Act, the United States transitioned to a first-inventor-to-file system in which, assuming that other requirements for patentability are met, the first-inventor-to-file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed invention. The America Invents Act also includes provisions that affect the way patent applications will be prosecuted and that may also affect patent litigation. It is not yet clear what, if any, impact the America Invents Act will have on the operation of Yumanity’s business. However, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of Yumanity’s patent applications and the enforcement or defense of any patents that may issue from its patent applications, all of which could have a material adverse effect on Yumanity’s business and financial condition.

In addition, recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. The full impact of these decisions is not yet known. For example, on March 20, 2012, in Mayo Collaborative Services, DBA Mayo Medical Laboratories, et al. v. Prometheus Laboratories, Inc., the Court held that several claims drawn to measuring drug metabolite levels from patient samples and correlating them to drug doses were not patentable subject matter. The decision appears to impact diagnostics patents that merely apply a law of nature via a series of routine steps and it has created uncertainty around the ability to obtain patent protection for certain inventions. Additionally, on June 13, 2013, in Association for Molecular Pathology v. Myriad Genetics, Inc., the Court held that claims to isolated genomic DNA are not patentable, but claims to complementary DNA molecules are patent eligible because they are not a natural product. The effect of the decision on patents for other isolated natural products is uncertain. However, on March 4, 2014, the USPTO issued a memorandum to patent examiners providing guidance for examining claims that recite laws of nature, natural phenomena or natural products under the Myriad and Prometheus decisions. This guidance did not limit the application of Myriad to DNA but rather applied the decision to other natural products.

In addition to increasing uncertainty with regard to Yumanity’s ability to obtain future patents, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on these and other decisions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could weaken Yumanity’s ability to obtain new patents or to enforce any patents that may issue in the future.

 

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Yumanity may be subject to damages resulting from claims that Yumanity or its employees, consultants, or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers.

Yumanity’s employees have been previously employed at other biotechnology or pharmaceutical companies, including its competitors or potential competitors. Yumanity also engages advisors and consultants who are concurrently employed at universities or who perform services for other entities.

Although Yumanity tries to ensure that its employees, consultants, and advisors do not use the proprietary information or know-how of others in their work for it, and although Yumanity is not aware of any claims currently pending against it, Yumanity may be subject to claims that Yumanity or its employees, advisors, or consultants have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third party. Yumanity has and may in the future also be subject to claims that an employee, advisor, or consultant performed work for it that conflicts with that person’s obligations to a third party, such as an employer, and thus, that the third party has an ownership interest in the intellectual property arising out of work performed for it. Litigation may be necessary to defend against these claims. Even if Yumanity is successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If Yumanity fails in defending such claims, in addition to paying money claims, Yumanity may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent its ability to commercialize its product candidates, which would materially adversely affect its commercial development efforts.

Yumanity may not be successful in obtaining, through acquisitions, in-licenses or otherwise, necessary rights to its discovery engine platform, product candidates or other technologies.

Yumanity currently has rights to intellectual property, through licenses from third parties, to identify and develop its discovery engine platform technology and product candidates. Many pharmaceutical companies, biotechnology companies, and academic institutions are competing with it in the field of neurodegeneration and discovery engine platform and may have patents and have filed and are likely filing patent applications potentially relevant to its business. In order to avoid infringing these third party patents, Yumanity may find it necessary or prudent to obtain licenses to such patents from such third party intellectual property holders. In addition, with respect to any patents Yumanity co-owns with third parties, Yumanity may require licenses to such co-owners’ interest to such patents. However, Yumanity may be unable to secure such licenses or otherwise acquire or in-license any compositions, methods of use, processes, or other intellectual property rights from third parties that Yumanity identifies as necessary for its current or future product candidates and its discovery engine platform technology. The licensing or acquisition of third party intellectual property rights is a competitive area, and several more established companies may pursue strategies to license or acquire third party intellectual property rights that Yumanity may consider attractive or necessary. These established companies may have a competitive advantage over it due to their size, capital resources and greater clinical development and commercialization capabilities. In addition, companies that perceive Yumanity to be a competitor may be unwilling to assign or license rights to it. Yumanity also may be unable to license or acquire third party intellectual property rights on terms that would allow it to make an appropriate return on its investment or at all. If Yumanity is unable to successfully obtain rights to required third party intellectual property rights or maintain the existing intellectual property rights Yumanity has, Yumanity may have to abandon development of the relevant program or product candidate, which could have a material adverse effect on its business, financial condition, results of operations and prospects.

Numerous factors may limit any potential competitive advantage provided by Yumanity’s intellectual property rights.

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

 

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others may be able to make products that are similar to its product candidates or utilize similar technology but that are not covered by the claims of the patents that Yumanity licenses or may own;

 

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Yumanity, or its current or future licensors or collaborators, might not have been the first to make the inventions covered by the issued patent or pending patent application that Yumanity licenses or owns now or in the future;

 

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Yumanity, or its current or future licensors or collaborators, might not have been the first to file patent applications covering certain of its or their inventions;

 

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

 

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it is possible that its current or future pending owned or licensed patent applications will not lead to issued patents;

 

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issued patents that Yumanity holds rights to may be held invalid or unenforceable, including as a result of legal challenges by its competitors or other third parties;

 

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its competitors or other third parties might conduct research and development activities in countries where Yumanity does not have patent rights and then use the information learned from such activities to develop competitive products for sale in its major commercial markets;

 

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Yumanity may not develop additional proprietary technologies that are patentable;

 

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the patents of others may harm its business; and

 

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Yumanity may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property.

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

Risks Related to Yumanity’s Indebtedness

Yumanity’s level of indebtedness and debt service obligations could adversely affect its financial condition and may make it more difficult for Yumanity to fund its operations.

In December 2019, Yumanity entered into a loan and security agreement with Hercules Capital, Inc. (“Hercules”) (the “Term Loan”), which was most recently amended in December 2020. The Term Loan provides up to $30.0 million of debt financing and has interest-only payments through August 1, 2021, with the option to extend an additional six months upon the drawdown following occurrence of a development milestone and an equity event as defined in the agreement. Thereafter, Yumanity is obligated to make payments that will include equal installments of principal and interest through the maturity date of January 1, 2024. As of September 30, 2020, $15.0 million was outstanding under the Term Loan. In April 2020, Yumanity incurred additional indebtedness consisting of a $1.1 million loan (the “PPP Loan”) under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act.

All obligations under the Term Loan are secured by substantially all of Yumanity’s existing property and assets, excluding its intellectual property. This indebtedness may create additional financing risk for Yumanity, particularly if its business or prevailing financial market conditions are not conducive to paying off or refinancing its outstanding debt obligations at maturity. This indebtedness could also have important negative consequences, including the fact that:

 

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Yumanity will need to repay its indebtedness by making payments of interest and principal, which will reduce the amount of money available to finance its operations, its research and development efforts and other general corporate activities; and

 

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Yumanity’s failure to comply with the restrictive covenants in the Term Loan could result in an event of default that, if not cured or waived, would accelerate its obligation to repay this indebtedness, and Hercules could seek to enforce its security interest in the assets securing such indebtedness.

To the extent that additional debt is added to Yumanity’s current debt levels, the risks described above could increase.

 

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In addition, while all or a portion of the PPP Loan may be forgiven if the PPP Loan is used for qualifying expenses as described in the CARES Act, there is no assurance that Yumanity will be able to obtain forgiveness, notwithstanding that it believes it has used the PPP Loan for qualifying expenses. The U.S. Department of the Treasury, Small Business Administration and members of Congress have indicated an intention to provide strong oversight of loans granted under the Paycheck Protection Program. If Yumanity is audited or reviewed or its records are subpoenaed by the government as a result of entering into the PPP Loan, it could divert management’s time and attention and Yumanity could incur legal and reputational costs, and an adverse finding could lead to the requirement to return the PPP Loan, which could reduce Yumanity’s liquidity, or could subject Yumanity to fines and penalties.

Yumanity may not have cash available to it in an amount sufficient to enable it to make interest or principal payments on its indebtedness when due. If Yumanity does not make scheduled payments when due, or otherwise materially breaches or experiences an event of default under the Term Loan, Hercules could accelerate Yumanity’s total loan obligation or enforce its security interest against us.

Failure to satisfy its current and future debt obligations under the Term Loan could result in an event of default. In addition, other events, including certain events that are not entirely in Yumanity’s control, such as the occurrence of a material adverse event on its business, could cause an event of default to occur. As a result of the occurrence of an event of default, Hercules could accelerate all of the amounts due. In the event of an acceleration of amounts due under the Term Loan, Yumanity may not have sufficient funds or may be unable to arrange for additional financing to repay its indebtedness. In addition, Hercules could seek to enforce its security interests in the assets securing such indebtedness. If Yumanity is unable to pay amounts due to Hercules upon acceleration of the Term Loan or if Hercules enforces its security interest against its assets securing its indebtedness to Hercules, Yumanity’s ability to continue to operate its business may be jeopardized.

Yumanity is subject to certain restrictive covenants which, if breached, could result in the acceleration of its debt under the Term Loan and have a material adverse effect on its business and prospects.

The Term Loan imposes operating and other restrictions on Yumanity. Such restrictions will affect, and in many respects limit or prohibit, Yumanity’s ability and the ability of any future subsidiary to, among other things:

 

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dispose of certain assets;

 

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engage in mergers or acquisitions;

 

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encumber its intellectual property;

 

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incur indebtedness or liens;

 

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pay dividends;

 

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make certain investments; and

 

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engage in certain other business transactions.

These restrictive covenants may prevent Yumanity from undertaking an action that it feels is in the best interests of its business. In addition, if Yumanity were to breach any of these restrictive covenants, Hercules could accelerate its indebtedness under the Term Loan or enforce its security interest against its assets, either of which would materially adversely affect Yumanity’s ability to continue to operate its business.

Risks Related to Yumanity’s Business Operations, Employee Matters and Managing Growth

Yumanity will need to develop and expand its company, and Yumanity may encounter difficulties in managing this development and expansion, which could disrupt its operations.

As of September 1, 2020, Yumanity had 41 full-time employees and three part-time employees, and in connection with becoming a public company, Yumanity expects to increase its number of employees and the scope of its operations. To manage its anticipated development and expansion, Yumanity must continue to implement and improve its managerial, operational, and financial systems, expand its facilities, and continue to recruit and train

 

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additional qualified personnel. Also, its management may need to divert a disproportionate amount of its attention away from its day-to-day activities and devote a substantial amount of time to managing these development activities. Due to its limited resources, Yumanity may not be able to effectively manage the expansion of its operations or recruit and train additional qualified personnel. This 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. The physical expansion of its operations may lead to significant costs and may divert financial resources from other projects, such as the development of its product candidates. If Yumanity’s management is unable to effectively manage its expected development and expansion, its expenses may increase more than expected, its ability to generate or increase its revenue could be reduced and Yumanity may not be able to implement its business strategy. Yumanity’s future financial performance and its ability to commercialize its product candidates, if approved, and compete effectively will depend, in part, on its ability to effectively manage the future development and expansion of its company.

Yumanity’s future success depends on its ability to retain its management team and to attract, retain, and motivate qualified personnel.

Its ability to compete in the highly competitive biotechnology and biopharmaceuticals industries depends upon its ability to attract and retain highly qualified managerial, scientific, and medical personnel. In order to induce valuable employees to continue their employment with Yumanity, Yumanity has provided stock options that vest over time. The value to employees of stock options that vest over time is significantly affected by movements in its stock price that are beyond its control, and may at any time be insufficient to counteract more lucrative offers from other companies.

Yumanity is highly dependent on its management, scientific and medical personnel, including its Chief Executive Officer, Richard Peters, M.D., Ph.D. Despite its efforts to retain valuable employees, members of its management, scientific, and development teams may terminate their employment with Yumanity on short notice. The loss of the services of any of its executive officers, including Dr. Peters, other key employees and other scientific and medical advisors, and an inability to find suitable replacements could result in delays in product development and harm Yumanity’s business. Pursuant to their employment arrangements, each of its executive officers, and other employees may voluntarily terminate their employment at any time, with or without notice. Yumanity’s success also depends on its ability to continue to attract, retain, and motivate highly skilled junior, mid-level, and senior managers as well as junior, mid-level, and senior scientific and medical personnel.

Yumanity may not be able to attract or retain qualified management and scientific personnel in the future due to the intense competition for a limited number of qualified personnel among biopharmaceutical, biotechnology, pharmaceutical, and other businesses. Many of the other pharmaceutical companies that Yumanity compete against for qualified personnel have greater financial and other resources, different risk profiles, and a longer history in the industry than Yumanity does. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high quality candidates than what Yumanity may be able to offer. Yumanity also experiences competition for the hiring of scientific personnel from universities and research institutions. If Yumanity is unable to continue to attract and retain high quality personnel, the rate and success at which Yumanity can develop and commercialize product candidates will be limited.

Yumanity faces potential product liability exposure, and, if claims are brought against it, Yumanity may incur substantial liability.

The use of Yumanity’s product candidates in clinical trials and the sale of its product candidates, if approved, exposes it to the risk of product liability claims. Product liability claims might be brought against Yumanity by patients, healthcare providers, or others selling or otherwise coming into contact with its product candidates. For example, Yumanity may be sued if any product Yumanity develops allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, including as a result of interactions with alcohol or other drugs, negligence, strict liability, and a breach of warranties. Claims could also be asserted under state consumer protection acts. If Yumanity becomes subject to product liability claims and cannot successfully defend itself against them, Yumanity could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in, among other things:

 

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withdrawal of subjects from Yumanity’s clinical trials;

 

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substantial monetary awards to patients or other claimants;

 

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decreased demand for Yumanity’s product candidates or any future product candidates following marketing approval, if obtained;

 

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damage to Yumanity’s reputation and exposure to adverse publicity;

 

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increased FDA warnings on product labels;

 

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litigation costs;

 

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distraction of management’s attention from Yumanity’s primary business;

 

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loss of revenue; and

 

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the inability to successfully commercialize Yumanity’s product candidates or any future product candidates, if approved.

Yumanity maintains product liability insurance coverage for its clinical trials with a €5 million annual aggregate coverage limit. Nevertheless, Yumanity’s insurance coverage may be insufficient to reimburse it for any expenses or losses Yumanity may suffer. Moreover, in the future, Yumanity may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect it against losses, including if insurance coverage becomes increasingly expensive. If and when Yumanity obtains marketing approval for its product candidates, Yumanity intends to expand its insurance coverage to include the sale of commercial products; however, Yumanity may not be able to obtain this product liability insurance on commercially reasonable terms. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. The cost of any product liability litigation or other proceedings, even if resolved in its favor, could be substantial, particularly in light of the size of its business and financial resources. A product liability claim or series of claims brought against Yumanity could cause its stock price to decline and, if Yumanity is unsuccessful in defending such a claim or claims and the resulting judgments exceed its insurance coverage, its financial condition, business, and prospects could be materially adversely affected.

Yumanity will incur increased costs as a result of operating as a public company, and its management team will be required to devote substantial time to new compliance initiatives.

As a public company, and particularly after Yumanity is no longer an “emerging growth company,” Yumanity will incur significant legal, accounting, and other expenses that Yumanity did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and rules subsequently implemented by the SEC and The Nasdaq Stock Market have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Its management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase its legal and financial compliance costs and will make some activities more time-consuming and costly.

Pursuant to Section 404 of the Sarbanes-Oxley Act (“Section 404”), Yumanity will be required to furnish a report by its management on its internal control over financial reporting, which may include an attestation report on internal control over financial reporting issued by its independent registered public accounting firm. While Yumanity remains an “emerging growth company” or a “smaller reporting company” with less than $100 million in annual revenues, Yumanity will not be required to include an attestation report on internal control over financial reporting issued by its independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, Yumanity will be engaged in a process to document and evaluate its internal control over financial reporting, which is both costly and challenging. In this regard, Yumanity will need to continue to dedicate internal resources, potentially engage outside consultants, and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate,

 

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validate through testing that controls are functioning as documented, and implement a continuous reporting and improvement process for internal control over financial reporting. Despite its efforts, there is a risk that neither Yumanity nor its independent registered public accounting firm will be able to conclude within the prescribed timeframe that its internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of its financial statements.

If Yumanity fails to maintain proper and effective internal controls, its ability to produce accurate and timely financial statements could be impaired, which could result in sanctions or other penalties that would harm its business.

After the completion of the Merger, Yumanity became subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and the rules and regulations of The Nasdaq Capital Market. The Sarbanes-Oxley Act requires, among other things, that Yumanity maintain effective disclosure controls and procedures and internal controls over financial reporting. Commencing with its fiscal year ending the year that the Merger is completed, Yumanity must perform system and process design evaluation and testing of the effectiveness of its internal controls over financial reporting to allow management to report on the effectiveness of its internal controls over financial reporting in its Form 10-K filing for that year, as required by Section 404 of the Sarbanes-Oxley Act. This will require that Yumanity incur substantial additional professional fees and internal costs to expand its accounting and finance functions and that Yumanity expend significant management efforts. Prior to the Merger, Yumanity had never been required to test its internal controls within a specified period and, as a result, Yumanity may experience difficulty in meeting these reporting requirements in a timely manner.

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

If Yumanity is not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if Yumanity is unable to maintain proper and effective internal controls over financial reporting, Yumanity may not be able to produce timely and accurate financial statements. If that were to happen, its investors could lose confidence in its reported financial information, the market price of its stock could decline and Yumanity could be subject to sanctions or investigations by the SEC or other regulatory authorities.

In order to satisfy its obligations as a public company, Yumanity will need to hire additional qualified accounting and financial personnel with appropriate public company experience.

As a newly public company, Yumanity will need to establish and maintain effective disclosure and financial controls and make changes in its corporate governance practices. Yumanity will need to hire additional accounting and financial personnel with appropriate public company experience and technical accounting knowledge, and it may be difficult to recruit and maintain such personnel. Even if Yumanity is able to hire appropriate personnel, its existing operating expenses and operations will be impacted by the direct costs of their employment and the indirect consequences related to the diversion of management resources from product development efforts.

Changes in tax law, including the recently passed comprehensive tax reform bill, could adversely affect Yumanity’s business and financial condition.

The rules dealing with U.S. federal, state, and local income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive application) could adversely affect Yumanity or holders of its common stock. In recent years, many such changes have been made and changes are likely to continue to occur in the future. On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “TCJA”), which significantly reforms the Internal Revenue Code of 1986, as amended, or the Code. The TCJA, 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 net interest expense to 30% of adjusted earnings

 

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(except for certain small businesses), and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”). Yumanity continues to examine the impact this tax reform legislation may have on its business. However, the effect of the TCJA on its business, whether adverse or favorable, is uncertain, and may not become evident for some period of time. Furthermore, Yumanity’s implementation of new practices and processes designed to comply with changing tax laws and regulations could require Yumanity to make substantial changes to its business practices, allocate additional resources, and increase its costs, which could negatively affect its business, results of operations and financial condition. Yumanity urges investors to consult with their legal and tax advisers regarding the implications of the TCJA and other changes in tax laws on an investment in its common stock.

Yumanity’s ability to use its net operating loss carryforwards and certain tax credit carryforwards may be subject to limitation.

As of December 31, 2019, Yumanity had federal and state net operating loss (“NOL”) carryforwards of $84.7 million and $84.8 million, respectively, which begin to expire in 2035. Under Section 382 of the Code changes in its ownership may limit the amount of its net operating loss carryforwards and research and development tax credit carryforwards that could be utilized annually to offset its future taxable income, if any. This limitation would generally apply in the event of a cumulative change in ownership of its company of more than 50% within a three-year period. Any such limitation may significantly reduce its ability to utilize its net operating loss carryforwards and research and development tax credit carryforwards before they expire. The completion of the Merger, together with private placements and other transactions that have occurred since its inception, may trigger such an ownership change pursuant to Section 382. Any such limitation, whether as the result of the Merger, prior private placements, sales of its common stock by its existing stockholders, or additional sales of its common stock by Yumanity after the Merger, could have a material adverse effect on its results of operations in future years. Yumanity has not yet completed a Section 382 analysis, and therefore, there can be no assurances that the NOL is already not limited.

In addition, the reduction of the corporate tax rate under the TCJA may cause a reduction in the economic benefit of its NOL carryforwards and other deferred tax assets available to it. For example, while the TCJA allows for federal NOLs incurred in tax years beginning after December 31, 2017 to be carried forward indefinitely, the TCJA also imposes an 80% limitation on the use of NOLs that are generated in tax years beginning after December 31, 2017. Net operating losses generated prior to December 31, 2017, however, will still have a 20-year carryforward period, but are not subject to the 80% limitation.

The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) modifies, among other things, the rules governing NOLs. NOLs arising in tax years 2018, 2019, and 2020 are subject to a five year carryback and indefinite carryforward, while NOLs arising in tax years beginning after December 31, 2020 also are subject to indefinite carryforward but cannot be carried back. The CARES Act also suspends the 80% limitation mentioned above for NOLs generated in taxable years ending after December 31, 2017 that are used in taxable years ending on or prior to December 31, 2020. In future years, if and when a net deferred tax asset is recognized related to Yumanity’s NOLs, the changes in the carryforward/carryback periods as well as the new limitation on use of NOLs may significantly impact its valuation allowance assessments for NOLs generated after December 31, 2017.

Furthermore, Yumanity’s ability to utilize NOLs is conditioned upon its maintaining profitability in the future and generating U.S. federal taxable income. Since Yumanity does not know whether or when it will generate the U.S. federal taxable income necessary to utilize its remaining NOLs, these NOL carryforwards generated prior to December 31, 2017 could expire unused. Notwithstanding the foregoing discussion of NOLs, Yumanity has recorded a full valuation allowance related to its NOLs due to the uncertainty of the ultimate realization of the future benefits of such NOLs.

Yumanity may acquire businesses or products, or form strategic alliances, in the future, and Yumanity may not realize the benefits of such acquisitions.

Yumanity may acquire additional businesses or products, form strategic alliances, or create joint ventures with third parties that Yumanity believes will complement or augment its existing business. If Yumanity acquire businesses with promising markets or technologies, Yumanity may not be able to realize the benefit of acquiring such

 

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businesses if Yumanity is unable to successfully integrate them with its existing operations and company culture. Yumanity may encounter numerous difficulties in developing, manufacturing, and marketing any new products resulting from a strategic alliance or acquisition that delay or prevent it from realizing their expected benefits or enhancing its business. Yumanity cannot provide assurance that, following any such acquisition, Yumanity will achieve the synergies expected in order to justify the transaction.

Proteostasis stockholders may not receive any payment on the CVRs and the CVRs may otherwise expire valueless.

Pursuant to the Contingent Value Rights Agreement, or CVR Agreement, for each share of Proteostasis common stock held, Proteostasis stockholders of record as of immediately prior to the effective time of the Merger (after giving effect to the exercise or settlement of any Proteostasis options or Proteostasis restricted stock units) received one contingent value right (“CVR”) entitling such holders to receive certain net proceeds, if any, derived from the grant, sale or transfer of rights of all or any part of Proteostasis’ intellectual property relating to its cystic fibrosis clinical programs (the “CF Assets”) completed prior to the effective time of the Merger or during the nine-month period after such effective time (a “CF Monetization”) (with any potential payment obligations continuing until the 10-year anniversary of the closing of the Merger).

A CF Monetization was not completed prior to the effective time of the Merger. The right of Proteostasis stockholders to receive any future payment for or derive any value from the CVRs is contingent solely upon Yumanity’s ability to monetize all or any part of the CF Assets through a CF Asset monetization within the time periods specified in the CVR Agreement and the consideration received being greater than the amounts permitted to be reimbursed to Yumanity under the CVR Agreement. If a CF Asset Monetization is not achieved within the time periods specified in the CVR Agreement or the consideration received is not greater than the amounts permitted to be reimbursed to Proteostasis, no payments will be made under the CVR Agreement, and the CVRs will expire valueless.

Yumanity has sole authority over whether and how to pursue the continued development of the CF Assets (if at all), and Yumanity’s only obligations will be to reasonably cooperate with the requests of the CVR Holders’ Representative to carry out the intent and purpose of the CVR Agreement and not to terminate or intentionally negatively impact the CF Assets during the nine-month period following the effective time of the Merger.

Furthermore, the CVRs will be unsecured obligations of the combined organization and all payments under the CVRs, all other obligations under the CVR Agreement and the CVRs and any rights or claims relating thereto will be subordinated in right of payment to the prior payment in full of all current or future senior obligations of the combined organization.

General Risk Factors

Unfavorable global economic conditions could adversely affect Yumanity’s business, financial condition, or results of operations.

Its results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. The recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, such as the recent global financial crisis, could result in a variety of risks to its business, including, weakened demand for Yumanity’s product candidates and its ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain its suppliers, possibly resulting in supply disruption, or cause its customers to delay making payments for its services. Any of the foregoing could harm its business and Yumanity cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact its business.

Yumanity, or the third parties upon whom Yumanity depend, may be adversely affected by earthquakes or other natural disasters and its business continuity and disaster recovery plans may not adequately protect Yumanity from a serious disaster.

Earthquakes or other natural disasters could severely disrupt its operations, and have a material adverse effect on its business, results of operations, financial condition, and prospects. If a natural disaster, power outage, or other event occurred that prevented Yumanity from using all or a significant portion of its headquarters, that damaged critical infrastructure, such as the manufacturing facilities of its third-party contract manufacturers and suppliers, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for Yumanity to continue its business for a substantial period of time. The disaster recovery and business continuity plans Yumanity has in place may prove inadequate in the event of a serious disaster or similar event. Yumanity may incur substantial expenses as a result of the limited nature of its disaster recovery and business continuity plans, which, particularly when taken together with its lack of earthquake insurance, could have a material adverse effect on its business.

Yumanity’s internal computer systems, or those of its third-party CROs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of its product candidates’ development programs.

Despite the implementation of security measures, Yumanity’s internal computer systems and those of its third-party CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war, and telecommunication and electrical failures. While Yumanity has not experienced any such system failure, accident, or security breach to date, if such an event were to occur and cause interruptions in its operations, it could result in a material disruption of its programs. For example, the loss of clinical study data for its product candidates could result in delays in its regulatory approval efforts and significantly increase its costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to its data or applications or other data or applications relating to its technology or product candidates, or inappropriate disclosure of confidential or proprietary information, Yumanity could incur liabilities and the further development of its product candidates could be delayed.

 

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Exhibit 99.2

YUMANITY MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Explanatory Note:

On December 22, 2020, pursuant to the Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), dated as of August 22, 2020 and as amended on November 6, 2020, by and among Yumanity Therapeutics, Inc. (formerly known as Proteostasis Therapeutics, Inc.) (the “Company”), Yumanity, Inc. (formerly known as Yumanity Therapeutics, Inc.) (“Yumanity”) and Pangolin Merger Sub, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), the Company completed the previously announced merger transaction with Yumanity, pursuant to which Merger Sub merged with and into Yumanity, with Yumanity surviving such merger as a wholly owned subsidiary of the Company (the “Merger”). In connection with the Merger, and immediately prior to the Effective Time, the Company effected a reverse stock split of the Company Common Stock at a ratio of 1:20 (the “Reverse Stock Split”). Also, in connection with the Merger, the Company changed its name from “Proteostasis Therapeutics, Inc.” to “Yumanity Therapeutics, Inc.” (the “Name Change”) and the business conducted by the Company became primarily the business conducted by Yumanity, which is a clinical stage biopharmaceutical company dedicated to accelerating the revolution in the treatment of neurodegenerative diseases.

You should read the following discussion and analysis of the Yumanity’s financial condition and results of operations together with the Company’s condensed consolidated financial statements and the related notes included in Exhibit 99.5 of the Company’s Amendment No. 1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on February 3, 2021. Some of the information contained in this discussion and analysis including information with respect to the Company’s plans and strategy for the Company’s business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” included in Exhibit 99.1 of the Company’s Amendment No. 1 to the Current Report on Form 8-K filed with the SEC on February 3, 2021, the Company’s actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

Yumanity is a clinical stage biopharmaceutical company dedicated to accelerating the revolution in the treatment of neurodegenerative diseases. Neurodegenerative diseases cause a progressive loss of structure and function in the brain, leaving patients with devastating damage to their nervous system and widespread functional impairment. Although treatments may help relieve some of the physical or mental symptoms associated with neurodegenerative diseases, few of the currently available therapies slow or stop the continued loss of neurons, resulting in a critical unmet need. Yumanity is specifically focused on developing novel disease-modifying therapies to treat devastating conditions, either with large or orphan disease markets, including Parkinson’s disease, dementia with Lewy bodies, multiple system atrophy (“MSA”), amyotrophic lateral sclerosis (“ALS” (also known as Lou Gehrig’s disease)), frontotemporal lobar degeneration (“FTLD”), and Alzheimer’s disease.

Yumanity’s goal is to advance one new program into the clinic every year. Yumanity’s lead program, YTX-7739, is now in Phase 1 clinical trials for the potential treatment and disease modification of Parkinson’s disease. YTX-7739 targets an enzyme known as stearoyl-CoA desaturase (“SCD”). Inhibition of SCD in multiple cellular systems, including patient-derived neurons, as well as in a novel mouse model of Parkinson’s disease, has been demonstrated to reverse the toxicity of misfolded alpha-synuclein (“α-synuclein”), a protein strongly associated with Parkinson’s disease. Yumanity recently completed enrollment of a Phase 1 single ascending dose (“SAD”) study of YTX-7739 in healthy volunteers, which evaluated a broad range of doses of YTX-7739. Yumanity initiated a multiple ascending dose (“MAD”) study in healthy volunteers in the third quarter of 2020 with results anticipated in the first quarter of 2021. A Phase 1b clinical study of YTX-7739 in patients with Parkinson’s disease is planned as a continuation of the MAD study. The Phase 1b study will assess safety, tolerability and pharmacokinetics of YTX-7739 as well as proof of biology by exploring biomarkers of target engagement and potential correlative clinical parameters such as neuroimaging measurements to monitor for early effects of YTX-7739. Early results from the Phase 1b trial are anticipated in the second quarter of 2021. Yumanity’s second program, YTX-9184, also inhibits

 

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SCD but is chemically distinct from YTX-7739. Investigational new drug (“IND”) enabling safety pharmacology and toxicological studies for YTX-9184 were initiated in the second quarter of 2020. Yumanity anticipates commencing the first in human studies of YTX-9184 in 2021, and intends to develop YTX-9184 for the potential treatment of dementia with Lewy bodies, which is another devasting neurodegenerative disease characterized by the abnormal accumulation of aggregates of α-synuclein.

At the center of Yumanity’s scientific foundation is its drug discovery engine, which is based on technology licensed from the Whitehead Institute. This core technology, combined with investments and advancements by Yumanity, is designed to enable rapid screening to identify drugs with the potential to modify disease by overcoming toxicity in disease-causing gene networks. Toxicity in many neurodegenerative diseases results from an aberrant accumulation of misfolded proteins in the brain. Yumanity leverages its proprietary discovery engine to identify and screen novel drug targets and drug molecules for their ability to protect nerve cells from toxicity arising from misfolded proteins. To date, Yumanity has identified over one dozen targets, most of which have not previously been linked to neurodegenerative diseases. Yumanity believes this discovery platform will allow it to replenish its pipeline as programs graduate towards the clinic.

Yumanity has incurred significant operating losses since inception. Yumanity’s ability to generate product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of Yumanity’s current or future product candidates. Yumanity’s net losses were $20.8 million and $31.2 million, respectively, for the nine months ended September 30, 2020 and the year ended December 31, 2019. As of September 30, 2020, Yumanity had an accumulated deficit of $111.1 million. Yumanity expects to continue to incur significant expenses and increasing operating losses for at least the next several years. Yumanity expects that its expenses and capital requirements will increase substantially in connection with its ongoing activities particularly if and as Yumanity:

 

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successfully completes preclinical and clinical development of its product candidates;

 

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identifies, assesses or develops new product candidates from its discovery engine platform;

 

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develops a sustainable and scalable manufacturing process for its product candidates, as well as establishes and maintains commercially viable supply relationships with third parties that can provide adequate products and services to support clinical activities and commercial demand for its product candidates;

 

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negotiates favorable terms in any collaboration, licensing, or other arrangements into which it may enter;

 

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obtains regulatory approvals for product candidates for which it successfully completes clinical development;

 

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launches and successfully commercializes product candidates for which it obtains regulatory approval, either by establishing a sales, marketing, and distribution infrastructure or collaborating with a partner;

 

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negotiates and maintains an adequate price for its product candidates, both in the United States and in foreign countries where its products are commercialized;

 

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obtains market acceptance of its product candidates as viable treatment options;

 

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builds out new facilities or expands existing facilities to support its ongoing development activity;

 

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addresses any competing technological and market developments;

 

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maintains, protects, expands, and enforces its portfolio of intellectual property rights, including patents, trade secrets, and know-how; and

 

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attracts, hires and retains qualified personnel.

 

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Yumanity will not generate revenue from product sales unless and until Yumanity successfully completes clinical development and obtains regulatory approval for its product candidates. If Yumanity obtains regulatory approval for any of its product candidates and does not enter into a commercialization partnership, Yumanity expects to incur significant expenses related to developing Yumanity’s internal commercialization capability to support product sales, marketing, manufacturing and distribution activities. Following the closing of the Merger, the Company expects to incur additional costs associated with operating as a public company.

As a result, the Company will need substantial additional funding to support its continuing operations and pursue its growth strategy. Until such time as the Company can generate significant revenue from product sales or additional licensing agreements, the Company expects to finance its operations through the sale of equity offerings, debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions. The Company may be unable to raise additional funds or enter into other agreements or arrangements when needed on favorable terms, or at all. If the Company fails to raise capital or enter into such agreements as, and when, needed, the Company could have to significantly delay, reduce or eliminate development and commercialization of one or more of its product candidates or delay its pursuit of potential in-licenses or acquisitions.

Because of the numerous risks and uncertainties associated with product development, Yumanity is unable to predict the timing or amount of increased expenses or when or if it will be able to achieve or maintain profitability. Even if Yumanity is able to generate product sales, Yumanity may not become profitable. If Yumanity fails to become profitable or is unable to sustain profitability on a continuing basis, then Yumanity may be unable to continue its operations at planned levels and be forced to reduce or terminate its operations.

As of December 4, 2020, the issuance date of the condensed consolidated financial statements for the nine months ended September 30, 2020, Yumanity expects that its existing cash and cash equivalents will fund its operating expenses, capital expenditure requirements and debt service payments into the third quarter of 2021. Yumanity has based this estimate on assumptions that may prove to be wrong, and Yumanity could exhaust its available capital resources sooner than it expects. See “—Liquidity and Capital Resources.” Beyond that point, Yumanity will need to raise additional capital to finance its operations, which cannot be assured. Yumanity has concluded that this circumstance raises substantial doubt about its ability to continue as a going concern within one year after September 23, 2020, the issuance date of its annual consolidated financial statements for the year ended December 31, 2019 and within one year after December 4, 2020, the issuance date of its unaudited condensed consolidated financial statements for the nine months ended September 30, 2020. See Notes 1 of Yumanity’s audited consolidated financial statements and unaudited consolidated financial statements included as Exhibits 99.4 and 99.5, respectively, of the Company’s Amendment No. 1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on February 3, 2021.

Similarly, in its report on Yumanity’s consolidated financial statements for the year ended December 31, 2019, Yumanity’s independent registered public accounting firm included an explanatory paragraph stating that Yumanity’s recurring losses from operations and required additional funding to finance Yumanity’s operations raise substantial doubt about its ability to continue as a going concern.

The Merger was completed in December 2020, which provided the Company with incremental net cash as was a concurrent private placement, which provided the Company with additional gross proceeds of $33.6 million. As of December 4, 2020, the issuance date of its unaudited condensed consolidated financial statements for the nine months ended September 30, 2020, Yumanity expects that its existing cash and cash equivalents will fund its operating expenses, capital expenditure requirements and debt service payments into the third quarter of 2021. Yumanity has based this estimate on assumptions that may prove to be wrong, and Yumanity could exhaust its available capital resources sooner than it expects.

COVID-19

In March 2020, COVID-19 was declared a global pandemic by the World Health Organization and to date, the COVID-19 pandemic continues to present a substantial public health and economic challenge around the world. The length of time and full extent to which the COVID-19 pandemic will directly or indirectly impact Yumanity’s business, results of operations and financial condition will depend on future developments that are highly uncertain, subject to change and difficult to predict. While Yumanity continues to conduct its research and development activities, the COVID-19 pandemic may cause disruptions that affect Yumanity’s ability to initiate and complete preclinical studies and clinical trials or to procure items that are essential for Yumanity’s research and development activities. The pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could impact Yumanity’s ability to raise additional funds to support its operations. Moreover, the pandemic has significantly impacted economies worldwide and could result in adverse effects on Yumanity’s business and operations. To date, Yumanity has not experienced material business disruptions or incurred impairment losses in the carrying values of its assets as a result of the pandemic.

Yumanity plans to continue to closely monitor the ongoing impact of the COVID-19 pandemic on its employees and its business operations. In an effort to provide a safe work environment for Yumanity employees, Yumanity has, among other things, implemented measures to enable remote work whenever possible. Yumanity expects to continue to take actions as may be required or recommended by government authorities or as Yumanity determines are in the best interests of its employees and other business partners in light of the pandemic.

Merger with Proteostasis

On August 22, 2020, Proteostasis Therapeutics, Inc, a Delaware corporation (“Proteostasis”), Merger Sub, Yumanity, and Yumanity Holdings, LLC (“Holdings”), entered into the Merger Agreement, as amended on November 6, 2020, pursuant to which the Merger Sub merged with and into Yumanity. Immediately prior to the

 

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closing of the transaction Yumanity and Holdings merged with Yumanity surviving the merger (the “Yumanity Reorganization”) and, upon the closing of the Merger, Yumanity became a wholly owned subsidiary of Proteostasis. The Merger was completed on December 22, 2020 pursuant to the terms of the Merger Agreement and Proteostasis changed its name to Yumanity.

Pursuant to the terms of the Merger Agreement, upon closing of the Merger, all of Yumanity’s outstanding common stock was exchanged for common stock of Proteostasis and all outstanding options to purchase common stock of Yumanity were exchanged for options to purchase common stock of Proteostasis. In addition, in connection with and immediately prior to the merger, the Company effected the Reverse Stock Split. Immediately following the closing of the merger, the Company effected the Name Change. Except as noted otherwise, the unaudited condensed consolidated financial statements and notes included in Exhibit 99.5 of Yumanity’s Amendment No. 1 to the Current Report on Form 8-K filed on December 4, 2020 do not give effect to the Reverse Stock Split.

The business combination will be accounted for as a reverse merger accounted for as an asset acquisition in accordance with Generally Accepted Accounting Principles in the United States, or GAAP. Under this method of accounting, Yumanity is deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the facts that, immediately following the merger: (i) Yumanity’s equityholders will own a substantial majority of the voting rights in the combined organization, (ii) Yumanity will designate a majority of the members (7 of 9) of the initial board of directors of the combined organization and (iii) Yumanity’s senior management will hold all key positions in the senior management of the combined organization. Accordingly, for accounting purposes, the business combination will be treated as the equivalent of Yumanity issuing stock to acquire the net assets of Proteostasis. As a result, as of the closing date of the Merger, the net assets of Proteostasis will be recorded at their acquisition-date fair values in the financial statements of the Company and the reported operating results prior to the business combination are those of Yumanity.

Financial Operations Overview

Revenue

To date, Yumanity has not generated any revenue from product sales and does not expect to generate any revenue from the sale of products for the foreseeable future. If Yumanity’s development efforts for product candidates are successful and result in regulatory approval or licenses with third parties, Yumanity may generate revenue in the future from product sales, milestone payments under Yumanity’s existing collaboration agreement or payments from other license agreements that Yumanity may enter into with third parties.

In June 2020, Yumanity entered into a research collaboration and license agreement (the “Collaboration Agreement”) with Merck Sharp & Dohme Corp. (“Merck”), focused on accelerating the development of new treatments for neurodegenerative diseases. Under the terms of the Collaboration Agreement, Merck will gain exclusive rights to two novel pipeline programs for the treatment of ALS and FTLD. Yumanity and Merck will collaborate to advance the two preclinical programs during the research term, after which Merck has the right to continue clinical development and commercialization. Under the Collaboration Agreement, Yumanity received an upfront payment totaling $15.0 million and is eligible to receive future milestone payments of up to $530.0 million associated with the successful research, development and sales of marketed products for pipeline programs, as well as royalties on net sales. Yumanity will perform certain research and development activities over the research term pursuant to the Collaboration Agreement and will participate on a Joint Steering Committee to oversee research and development activities. Yumanity cannot provide assurance as to the timing of future milestone or royalty payments or that Yumanity will receive any of these payments at all.

Yumanity will record revenue over the research term as Yumanity satisfies its performance obligation under the Collaboration Agreement. Accordingly, the upfront payment of $15.0 million will be recognized as revenue using the cost-to-cost method, which Yumanity believes best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Through September 30, 2020, Yumanity has recorded $3.3 million of collaboration revenue related to the Collaboration Agreement following the commencement of development services.

 

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Operating Expenses

Research and Development

Research and development expenses consist primarily of costs incurred in connection with the discovery, preclinical and clinical development and manufacture of Yumanity’s product candidates, and include:

 

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salaries, benefits, equity-based compensation, consultants and other related costs for individuals involved in research and development activities;

 

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external research and development expenses incurred under agreements with contract research organizations (“CROs”), investigative sites and other scientific development services;

 

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costs incurred under agreements with contract development and manufacturing organizations (“CDMOs”) for developing and manufacturing material for preclinical studies and clinical trials;

 

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licensing agreements and associated milestones;

 

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costs related to compliance with regulatory requirements;

 

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lab supplies and other lab related expenses; and

 

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facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, insurance and other operating costs.

Yumanity expenses research and development costs as incurred and recognizes external development costs based on an evaluation of the progress to completion of specific tasks using information provided to Yumanity by its service providers. This process involves reviewing open contracts and purchase orders, communicating with its personnel to identify services that have been performed on its behalf, and estimating the level of service performed and the associated cost incurred for the service when Yumanity has not yet been invoiced or otherwise notified of actual costs. Nonrefundable advance payments for goods and services to be received in the future for use in research and development activities are deferred and capitalized in prepaid expenses and other current assets. The capitalized amounts are expensed as the related goods are delivered or the services are performed. Upfront payments, milestone payments and annual maintenance fees under license agreements are expensed in the period in which they are incurred.

Yumanity’s external direct research and development expenses are tracked by product candidate and consist primarily of costs that include fees and other expenses paid to outside consultants, CROs, CDMOs and research laboratories in connection with its preclinical development, process development, manufacturing and clinical development activities. Yumanity’s direct research and development expenses by product candidate also include fees incurred under third-party license agreements. Yumanity does not allocate employee costs and costs associated with its platform technology, early stage discovery efforts, laboratory supplies and facilities, including depreciation or other indirect costs, to specific product candidates because these costs are deployed across multiple programs and Yumanity’s platform and, as such, are not separately classified.

Research and development activities are central to Yumanity’s business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, Yumanity expects research and development costs to increase significantly for the foreseeable future as it continues the development of YTX-7739 and YTX-9184 and any product candidates Yumanity may develop in the future. Yumanity cannot accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of product candidates including future trial design and various regulatory requirements, many of which cannot yet be determined with accuracy based on Yumanity’s stage of development. Additionally, future commercial and regulatory factors beyond Yumanity’s control will impact its clinical development program and plans.

The successful development and commercialization of YTX-7739 and YTX-9184 and any product candidates Yumanity may develop in the future is highly uncertain. At this time, Yumanity cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of its product candidates. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:

 

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the timing and progress of preclinical and clinical development activities;

 

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the number and scope of preclinical and clinical programs Yumanity decides to pursue;

 

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the ability to maintain current research and development programs and to establish new ones;

 

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establishing an appropriate safety profile with IND enabling studies;

 

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successful patient enrollment in, and the initiation and completion of, clinical trials;

 

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the successful completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;

 

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the receipt of regulatory approvals from applicable regulatory authorities;

 

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the timing, receipt and terms of any marketing approvals from applicable regulatory authorities;

 

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Yumanity’s ability to establish new licensing or collaboration arrangements;

 

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the performance of Yumanity’s future collaborators, if any;

 

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establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

 

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development and timely delivery of commercial-grade drug formulations that can be used in Yumanity’s planned clinical trials and for commercial launch;

 

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obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights;

 

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launching commercial sales of product candidates, if approved, whether alone or in collaboration with others; and

 

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maintaining a continued acceptable safety profile of the product candidates following approval.

Any changes in the outcome of any of these variables with respect to the development of Yumanity’s product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay Yumanity’s planned start of clinical trials or requires Yumanity to conduct clinical trials or other testing beyond those that Yumanity currently expects, or if Yumanity experiences significant delays in enrollment in any of its planned clinical trials, Yumanity could be required to expend significant additional financial resources and time to complete clinical development of that product candidate. Yumanity may never obtain regulatory approval for any of its product candidates. Drug commercialization will take several years and millions of dollars in development costs.

General and Administrative

General and administrative expenses consist primarily of personnel-related expenses, including salaries, benefits, and equity-based compensation expenses for personnel in executive, finance, accounting, human resources and other administrative functions. Other significant general and administrative expenses include legal fees relating to patent, intellectual property and corporate matters, and fees paid for accounting, audit, consulting and other professional services, as well as facilities, and other allocated expenses, which include direct and allocated expenses for rent, insurance and other operating costs.

Yumanity anticipates that its general and administrative expenses will increase in the future as its business expands to support its continued research and development activities, including its future clinical programs. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, among other expenses. Yumanity also anticipates increased expenses associated with being a public company, including costs for audit, legal, regulatory, and tax-related services related to compliance with the rules and regulations of the SEC listing standards applicable to companies listed on a national securities exchange, director and officer insurance premiums and investor relations costs.

 

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Other Income (Expense)

Change in Fair Value of Warrant Liabilities

In connection with Yumanity’s loan and security arrangements, Holdings issued warrants to purchase preferred units. These warrants were liability classified and remeasured to fair value at each reporting date, with changes in the fair value recognized as a component of other income (expense) in its statement of operations.

Immediately prior to the Merger, all of Holding’s outstanding warrants were exchanged and become warrants to purchase shares of Yumanity’s common stock. As a result, the fair value of the warrants was reclassified to additional paid-in capital and there is no longer a warrant liability to remeasure.

Interest Expense

Interest expense consists of interest charged on outstanding borrowings associated with Yumanity’s loan and security agreements, as well as amortization of debt issuance costs and accretion of a final payment payable upon the maturity or the repayment in full of all obligations under such loans. Interest expense also consists of interest related to capital leases, which upon Yumanity’s adoption of the new lease standard as of January 1, 2019, it now refers to as finance leases.

Interest Income and Other Income (Expense), Net

Interest income consists of interest earned on Yumanity’s invested cash balances. Other income (expense), net has not been significant for the periods presented.

Income Taxes

Holdings was treated as a partnership for federal income tax purposes and, therefore, its owners, and not Holdings, were subject to U.S. federal or state income taxation. Yumanity, Holdings’ directly held subsidiary, was treated as a corporation for U.S. federal income tax purposes and subject to taxation in the United States. In each reporting period, Yumanity’s tax provision included the effects of consolidating the results of the operations of Yumanity. Since its inception, Yumanity has not recorded any income tax benefits for the net losses it has incurred in each year or for its earned research and development tax credits, as Yumanity believes, based upon the weight of available evidence, that it is more likely than not that all of Yumanity’s net operating loss carryforwards and tax credits will not be realized. As of December 31, 2019, Yumanity had U.S. federal and state net operating loss carryforwards of $84.7 million and $84.8 million, respectively, which may be available to offset future income tax liabilities. As of December 31, 2019, $34.6 million of federal net operating loss carryforwards will begin to expire in 2035, and $50.1 million can be carried forward indefinitely. State net operating loss carryforwards will begin to expire in 2035. As of December 31, 2019, Yumanity also had U.S. federal and state research and development tax credit carryforwards of $1.5 million and $1.1 million, respectively, which may be available to offset future tax liabilities and each begin to expire in 2035 and 2031, respectively. Yumanity has recorded a full valuation allowance against its net deferred tax assets at each balance sheet date.

 

7

Results of Operations

Comparison of the Three Months Ended September 30, 2020 and 2019

The following table summarizes Yumanity’s results of operations for the three months ended September 30, 2020 and 2019:

 

		Three Months Ended September 30,
		2020				2019				Change
		(in thousands)
Collaboration revenue		$	3,308			$	—			$	3,308
Operating expenses:
Research and development			5,489				5,437				52
General and administrative			3,725				2,126				1,599
Total operating expenses			9,214				7,563				1,651
Loss from operations			(5,906	)			(7,563	)			1,657
Other income (expense):
Change in fair value of preferred unit warrant liability			46				4				42
Interest expense			(501	)			(293	)			(208	)
Interest income and other income (expense), net			(24	)			124				(148	)
Total other income (expense), net			(479	)			(165	)			(314	)
Net loss		$	(6,385	)		$	(7,728	)		$	1,343

Research and Development Expenses

 

		Three Months Ended September 30,
		2020				2019				Change
		(in thousands)
Direct research and development expenses by program:
YTX-7739		$	1,310			$	794			$	516
YTX-9184			621				78				543
Platform, research and discovery, and unallocated expenses:
Platform and other early stage research external costs			806				1,295				(489	)
Personnel related (including equity-based compensation)			1,211				2,031				(820	)
Facility related and other			1,541				1,239				302
Total research and development expenses		$	5,489			$	5,437			$	52

Research and development expenses were $5.5 million for the three months ended September 30, 2020, an increase of $0.1 million from $5.4 million for the three months ended September 30, 2019. Direct expenses of Yumanity’s YTX-7739 program increased by $0.5 million in the three months ended September 30, 2020, compared to the three months ended September 30, 2019. The change was primarily due to an increase in clinical costs relating to its SAD and MAD studies, partially offset by a decline in preclinical costs as YTX-7739 progressed from IND-enabling studies in 2019 to clinical trials. Direct expenses of Yumanity’s YTX-9184 program in 2020 included preclinical and manufacturing costs for IND-enabling studies. YTX-9184 was designated as a product candidate in mid-2019. Yumanity does not track external costs to programs prior to designation of a product candidate. Yumanity’s platform and other early stage research external costs decreased by $0.5 million due to decreased laboratory activities as a result of COVID-19 and our move to new office and laboratory space in the second quarter of 2020. Yumanity’s personnel related costs decreased primarily due to employee turnover, including two senior executives, and a decrease in payroll taxes. Facility related and other costs increased by $0.3 million due to increased costs associated with new office and laboratory space, partially offset by decreased laboratory activities as a result of COVID-19.

 

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General and Administrative Expenses

 

		Three Months Ended September 30,
		2020				2019				Change
		(in thousands)
Personnel related (including equity-based compensation)		$	1,422			$	1,133			$	289
Professional and consultant fees			2,103				872				1,231
Facility related and other			200				121				79
Total general and administrative expenses		$	3,725			$	2,126			$	1,599

General and administrative expenses were $3.7 million for the three months ended September 30, 2020, an increase of $1.6 million from $2.1 million for the three months ended September 30, 2019. The increase of $0.3 million in personnel related costs was primarily due to an increase in equity-based compensation expense. Personnel-related costs for each of the three months ended September 30, 2020 and 2019 included equity-based compensation of $0.5 million and $0.2 million, respectively. Professional and consultant fees increased by $1.2 million primarily due to higher audit expenses and legal fees related to patent costs and other business development activities.

Other Income (Expense)

Yumanity’s interest expense increased by $0.2 million in the three months ended September 30, 2020 as compared to the three months ended September 30, 2019 due to an increase in Yumanity’s outstanding borrowings. In December 2019, Yumanity entered into a loan and security agreement with a new lender for $15.0 million of gross proceeds and paid off its $10.0 million debt facility, resulting in a net increase to notes payable of $5.0 million.

Yumanity’s interest income and other income (expense), net decreased by $0.1 million from the three months ended September 30, 2020 to the three months ended September 30, 2019 resulting from lower invested balances.

Comparison of the Nine Months Ended September 30, 2020 and 2019

The following table summarizes Yumanity’s results of operations for the nine months ended September 30, 2020 and 2019:

 

		Nine Months Ended September 30,
		2020				2019				Change
		(in thousands)
Collaboration revenue		$	3,308			$	—			$	3,308
Operating expenses:
Research and development			14,457				16,454				(1,997	)
General and administrative			8,356				5,107				3,249
Total operating expenses			22,813				21,561				1,252
Loss from operations			(19,505	)			(21,561	)			2,056
Other income (expense):
Change in fair value of preferred unit warrant liability			72				13				59
Interest expense			(1,410	)			(906	)			(504	)
Interest income and other income (expense), net			21				490				(469	)
Total other income (expense), net			(1,317	)			(403	)			(914	)
Net loss		$	(20,822	)		$	(21,964	)		$	1,142

 

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Research and Development Expenses

 

		Nine Months Ended September 30,
		2020				2019				Change
		(in thousands)
Direct research and development expenses by program:
YTX-7739		$	2,908			$	3,350			$	(442	)
YTX-9184			927				78				849
Platform, research and discovery, and unallocated expenses:
Platform and other early stage research external costs			1,638				3,472				(1,834	)
Personnel related (including equity-based compensation)			5,379				5,571				(192	)
Facility related and other			3,605				3,983				(378	)
Total research and development expenses		$	14,457			$	16,454			$	(1,997	)

Research and development expenses were $14.5 million for the nine months ended September 30, 2020, a decrease of $2.0 million from $16.5 million for the nine months ended September 30, 2019. Direct expenses of Yumanity’s YTX-7739 program decreased by $0.4 million in the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. The change was due primarily to a decrease in preclinical and manufacturing costs, partially offset by an increase in clinical costs as YTX-7739 progressed from IND-enabling studies in 2019 to its SAD and MAD clinical studies during 2020. Direct expenses of Yumanity’s YTX-9184 program in 2020 included preclinical and manufacturing costs for IND-enabling studies. YTX-9184 was designated as a product candidate in mid-2019. Yumanity does not track external costs to programs prior to designation of a product candidate. Yumanity’s platform and other early stage research external costs decreased by $1.8 million due to decreased laboratory activities as a result of COVID-19 and our move to new office and laboratory space in the second quarter of 2020. Yumanity’s personnel related costs decreased primarily due to employee turnover in the research and development function. Facility related and other costs decreased by $0.4 million due to decreased laboratory activities as a result of COVID-19 and lower spend on supplies in anticipation of the move to Yumanity’s new office and laboratory space, partially offset by increased costs associated with the new office and laboratory space.

General and Administrative Expenses

 

		Nine Months Ended September 30,
		2020				2019				Change
		(in thousands)
Personnel related (including equity-based compensation)		$	3,845			$	2,807			$	1,038
Professional and consultant fees			3,846				1,926				1,920
Facility related and other			665				374				291
Total general and administrative expenses		$	8,356			$	5,107			$	3,249

General and administrative expenses were $8.3 million for the nine months ended September 30, 2020, an increase of $3.2 million from $5.1 million for the nine months ended September 30, 2019. The increase of $1.0 million in personnel related costs was primarily due to an increase in equity-based compensation and additional hiring in the general and administrative function. Personnel-related costs for each of the nine months ended September 30, 2020 and 2019 included equity-based compensation of $1.2 million and $0.5 million, respectively. Professional and consultant fees increased by $1.9 million primarily due to higher audit expenses and legal fees related to patent costs and other business development activities.

Other Income (Expense)

Yumanity’s interest expense increased by $0.5 million in the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 due to an increase in Yumanity’s outstanding borrowings. In December 2019, Yumanity entered into a loan and security agreement with a new lender for $15.0 million of gross proceeds and paid off its $10.0 million debt facility, resulting in a net increase to notes payable of $5.0 million.

 

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Yumanity’s interest income and other income (expense), net decreased by $0.5 million from the nine months ended September 30, 2020 to the nine months ended September 30, 2019 resulting from lower invested balances.

Liquidity and Capital Resources

Sources of Liquidity

Since its inception, Yumanity has not generated revenue from product sales and has incurred significant operating losses and negative cash flows from its operations. Yumanity has funded its operations to date primarily with proceeds from sales of preferred units totaling $110.5 million and an upfront payment of $15.0 million from its collaboration agreement with Merck received in July 2020. Yumanity has also funded operations using borrowings under loan and security agreements.

Cash Flows

The following table summarizes Yumanity’s sources and uses of cash for each of the periods presented:

Net Cash Used in Operating Activities

 

		Nine Months Ended September 30,
		2020				2019
		(in thousands)
Cash used in operating activities		$	(6,377	)		$	(21,309	)
Cash provided by (used in) investing activities			(2,407	)			28,754
Cash provided by (used in) financing activities			22,022				(829	)
Net increase in cash, cash equivalents, and restricted cash		$	13,238			$	6,616

During the nine months ended September 30, 2020, operating activities used $6.4 million of cash, resulting from Yumanity’s net loss of $20.8 million, partially offset by net cash provided by changes in Yumanity’s operating assets and liabilities of $10.1 million and non-cash charges of $4.3 million. Net cash provided by changes in Yumanity’s operating assets and liabilities for the nine months ended September 30, 2020 consisted of an $11.7 million increase in deferred revenue and a $1.0 million increase in accounts payable and accrued expenses and other current liabilities, partially offset by a $1.4 million increase in prepaid expenses and other current assets, a $0.9 million decrease in operating lease liabilities and a $0.3 million increase in deposits.

During the nine months ended September 30, 2019, operating activities used $21.3 million of cash resulting from Yumanity’s net loss of $22.0 million and net cash used by changes in Yumanity’s operating assets and liabilities of $1.9 million, partially offset by non-cash charges of $2.5 million. Net cash used by changes in Yumanity’s operating assets and liabilities for the nine months ended September 30, 2019 consisted primarily of a $0.6 million decrease in accounts payable and accrued expenses and other current liabilities, a $0.7 million decrease in operating lease liabilities and a $0.6 million increase in prepaid expenses and other current assets.

Changes in accounts payable, accrued expenses and prepaid expenses in all periods were generally due to growth in Yumanity’s business and the timing of vendor invoicing and payments. Changes in deposits related primarily to the Company’s new office headquarters.

Net Cash Provided by (Used in) Investing Activities

During the nine months ended September 30, 2020, net cash used in investing activities was $2.4 million, primarily related to the purchase of marketable securities and property and equipment, partially offset by the sale and maturity of marketable securities.

During the nine months ended September 30, 2019, net cash provided by investing activities was $28.8 million, primarily related to the sale and maturity of marketable securities, partially offset by the purchase of marketable securities and property and equipment.

 

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Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2020 was $22.0 million, consisting primarily of net proceeds from the issuance of Class C preferred units of $21.2 million and proceeds from a government loan (Paycheck Protection Program (“PPP”) loan) of $1.1 million, partially offset by payments of finance lease obligations of $0.3 million.

Net cash used in financing activities for the nine months ended September 30, 2019 was $0.8 million and resulted from payments of finance lease obligations.

Description of Indebtedness

Loan and Security Agreement

Yumanity has outstanding borrowings of $15.0 million (“Tranche 1”), under a loan and security agreement entered into in December 2019 (the “New Loan”). Yumanity may borrow an additional $5.0 million upon the occurrence of a development milestone and an equity event as defined in the agreement (“Tranche 2”), and an additional $10.0 million may become available to be drawn upon lender approval. Borrowings under the New Loan are repayable in monthly interest-only payments until August 1, 2021, with the option to extend an additional six months upon the drawdown of Tranche 2. The interest-only period will be followed by monthly payments of equal principal plus interest until the loan maturity date of January 1, 2024. Outstanding borrowings bear interest at the greater of (i) 8.75% and (ii) the prime rate as reported in the Wall Street Journal plus 4.00%. A final payment fee of 5.25% of the amounts drawn under the New Loan is due upon the earlier of the maturity date or the repayment date if paid early, whether voluntary or upon acceleration due to default. Yumanity may repay the New Loan at any time by paying the outstanding principal balance in full, along with any unpaid accrued interest, the final payment fees of 5.25% of the amounts drawn and a prepayment fee calculated on amounts being prepaid. The prepayment fee is 3.0% if the New Loan is repaid within the one-year anniversary of the draw date, 2.0% if paid between the first and second-year anniversary of the draw date and 1.0% if paid after the second anniversary of the draw date but before the maturity date.

In April 2020, the New Loan was amended to permit indebtedness consisting of a loan under the PPP of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), provided that such loan shall be unsecured, shall not contain any terms or conditions that are adverse to the lender’s rights under the loan and that Yumanity will not prepay such loan. In June 2020, the New Loan was amended and an additional final payment fee of $0.3 million became due upon repayment of the loan.

Borrowings under the New Loan are collateralized by substantially all of Yumanity’s personal property, other than its intellectual property. There were no financial covenants associated with the New Loan; however, Yumanity is subject to certain affirmative and negative covenants restricting its activities, including limitations on dispositions, mergers or acquisitions; encumbering its intellectual property; incurring indebtedness or liens; paying dividends; making certain investments; and engaging in certain other business transactions. The obligations under the New Loan are subject to acceleration upon the occurrence of specified events of default, including a material adverse change Yumanity’s business, operations or financial or other condition. Upon the occurrence of an event of default and until such event of default is no longer continuing, the annual interest rate will be 5.0% above the otherwise applicable rate.

Paycheck Protection Program Loan

In April 2020, Yumanity issued a Promissory Note to Silicon Valley Bank, pursuant to which it received loan proceeds of $1.1 million (the “PPP Loan”), provided under the PPP established under the CARES Act and guaranteed by the U.S. Small Business Administration. The PPP Loan is unsecured, is scheduled to mature on April 24, 2022, and has a fixed interest rate of 1.0% per annum. Equal monthly payments of principal and interest will be due commencing in August 2021 until the maturity date. Interest accrues on the unpaid principal balance from the inception date of the loan. Forgiveness of the PPP Loan is only available for principal that is used for the limited purposes that expressly qualify for forgiveness under U.S. Small Business Administration requirements. Yumanity

 

12

has determined to account for the PPP Loan as debt and has allocated and recorded the loan proceeds between current and non-current liabilities. Yumanity further determined that loan forgiveness would become probable of occurring upon acceptance by the Small Business Association of Yumanity’s forgiveness application. If and when the loan forgiveness becomes probable, Yumanity will recognize income for debt extinguishment.

Funding Requirements

Yumanity expects its expenses to increase substantially in connection with its ongoing activities, particularly as it advances the preclinical activities and clinical trials of its product candidates in development. In addition, Yumanity expects to incur additional costs associated with operating as a public company. The timing and amount of Yumanity’s operating expenditures will depend largely on:

 

•

the scope, number, initiation, progress, timing, costs, design, duration, any potential delays and results of clinical trials and nonclinical studies for Yumanity’s current or future product candidates;

 

•

the clinical development plans Yumanity establishes for these product candidates;

 

•

the number and characteristics of product candidates and programs that Yumanity develops or may in-license;

 

•

the outcome, timing and cost of regulatory reviews, approvals or other actions to meet regulatory requirements established by the FDA and comparable foreign regulatory authorities, including the potential for the FDA or comparable foreign regulatory authorities to require that Yumanity perform more studies for its product candidates than those that Yumanity currently expects;

 

•

Yumanity’s ability to obtain marketing approval for its product candidates;

 

•

the cost of filing, prosecuting, defending and enforcing Yumanity’s patent claims and other intellectual property rights covering its product candidates;

 

•

Yumanity’s ability to maintain, expand and defend the scope of its intellectual property portfolio, including the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against Yumanity or its product candidates;

 

•

the cost and timing of completion of commercial-scale outsourced manufacturing activities with respect to Yumanity’s product candidates;

 

•

Yumanity’s ability to establish and maintain licensing, collaboration or similar arrangements on favorable terms and whether and to what extent Yumanity retains development or commercialization responsibilities under any new licensing, collaboration or similar arrangement;

 

•

the cost of establishing sales, marketing and distribution capabilities for any product candidates for which Yumanity may receive regulatory approval in regions where Yumanity chooses to commercialize its products on its own;

 

•

the success of any other business, product or technology that Yumanity acquires or in which Yumanity invests;

 

•

the costs of acquiring, licensing or investing in businesses, product candidates and technologies;

 

•

Yumanity’s need and ability to hire additional management and scientific and medical personnel;

 

•

the costs to operate as a public company in the U.S. including the need to implement additional financial and reporting systems and other internal systems and infrastructure for Yumanity’s business;

 

•

market acceptance of Yumanity’s product candidates, to the extent any are approved for commercial sale; and

 

•

the effect of competing technological and market developments.

The Merger was completed in December 2020, which provided the Company with incremental net cash as was a concurrent private placement, which provided the Company with additional gross proceeds of $33.6 million. As of December 4, 2020, the issuance date of the condensed consolidated financial statements for the nine months ended September 30, 2020, Yumanity expects that its existing cash and cash equivalents will fund its operating expenses, capital expenditure requirements and debt service payments into the third quarter of 2021. Yumanity has based this estimate on assumptions that may prove to be wrong, and Yumanity could exhaust its available capital resources sooner than it expects.

 

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Until such time, if ever, as the Company can generate substantial product revenue, the Company expects to finance its cash needs through a combination of equity offerings, debt financings, collaborations, and marketing, distribution or licensing arrangements with third parties. To the extent that the Company raises additional capital through the sale of equity or convertible debt securities, the ownership interest of the Company may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect the rights of the Company’s stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit the Company’s ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. If the Company raises funds through collaborations or marketing, distribution or licensing arrangements with third parties, the Company 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 the Company. If the Company is unable to raise additional funds through equity or debt financings or other arrangements when needed, the Company may be required to delay, reduce or eliminate its product development or future commercialization efforts, or grant rights to develop and market product candidates that the Company would otherwise prefer to develop and market themselves.

Critical Accounting Policies and Estimates

Yumanity’s consolidated financial statements are prepared in accordance with GAAP. The preparation of Yumanity’s consolidated financial statements and related disclosures requires Yumanity to make judgments and estimates that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in its financial statements. Yumanity bases its estimates on historical experience, known trends and events and various other factors that Yumanity believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Yumanity evaluates its estimates and assumptions on an ongoing basis. Yumanity’s actual results may differ from these estimates under different assumptions or conditions.

While Yumanity’s accounting policies are described in more detail in Note 2 to its audited consolidated financial statements appearing in Yumanity Therapeutics, Inc. (formerly known as Proteostasis Therapeutics, Inc.) Registration Statement on Form S-4, File Number 333-248993, on file with the SEC and in Note 2 to its unaudited condensed consolidated financial statements included in Exhibit 99.5 of Yumanity’s Amendment No. 1 to the Current Report on Form 8-K filed on February 3, 2021, Yumanity believes the following accounting policies require the most significant judgments and estimates used in the preparation of its financial statements.

Revenue Recognition

Yumanity accounts for its one collaboration arrangement, entered into in June 2020, under Accounting Standards Codification Topic 606, Revenue From Contracts With Customers (“ASC 606”). Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Yumanity only applies the five-step model to contracts when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer.

Yumanity assesses the goods or services promised within each contract and determines those that are performance obligations. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. Yumanity assesses if these options provide a material right to

 

14

the customer and if so, they are considered performance obligations. The identification of material rights requires judgments related to the determination of the value of the underlying license relative to the option exercise price, including assumptions about technical feasibility and the probability of developing a candidate that would be subject to the option rights. The exercise of a material right is accounted for as a contract modification for accounting purposes.

Yumanity assesses whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct) and (ii) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract). In assessing whether a promised good or service is distinct, Yumanity considers factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. Yumanity also considers the intended benefit of the contract in assessing whether a promised good or service is separately identifiable from other promises in the contract. If a promised good or service is not distinct, an entity is required to combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct.

The transaction price is then determined and allocated to the identified performance obligations in proportion to their standalone selling prices (“SSP”) on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, Yumanity considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. Yumanity validates the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations.

If the consideration promised in a contract includes a variable amount, Yumanity estimates the amount of consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer. Yumanity determines the amount of variable consideration by using the expected value method or the most likely amount method. Yumanity includes the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, Yumanity re-evaluates the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment.

If an arrangement includes development and regulatory milestone payments, Yumanity evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within Yumanity’s control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.

For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, Yumanity recognizes royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied.

 

15

Yumanity records amounts as accounts receivable when the right to consideration is deemed unconditional. When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded for deferred revenue.

In determining the transaction price, Yumanity adjusts consideration for the effects of the time value of money if the timing of payments provides Yumanity with a significant benefit of financing. Yumanity does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less. Yumanity then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied, either at a point in time or over time, and if over time, recognition is based on the use of an output or input method.

Yumanity assessed the promised goods and services within the Collaboration Agreement to determine if they are distinct. Based on this assessment, Yumanity determined that Merck cannot benefit from the promised goods and services separately from the others as they are highly interrelated and therefore not distinct. Accordingly, the promised goods and services represent one combined performance obligation and the entire transaction price was allocated to that single combined performance obligation. The performance obligation is being satisfied over the research term as Yumanity performs the research and development activities through the first substantive option period and participates in a Joint Steering Committee to oversee research and development activities. Yumanity recognizes revenue using the cost-to-cost method, which it believes best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Under this method, revenue is recorded as a percentage of the estimated transaction price based on the extent of progress towards completion. At contract inception, the potential milestone payments that Yumanity is eligible to receive were excluded from the transaction price as they were fully constrained. At the end of each reporting period, Yumanity reevaluates the transaction price and as uncertain events are resolved or other changes in circumstances occur, and if necessary, Yumanity will adjust its estimate of the transaction price. Any additions to the transaction price would be reflected in the period as a cumulative revenue catch-up. At the inception of the arrangement, Yumanity evaluated the options held by Merck to either advance or terminate the applicable research program to determine if they provided Merck with any material rights. Yumanity concluded that the options were not issued at a significant and incremental discount, and therefore do not provide Merck with a material right. As such, these options were excluded as performance obligations and will be accounted for if and when they occur.

Yumanity assessed the Collaboration Agreement to determine whether a significant financing component exists and concluded that a significant financing component does not exist.

Research and Development

As part of the process of preparing its financial statements, Yumanity is required to estimate its accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with its applicable personnel to identify services that have been performed on Yumanity’s behalf and estimating the level of service performed and the associated cost incurred for the service when Yumanity has not yet been invoiced or otherwise notified of actual costs. The majority of Yumanity’s service providers invoice Yumanity in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. Yumanity makes estimates of its accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to them at that time. Yumanity periodically confirms the accuracy of these estimates with the service providers and makes adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to:

 

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vendors in connection with clinical and preclinical development activities;

 

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CROs and investigative sites in connection with clinical trials; and

 

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CDMOs in connection with the production of preclinical and clinical trial materials.

 

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Yumanity bases the expense recorded related to external research and development on its estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CDMOs, CROs and other vendors that supply, conduct and manage preclinical studies and clinical trials on its behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to Yumanity’s vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, Yumanity estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, Yumanity adjusts the accrual or the amount of prepaid expenses accordingly. Although Yumanity does not expect its estimates to be materially different from amounts actually incurred, Yumanity’s understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period.

Equity-Based Compensation

Holdings measured all equity-based awards based on the fair value on the date of the grant and recognizes compensation expense over the requisite service period for employees and directors and as services are delivered for non-employees, both of which are generally the vesting period of the respective award. Holdings has issued equity-based awards with only service-based and performance-based vesting conditions. Holdings records the expense for awards with only service-based vesting conditions using the straight-line method. Holdings records the expense for awards with both service-based and performance-based vesting conditions using the graded vesting method, commencing once achievement of the performance condition becomes probable. Holdings determines the fair value of restricted unit awards using the fair value of its common units less any applicable purchase price.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model, which used as assumption inputs: the fair value of Holdings’ common units, calculation of volatility of Holdings’ common units using historical benchmarking to peer companies, the expected term of its options, the risk-free interest rate for a period that approximates the expected term of its options and its expected dividend yield.

Determination of the Fair Value of Common Units

As there had been no public market for Holdings’ common units to date, the estimated fair value of its common units was determined by its board of directors as of the date of each award grant, with input from management, considering its most recently available third-party valuations of common units and its board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Holdings’ common unit valuations were prepared using an option pricing method (“OPM”), which used market approaches to estimate its enterprise value. The OPM treats common units and preferred units as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, the common units have value only if the funds available for distribution to equityholders exceeded the value of the preferred unit liquidation preferences at the time of the liquidity event, such as a strategic sale or a merger. A discount for lack of marketability of the common unit is then applied to arrive at an indication of value for the common units. The third-party valuations were performed on May 15, 2019 and June 19, 2020, which resulted in a valuation of Holdings’ common units of $3.62 per unit and $1.72 per unit, respectively.

In addition to considering the results of these third-party valuations, Holdings’ board of directors considered various objective and subjective factors to determine the fair value of its common unit as of each grant date, including:

 

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the prices at which Holdings sold its preferred units and the superior rights and preferences of the Holdings preferred units relative to the Holdings common units at the time of each grant;

 

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the progress of Yumanity’s research and development programs, including the status of preclinical studies and planned clinical trials for its product candidates;

 

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Yumanity’s stage of development and commercialization and its business strategy;

 

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external market conditions affecting the biopharmaceutical industry, and trends within the biopharmaceutical industry;

 

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Yumanity’s financial position, including cash on hand, and its historical and forecasted performance and operating results;

 

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the lack of an active public market for the Holdings common units and Holdings preferred units;

 

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the likelihood of achieving a liquidity event, such as an IPO, merger consolidation or a sale of Yumanity in light of prevailing market conditions; and

 

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the analysis of IPOs and the market performance of similar companies in the biopharmaceutical industry.

The assumptions underlying these valuations represented the management of Yumanity’s best estimates, which involved inherent uncertainties and the application of management’s judgment. As a result, if Yumanity had used significantly different assumptions or estimates, the fair value of the Holdings common units and Yumanity’s equity-based compensation expense could be materially different.

Following the closing of the Merger, it is no longer necessary for Holdings’ board of directors to estimate the fair value of underlying equity in connection with the accounting for equity awards, as the fair value of common stock is determined based on the quoted market price of the Company’s common stock.

Off-Balance Sheet Arrangements

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

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact Yumanity’s financial position and results of operations is disclosed in Note 2 to its audited consolidated financial statements included in Exhibit 99.4 of Yumanity’s Amendment No. 1 to the Current Report on Form 8-K filed on February 3, 2021 and in Note 2 to its unaudited condensed consolidated financial statements included in Exhibit 99.5 of Yumanity’s Amendment No. 1 to the Current Report on Form 8-K filed on February 3, 2021.

Quantitative and Qualitative Disclosures about Market Risks

Interest Rate Risk

As of September 30, 2020 and December 31, 2019, Yumanity had cash, cash equivalents, and marketable securities of $31.0 million and $15.4 million, respectively, which consisted of cash, money market funds, and commercial paper. Interest income is sensitive to changes in the general level of interest rates; however, due to the nature of these investments, an immediate 10% change in market interest rates would not have a material effect on the fair market value of Yumanity’s investment portfolio.

As of September 30, 2020 and December 31, 2019, Yumanity had $15.0 million of borrowings outstanding under its loan and security agreement. Outstanding borrowings bear interest at a variable rate based on the prime rate as reported in the Wall Street Journal. An immediate 10% change in the prime rate would not have had a material impact on Yumanity’s financial position or results of operations. As of September 30, 2020, Yumanity also had $1.1 million outstanding under the PPP Loan with Silicon Valley Bank. As this indebtedness accrues interest at a fixed interest rate, a change in market interest rates would not have any impact on Yumanity’s financial position or results of operations.

 

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Foreign Exchange Risk

Yumanity is not currently exposed to significant market risk related to changes in foreign currency exchange rates. Yumanity’s operations may be subject to fluctuations in foreign currency exchange rates in the future.

Capital Market Risk

Yumanity currently has no product revenues and depends on funds raised through other sources. One possible source of funding is through equity offerings. Following the closing of the Merger, the Company’s ability to raise funds in this manner depends upon capital market forces affecting the Company’s stock price.

Yumanity does not believe that inflation had a material effect on its business, financial condition or results of operations during the nine months ended September 30, 2020 or the year ended December 31, 2019.

 

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Exhibit 99.3

YUMANITY BUSINESS

Overview

Yumanity is a clinical stage biopharmaceutical company dedicated to accelerating the revolution in the treatment of neurodegenerative diseases. Neurodegenerative diseases cause a progressive loss of structure and function in the brain, leaving patients with devastating damage to their nervous system and widespread functional impairment. Although treatments may help relieve some of the physical or mental symptoms associated with neurodegenerative diseases, few of the currently available therapies slow or stop the continued loss of neurons, resulting in a critical unmet need. Yumanity is specifically focused on developing novel disease-modifying therapies to treat devastating conditions, either with large or orphan disease markets, including Parkinson’s disease, dementia with Lewy bodies, multiple system atrophy, or MSA, amyotrophic lateral sclerosis, or ALS (also known as Lou Gehrig’s disease), frontotemporal lobar degeneration, or FTLD, and Alzheimer’s disease.

Neurodegenerative diseases exert a heavy societal burden worldwide and represent one of the largest global healthcare challenges of our time. With an increasingly aging population, diseases affecting the brain and central nervous system are rising in prevalence, with overwhelming personal and economic consequences that exact a toll on patients, caregivers and treatment providers. The rising prevalence of neurodegenerative disease and a lack of disease-modifying treatments has resulted in a significant and growing unmet medical need. It is estimated that more than 60 million people worldwide suffer from neurodegenerative diseases, which is expected to almost double every 20 years. Global costs for treating these diseases are greater than $1 trillion annually.

Yumanity’s goal is to advance one new program into the clinic every year. Yumanity’s lead program, YTX-7739, is now in Phase 1 clinical trials for the potential treatment and disease modification of Parkinson’s disease. YTX-7739 targets an enzyme known as stearoyl-CoA desaturase, or SCD. Inhibition of SCD in multiple cellular systems, including patient-derived neurons, as well as in a novel mouse model of Parkinson’s disease, has been demonstrated to reverse the toxicity of misfolded alpha-synuclein, or α-synuclein, a protein strongly associated with Parkinson’s disease. Yumanity recently completed enrollment of a Phase 1 single ascending dose (SAD) study of YTX-7739 in healthy volunteers, which evaluated a broad range of doses of YTX-7739. Yumanity initiated a multiple ascending dose (MAD) study in healthy volunteers in the third quarter of 2020 with results anticipated in the first quarter of 2021. A Phase 1b clinical study of YTX-7739 in patients with Parkinson’s disease is planned as a continuation of the MAD study. The Phase 1b study will assess safety, tolerability and pharmacokinetics of YTX-7739 as well as proof of biology by exploring biomarkers of target engagement and potential correlative clinical parameters such as neuroimaging measurements to monitor for early effects of YTX-7739. Early results from the Phase 1b trial are anticipated in the second quarter of 2021. Yumanity’s second program, YTX-9184, also inhibits SCD but is chemically distinct from YTX-7739. Investigational new drug, or IND-enabling safety pharmacology and toxicological studies for YTX-9184 were initiated in the second quarter of 2020. Yumanity anticipates commencing the first in human studies of YTX-9184 in 2021, and intends to develop YTX-9184 for the potential treatment of dementia with Lewy bodies, which is another devasting neurodegenerative disease characterized by the abnormal accumulation of aggregates of α-synuclein.

At the center of Yumanity’s scientific foundation is its drug discovery engine, which is based on technology licensed from the Whitehead Institute, an affiliate of the Massachusetts Institute of Technology. This core technology, combined with investments and advancements by Yumanity, is designed to enable rapid screening to identify drugs with the potential to modify disease by overcoming toxicity in disease-causing gene networks. Toxicity in many neurodegenerative diseases results from an aberrant accumulation of misfolded proteins in the brain. Yumanity leverages its proprietary discovery engine to identify and screen novel drug targets and drug molecules for their ability to protect nerve cells from toxicity arising from misfolded proteins. To date, Yumanity has identified over one dozen targets, most of which have not previously been linked to neurodegenerative diseases. Yumanity believes this discovery platform will allow it to replenish its pipeline as programs graduate towards the clinic.

Yumanity is applying to neurodegeneration several research and development principles that have been proven to be successful in oncology and rare disease, including leveraging breakthroughs in genetics, use of advanced laboratory technology and techniques, and use of biomarkers to guide drug development, to inform the selection of specific and well-defined patient populations for clinical trials. To support this approach, Yumanity has assembled a management team with deep experience in neurology, neuroscience, rare disease, and oncology drug discovery and development.

 

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Yumanity has built momentum across multiple dimensions of its business. In addition to advancing its clinical and preclinical pipeline, Yumanity has been successful in its business development efforts. In the second quarter of 2020, Yumanity secured a strategic research and development collaboration in ALS and FTLD with Merck Sharp & Dohme Corp., or Merck, with upfront and potential milestone payments of up to $530 million plus royalties. Yumanity anticipates scaling its business with a combination of internal programs and continued opportunities for biopharmaceutical company partnerships.

Neurodegenerative Disease Market and Challenges

Many factors, including too few disease-relevant biological hypotheses, the inherent complexity of the brain, and high patient heterogeneity, have led to a graveyard of failed approaches over the last several decades and have produced few approved disease-modifying therapies for neurodegenerative diseases to date.

Yumanity believes this is about to change. Recent scientific and technological advances include the improved understanding of the disease-relevant biology, innovative target discovery technologies, potentially better predictive animal models, new imaging approaches and identification of new biomarkers. These advances have ignited a renewed focus and commitment to neurodegenerative disease research and development, and Yumanity is one of the companies at the forefront of this emerging revolution.

Clinical study of neurodegenerative disease and evaluation of potential therapeutics has faced several hurdles. A primary consideration is the genetic heterogeneity of neurodegenerative diseases and subsequent variations in the disease biology in patients with similar clinical diagnoses. Yumanity believes this degree of heterogeneity is far greater than previously appreciated and is likely due to a unique combination of genetic and environmental factors which have important implications for development of therapies and their appropriate use by individual patients. As such, Yumanity plans to take a targeted approach to patient enrichment and stratification in its clinical trials. This approach further speaks to the need for a larger and more accurate set of biomarkers to aid in diagnosis as well as monitoring disease progression and treatment response in trials. Damage to brain cells early in the disease course and prior to the onset of symptoms presents further challenges for the design of clinical trials, as patients enrolling in clinical trials are typically selected based on expression of disease symptoms when significant damage to brain cells has already occurred. For example, increasingly sophisticated imaging studies have demonstrated that patients have lost at least 40% to 60% of dopaminergic neuronal integrity before qualifying for a diagnosis of Parkinson’s disease, indicating damage to brain cells begins long, often decades, before clinical symptoms manifest. As a result, many previous clinical trials in neurodegenerative disease included patients at a stage of the disease beyond which progression could no longer be modified. Thus, clinical trials would optimally be performed in patient populations that are at an early enough stage where potential disease-modifying therapies have an opportunity to preserve existing brain cells and function. Approaches to early diagnosis remain a focus in the neurodegenerative clinical research field.

In Parkinson’s disease, the cornerstone of pharmacological therapy for the past several decades has focused on either temporarily replenishing dopamine or mimicking the action of dopamine such as with the dopamine precursor levodopa. Levodopa, which is very helpful to patients in managing some of the motor symptoms of the disease, does not alter disease progression. Certain disease-modifying molecules are currently being investigated in early clinical trials for the potential of removing or reducing levels of α-synuclein. These programs, however, are predominantly focused on the development of antibodies. Therapeutic antibodies are large molecules that are administered systemically, and as such have significant challenges crossing the blood brain barrier and penetrating into the brain, which is the target tissue for neurodegenerative diseases. Even if some limited amount of antibody can penetrate into the brain, antibodies face a further challenge. α-Synuclein functions within cells to facilitate vesicle trafficking, however when α-synuclein misfolds it is thought to have an increased propensity to aggregate and disrupt multiple critical processes inside the cell. The ultimate expression of this pathology is the formation of Lewy bodies within neurons, which are a hallmark of dystrophic and degenerating cells. Therapeutics that target pathological processes within cells would be expected to prevent this toxic progression. α-Synuclein can also be secreted by neurons, and although the function is unclear, this results in α-synuclein outside of cells. It is this population that would be a target for antibody therapeutics which are generally believed to interact with protein extracellularly, or outside the

 

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cell. Yumanity believes antibodies therefore have less access to α-synuclein, and recently, one antibody drug candidate that targets α-synuclein failed to meet primary clinical endpoints in a Phase 2 trial. By contrast, Yumanity is developing small molecules that the yeast platform pre-selects by design to cross the blood brain barrier and diffuse into the cell where α-synuclein causes cellular toxicity and damage. YTX-7739 and YTX-9184 both target the enzyme SCD, the inhibition of which has been shown to help overcome the toxicity of α-synuclein and promote protection of neurons.

Recent advances provide a rationale for optimism across the industry in the face of historic difficulties. A revolution in genetics over the past 15 years has identified specific genetic causes and genetic risk factors for several neurodegenerative diseases. Advanced research tools such as CRISPR and induced pluripotent stem cells, or iPSCs, allow scientists to probe core disease biology in the research laboratory in newfound ways, making inroads into the historic inaccessibility of the brain. Diagnostic methods are steadily improving, and the increased understanding of disease genetics helps to more precisely define disease subtypes and classify patients based on disease severity and likely rate of progression. Additionally, the use of imaging and digital technology, artificial intelligence and large analytical data repositories now allows for more precise monitoring of disease stage, progression, and response to treatment. These advancements will help clinicians enroll patients in clinical trials at a stage of disease when they are most likely to respond to neuroprotective therapy.

Yumanity’s Approach and Pipeline

Yumanity’s approach is to unlock the path to new therapies by addressing the fundamental and persistent barriers in neurodegeneration research: the poor understanding of disease mechanisms and lack of new biological targets. Yumanity believes that a dramatically expanded portfolio of programs focused on novel drug targets, which are grounded in an improved understanding of disease biology, will enable a higher likelihood of success in developing disease-modifying therapies.

Yumanity’s discovery engine is built upon core enabling technology that it exclusively licenses from the Whitehead Institute, an affiliate of the Massachusetts Institute of Technology. The core discovery technologies were created in the laboratory of Yumanity’s co-founder, Dr. Susan Lindquist. Dr. Lindquist and senior scientists from her team integrated multiple technology platforms to create a drug discovery engine designed to reliably generate new insights into fundamental mechanisms of neurodegenerative disease, and also reveal new potential drug targets and drug molecules that address neurodegeneration in a range of different ways, many of which were previously unknown.

The discovery engine is centered on the key insight that protein misfolding, a phenomenon at the root of virtually all neurodegenerative diseases, can be modeled in yeast cells. These yeast models are then screened against large chemical libraries using high throughput technology, selecting for chemical hits that protect cells from the toxicities created by the misfolded human disease-relevant proteins. The biological targets and pathways for these protective molecules are then uncovered using a series of chemical genetic techniques. Yumanity’s technology also allows for screening yeast collections that have individual genes deleted, such that, when rescue is observed, it can be inferred that the gene that was deleted in that yeast strain is involved in ameliorating the toxicity of the misfolded human disease-relevant protein. Since the only modification to the original yeast system was the introduction of the culprit misfolding proteins, any molecule or gene deletion that can protect cells from the resultant toxicity is of interest. The discovery of protective molecules and biological targets, especially when previously unknown, can reveal new or untapped areas for study. Yumanity believes that the complement and overlap between the small molecule and genetic rescue screens has the potential to create a powerful network of interlinked biological processes that can further identify previously unknown therapeutic targets. Yumanity explores these cell-protective discoveries from the yeast system for translation to human disease-relevant cells using informatics and cutting-edge stem cell and iPSC experimental techniques. The discovery engine is designed to ultimately output novel programs: molecules with novel biological targets that can then be progressed through the standard preclinical drug development processes.

Yumanity believes its proprietary discovery engine has the potential to dramatically expand the knowledge around the complex biology of neurodegeneration, and further allows initiation of discovery programs outside of the traditional, limited set of hypotheses that exist today. Screening for hits in a living yeast system can save time by providing a biological-relevant readout sooner than some of the more typical practice of starting in non-live, test

 

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tube systems. Additionally, shared features between yeast cell membranes and the blood brain barrier, such as comparable membrane permeability, polarity, and drug pumps for removal of non-native compounds, mean that molecules that can permeate a yeast cell to effect intracellular rescue may also be likely to penetrate the blood brain barrier. Furthermore, Yumanity’s molecules get tested in diseased human cells ex-vivo at the beginning rather than at the end of preclinical development. Yumanity believes that success in this setting confers increased confidence in programs compared to the more traditional paradigm of multiple rounds of animal studies before any actual testing in human tissues.

Key Differentiators of Yumanity Discovery Engine

 

 

Yumanity leverages the power of its discovery engine to generate a robust portfolio of promising novel drug targets and molecules. Yumanity then prioritizes the most promising targets to accelerate drug discovery programs and advance compounds into preclinical and ultimately clinical development. To date, this approach has already uncovered over one dozen novel targets, pathways, mechanisms, and molecules that Yumanity believes have the potential to ameliorate the fundamental cellular toxicities associated with neurodegenerative diseases. Yumanity expects that this list of new targets and subsequent programs will continue to grow as Yumanity iterates through its discovery engine. The list shown below illustrates Yumanity’s current 14 most advanced targets.

 

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Novel Neurodegeneration Targets Discovered at Yumanity

 

Discovered targets mature into programs as they advance through the discovery process. YTX-7739, Yumanity’s lead program, targets the enzyme SCD, one of the early targets identified and validated in Yumanity’s discovery engine and is being studied for the treatment of Parkinson’s disease. Yumanity’s second program, known as YTX-9184, is also a small molecule inhibitor of SCD and is being developed for the treatment of dementia with Lewy bodies as the likely indication. It can also serve as a back-up for YTX-7739. Yumanity is developing lead compounds and validating the targets for its potential third and fourth programs, which are represented as targets A and B in the chart above. These two targets are advancing through a research collaboration with Merck. Other targets for multiple potential indications are at varying stages of the discovery process, with several examples listed above for targets C through M.

Yumanity’s Pipeline

Yumanity has set a goal of introducing one new program to the clinic every year. The following chart summarizes key information about Yumanity’s most advanced discovered targets. All of Yumanity’s therapeutic candidates are small molecules and are optimized and formulated for oral delivery. Yumanity owns both development and commercialization rights to its first and second programs as well as potential programs 5-15, the latter of which are in early preclinical studies and currently being evaluated in mammalian systems. Potential programs 3 and 4 are advancing as part of a research collaboration with Merck, who has licensed these potential programs and will conduct IND-enabling toxicology and safety pharmacology, clinical development, and commercialization.

 

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Yumanity’s lead program, YTX-7739, is a novel small molecule for the potential treatment of Parkinson’s disease and related disorders of α-synuclein. The program that resulted in this lead compound was the first prioritized output program of Yumanity’s discovery engine. YTX-7739 is designed to ameliorate the consequences of α-synuclein toxicity in human cells that results in cellular dysfunction, specifically disruptions with the directed movement, or trafficking, of proteins or lipid-bound vesicles within cells. Yumanity’s second program, YTX-9184, is chemically distinct from YTX-7739 but is also designed to confer protection against α-synuclein toxicity. Both YTX-7739 and YTX-9184 target the enzyme SCD, that catalyzes a reaction in the lipid metabolism pathway.

α-Synuclein is a protein that is a prominent constituent of Lewy bodies, the abnormal protein aggregates that are the pathological hallmarks of Parkinson’s disease, dementia with Lewy bodies, MSA and other neurological disorders known collectively as “synucleinopathies”. Current treatments for Parkinson’s disease manage the early motor symptoms of the disease. The goal of Yumanity’s differentiated and potentially disease-modifying approach with YTX-7739 and YTX-9184 is to block the intracellular toxicity associated with α-synuclein misfolding and aggregation to allow the cell to continue to function normally, and to slow or possibly even halt the progressive degenerative consequences of the disease.

YTX-7739 is now in Phase 1 clinical development consisting of three initial studies: a SAD study in healthy volunteers, a MAD study in healthy volunteers, and a Phase 1b study in patients with Parkinson’s disease. The SAD study in healthy volunteers has completed enrollment and evaluates safety, tolerability, pharmacokinetics, pharmacodynamics parameters, and the effect of food on YTX-7739 pharmacokinetics over a broad range of doses of YTX-7739. The MAD study was initiated in the third quarter of 2020, with data anticipated for healthy volunteers in the first quarter of 2021. The Phase 1b study will be a continuation of the MAD study, conducted in patients with Parkinson’s disease, and will assess safety, tolerability and pharmacokinetics of YTX-7739 as well as proof of biology by exploring biomarkers of target engagement and potential correlative clinical parameters such as neuroimaging measurements to monitor for early effects of YTX-7739. Early results from the Phase 1b trial are expected to be available in the second quarter of 2021, assuming no further clinical trial delays due to the COVID-19 pandemic. Yumanity then plans to initiate a Phase 2 trial in patients with Parkinson’s disease in 2022. IND-enabling safety pharmacology and toxicological studies for YTX-9184, Yumanity’s second program, were initiated in the second quarter of 2020. YTX-9184 is being developed as a potential treatment for dementia with Lewy bodies and is anticipated to enter Phase 1 clinical development in 2021.

Yumanity’s potential third and fourth programs are novel targets for the treatment of ALS and FTLD. Activities for these potential programs are currently being conducted through a research collaboration with Merck, with up to $530 million in potential milestones for Yumanity plus royalties. If these potential programs are successful and achieve full target validation with small molecule agents, they will advance to IND-enabling safety pharmacology and toxicology studies to be conducted by Merck, who will also be responsible for any subsequent clinical development and commercialization.

 

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Beyond Yumanity’s first two programs and two additional potential programs, Yumanity has additional targets that constitute a rich discovery pipeline. Targets C through M in the chart above are all progressing towards target validation in human neuron systems and development of small molecule inhibitors with drug-like properties.

Leadership team, Scientific Team, and Investors

Yumanity is led by a team of seasoned executives with prior experience in both public and private companies as well as small and large biopharmaceutical companies. The management team has deep expertise in neurology, neuroscience, rare diseases, and oncology.

Yumanity’s Chief Executive Officer is Richard Peters, M.D., Ph.D., the former President, Chief Executive Officer and director at Merrimack Pharmaceuticals, and former Senior Vice President and Head of Global Rare Diseases at Sanofi Genzyme. Paulash Mohsen is Yumanity’s Chief Business Officer, and he was the former Country Manager (Canada) at Cubist (acquired by Merck) and Vice President of Strategy and Business Operations at Optimer Pharmaceuticals (acquired by Cubist), and also a Vice President of Strategy and Multi-Channel Management at Pfizer. Yumanity’s Chief Medical Officer is Brigitte Robertson, M.D., who was previously the Vice President, Therapeutic Area Head of Neuroscience, Global Clinical Development at Shire/Takeda, the Chief Medical Officer at Neurovance and has held senior roles at Sunovion Pharmaceuticals in clinical development and experimental medicine, and at GlaxoSmithKline in the Center for Excellence in Drug Discovery. The scientific research team is led by Yumanity’s Head of Research, Robert Scannevin, Ph.D., who was formerly the Vice President of Discovery Biology at Yumanity and a Senior Director at Biogen, Johnson&Johnson and Wyeth.

Yumanity’s co-founder and Executive Chair of its board of directors is N. Anthony Coles, M.D., previously the Chief Executive Officer of Onyx Pharmaceuticals until its sale to Amgen in 2013, and current Chief Executive Officer of Cerevel Therapeutics. Yumanity’s other co-founder is the late Susan Lindquist, Ph.D., a renowned cell biologist, National Medal of Science recipient, Howard Hughes Medical Instituteinvestigator and former director of the Whitehead Institute. Yumanity’s investors include a leading group of healthcare-focused investors including Fidelity Investments, the Redmile Group, Alexandria Venture Investments, Merck, Pfizer, Biogen, and Sanofi.

Yumanity’s Priorities

Yumanity’s goal is to become a leading biopharmaceutical company to discover, develop, and commercialize disease-modifying therapies that employ novel approaches to treat neurodegenerative diseases. To achieve this goal, key elements of Yumanity’s priorities include:

 

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Advance lead program YTX-7739 through clinical development, regulatory approval, and commercialization. YTX-7739 is currently in Phase 1 trials. Yumanity aims to bring to patients a meaningful therapy that can modify the course of Parkinson’s disease and/or other disorders of misfolded α-synuclein. Yumanity’s near-term focus is to demonstrate safety, efficacy, and proof of biology (through target engagement) of YTX-7739 in patients with Parkinson’s disease through completion of a Phase 1b trial.

 

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Progress YTX-9184 into clinical development. YTX-9184 is Yumanity’s second program. Like YTX-7739, YTX-9184 is also an inhibitor of the SCD enzyme. YTX-9184 is chemically distinct from YTX-7739 and may serve as a potential option for patients with other disorders of α-synuclein such as dementia with Lewy bodies as well as a potential back-up to YTX-7739.

 

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Advance Yumanity’s potential third and fourth programs for ALS and FTLD in partnership with Merck. Yumanity expects to continue preclinical development of these two potential programs in partnership with Merck, from which Yumanity is eligible to receive potential milestone payments of up to $530 million plus royalties.

 

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Continue to progress Yumanity’s early pipeline. Yumanity has discovered several other novel targets in neurodegeneration that are currently at early stages of validation. Yumanity’s goal is to advance its discovery pipeline through the preclinical stages and towards the clinic, either alone or in conjunction with potential partners.

 

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Invest in and continue to innovate around Yumanity’s discovery engine. Yumanity’s discovery engine has been productive in identifying novel targets in neurodegeneration, often including chemical modifiers of these targets. Yumanity plans to continue to invest in its discovery engine to identify additional targets that will replenish its discovery pipeline as programs mature towards to clinic.

Yumanity’s Discovery Engine Platform

Overview – Protein Misfolding and Toxicity Cascades

DNA is the foundational code for all proteins. The information held in DNA, in our genes, is transcribed first into RNA and then translated into linear strands of amino acids, the building blocks of all proteins found within cells. The linear strands of amino acids then fold in very precise, highly complex ways to form proteins, each having defined shapes and structures that enable them to carry out their normal biological function. When protein folding goes awry, critical functions of proteins may be lost, or new, abnormal functions may be gained.

Protein misfolding plays a key role in the initiation and progression of neurodegenerative diseases, including Alzheimer’s disease, Parkinson’s disease, dementia with Lewy bodies, MSA, ALS and FTLD. In each of these diseases, as culprit proteins misfold, they form aggregates that may combine into plaques, which form sticky deposits in the brain cells or in brain tissue. These aggregates and plaques can interfere with normal cellular function in a number of ways. For example, they may interfere with the directed movement, or trafficking, of proteins or lipid-bound vesicles within cells, or they may trigger inflammatory reactions. They may also impede chemical and enzymatic processes. Ultimately, these aggregates and plaques result in nerve cell damage and cell death.

A revolution in genetics over the past 15 years has led to the identification of genetic risk factors for neurodegenerative diseases and a number of genes that can be causally tied to protein misfolding processes. Patients who inherit mutations in a single, specific gene generally present with early-onset and aggressive forms of disease. Genetic data have enabled the development of animal and cellular pathology models based on overexpression of disease-causing genes. While undoubtedly an important advance, these models often do not replicate the full features of disease pathology. As a result, there is no conclusive demonstration to date that simply reducing the levels of misfolded proteins reduces the neurodegenerative pathology or presents an efficacious therapeutic approach to the treatment of neurodegenerative disease in humans.

Protein aggregate formation occurs in different places. In Alzheimer’s disease, protein aggregates are found in extracellular plaques, but in diseases like Parkinson’s disease and ALS, misfolded proteins tend to aggregate and create toxic effects inside of brain cells. These intracellular protein aggregates are protected by a cell membrane and therefore lie beyond the typical reach of protein-based drugs, such as antibodies, that do not effectively cross cell membranes. Ongoing trials seeking to use antibody therapy to bind to the misfolded proteins can only do so while proteins are outside cell membranes, which is a relative minority of their life cycle.

The toxic consequences of protein misfolding and aggregation ultimately result in cell death, and the accumulation of dead cells within specific brain regions marks the progression of disease symptoms and severity. It is Yumanity’s goal to keep cells alive by protecting them from the consequences of these misfolded proteins, thereby slowing disease progression. Yumanity’s discovery engine is designed to better understand the processes through which protein misfolding and aggregation trigger cellular toxicity, and to do so in a manner that allows Yumanity to identify a network of new targets and biological processes which, when modulated using a therapeutic drug, Yumanity believes will ameliorate the toxicities initiated by protein misfolding, allow the cells to continue to function normally, and halt the progression of disease. Yumanity believes the identification of these new targets and close-in biology networks, and the molecules that modulate them, enables Yumanity to provide a new treatment approach to neurodegenerative drug discovery.

 

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The Yeast Model

The core of Yumanity’s discovery engine are cellular models that allow for studying the consequences of protein misfolding in a way that improves the understanding of cellular pathways that trigger neurodegenerative disease and enables discovery of the molecules that inhibit specific drug targets within these pathways. Protein aggregation due to misfolding is an ancient cellular complication. All living cells have evolved mechanisms to deal with misfolded proteins. These mechanisms are highly conserved across evolution from simple cells such as yeast to complex cells like human neurons. It was the keen insight of Dr. Lindquist, Yumanity’s co-founder, at the Whitehead Institute that these parallels might be exploited to make yeast serve as a model for neurodegenerative drug discovery. When known genetic drivers of human disease, for example α-synuclein for Parkinson’s disease or beta-amyloid for Alzheimer’s disease, are introduced into a yeast cell, these proteins misfold and cause the yeast cells to stop growing or die. The cellular processes that cause the yeast cells to stop growing or die are largely indistinguishable from those that cause human neurons to die in neurodegenerative disease. For example, yeast cells with α-synuclein or beta-amyloid display disorders of vesicle trafficking, mitochondrial dysfunction and other toxicities observed in diseased human cells. Therefore, yeast cells, despite their simplicity, can function as effective models of disorders of protein misfolding, including neurodegenerative diseases.

Using yeast as a model system confers several noteworthy benefits. First, the yeast genome is highly tractable and well-characterized. At approximately 6,000 genes, it is less than a quarter of the size of the human genome. The yeast genome was sequenced much earlier than the human genome and has been studied extensively. Based on thousands of genome-wide studies, the yeast genome and proteome are well-annotated, including gene-gene interactions, biochemical processes, intracellular and cell-to-cell signaling cascades as well as gene to protein interaction networks. As a comparison, while sequenced, the functions of the majority of genes in the human genome are currently unknown. Second, core aspects of eukaryotic cell biology, such as organelle and cytoskeletal biology, protein homeostasis pathways, intracellular protein trafficking, lipid metabolism, RNA metabolism, and signal transduction, are well conserved from yeast to human cells. Critically, recent human genetic studies have strongly implicated distress of these conserved eukaryotic pathways in major neurodegenerative diseases. Third, there are existing research tools readily available in yeast, for example gene deletion libraries, that do not currently exist for human cells. Finally, experimentation in yeast cells tends to be easier to control and therefore more reproducible compared to human cells or cell lines.

As an additional benefit, yeast cells express many drug pumps and transporters that are responsible for removing potentially harmful molecules from the interior of the cell. These yeast pumps and transporters are believed to be very similar to the drug pumps and transporters found in the human blood brain barrier. This means that a compound, for example a potential drug, that can penetrate the yeast cell membrane is also likely to be able to cross the human blood brain barrier and not be pumped back out of the brain. Compounds that are able to permeate a yeast cell membrane need to have the right size and properties to diffuse into the cell, which are advantageous properties also needed to cross the blood brain barrier.

Because cellular pathologies of many neurodegenerative diseases are conserved across cell types, Yumanity’s co-founder hypothesized that proteins whose misfolding and aggregation drives neurodegeneration would disrupt similar cellular processes in yeast and human cells. Yumanity has studied the toxic consequences of misfolding of various neurodegenerative disease-related proteins, including α-synuclein, beta-amyloid, TDP-43, ApoE4, FUS, C9orf72, and huntingtin in yeast cells. The expression of these proteins in yeast causes cellular toxicities that are clear analogs of their human counterparts. The development of yeast as a model system allows Yumanity to recreate cellular toxicities caused by protein misfolding relevant to neurodegeneration in a simpler cell with unparalleled genetic tractability, which Yumanity then translates to human cell models.

Phenotypic Screening in Yeast

Since the dawn of the genomics revolution in biology and widespread availability of recombinant DNA methods, the conventional approach employed by the biopharmaceutical industry for drug discovery has been the target-based screen. In this approach, one begins with a known ‘target,’ or a specific protein involved in a defined cellular process considered to be relevant to disease pathology. Large chemical libraries are then screened for compounds that bind to or modulate the activity of this target. This screening is usually performed in a cell-free environment, meaning no membranes, with just the protein target in solution in a test tube or assay plate. The successful screening hit then undergoes iterative rounds of chemical optimization and refinement to improve affinity and activity at the

 

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target, again in a cell free environment. Once a molecule with favorable properties is obtained, standard preclinical development processes occur, including further optimization, pharmacology and toxicity testing and formulation. In the field of neurodegeneration, the very small number of hypothesized targets has proven to be a significant limitation of the productivity of the target-based screening approach. Moreover, the iterative rounds of optimization and screening occasionally yield advanced compounds that do not readily cross the blood brain barrier or do not cross cell membranes efficiently.

In contrast to target-based screens, phenotypic screening seeks compounds or genetic factors that modify a specific observable trait, or phenotype, within the physiological context of an intact cell or organism. A large chemical or genetic deletion library can be screened for molecules or genes that modify the phenotype in question. The phenotype Yumanity seeks to correct is slow growth or cell death that results from pathologies driven by misfolded proteins. The primary benefit of phenotypic screening is the identification of compounds or genes that modify a specific trait without the bias of any pre-existing hypotheses about what may be the best molecule or target to modify the phenotype. Success in phenotypic screening can therefore point to previously unknown pharmacology and potential therapeutic compounds and their targets in an unbiased manner. Additionally, Yumanity can learn what pharmacology is relevant to the amelioration of disease phenotypes from the results of the screen.

Phenotypic screens are possible in some in vivo animal models, including certain worms, flies, zebrafish, mice and rats. Based on the complexities of working with larger multicellular species, phenotypic screening in unicellular yeast is expected to allow for higher throughput and exploration of more cellular phenotypes. Yeast cells also have an advantage of sophisticated genetic tools that are essential for downstream target identification. Using human neuronal cells in high throughput phenotypic screens is also believed to be challenging due to the inherent complexity in generating and maintaining robust and reproducible numbers of cells to support large-scale screening in a lab setting.

In contrast, phenotypic screening in yeast cells is inexpensive, extremely high throughput, and highly replicable. The robust cell growth and viability of phenotypes in yeast are well suited to phenotypic screening in high throughput formats. Large numbers of yeast cells with genetically introduced misfolding human proteins can be subjected to screening against large chemical libraries to isolate compounds which protect against cellular toxicity. While most of the yeast cells in the screening exercise will die as a result of the misfolding mediated toxicities, any cell that do not die as a result of exposure to specific compounds in the screening library results in ‘hits’, or compounds that warrant further investigation due to their ability to rescue cells from the effects of protein misfolding-induced toxicity.

Target Identification

Despite many advantages, phenotypic screens are beset with a fundamental limitation: while the screen identifies a compound that rescues the toxic phenotype, it does not identify the biological target implicated in the rescue. Phenotypic screening in yeast successfully identifies molecules that reduce protein misfolding toxicity in the yeast model, but it does not immediately define their biological targets.

The second technology platform in Yumanity’s discovery engine overcomes this limitation of phenotypic screening by uncovering the target implicated in the toxicity rescue. Yumanity’s target identification capability takes advantage of the fact that yeast is uniquely well-studied and characterized from a genetic perspective. Yumanity’s proprietary capability leverages pre-existing gene knockout libraries, gene-gene interaction networks, and other readily available tools in yeast to identify, in a high-throughput manner, the targets implicated in the phenotypic screen’s successful hits. This information, collected across hundreds of screening hits across multiple independent screening libraries, gives Yumanity a growing understanding of the genes and pathways involved in rescuing cells from the consequences of misfolding protein induced toxicity. Using the set of experimental tools available in yeast, Yumanity is able to narrow down and eventually identify the specific genetic targets associated with the hits that result from the phenotypic screens.

Once the targets have been identified within the yeast genome, Yumanity then uses informatics to discern the analogous targets within the human genome. Yumanity can compare the sequence, structure, and function of yeast genes with a database of human gene sequences to identify the closest yeast-to-human match. Yeast genes may have a range of relationships to their human counterparts, including one-to-one, one-to-many, or other configurations.

 

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Importantly, like the phenotypic screening platform in yeast, the methods involved in target identification in yeast (and subsequent translation to human targets) are high throughput. Yumanity has used this process multiple times to identify a portfolio of potentially attractive novel targets.

Human Cell Translation

The third technology platform of Yumanity’s discovery engine translates its work from yeast into human cells. The outputs of the first two technology platforms are hit compounds that rescue toxicity in yeast and identification of the genetic targets implicated in that rescue in both yeast and human systems. The critical translational test is to see whether the observed rescue in yeast can be replicated in diseased human neurons.

To accomplish this, Yumanity takes advantage of extraordinary advances in stem cell technology. Yumanity is able to reprogram adult somatic cells, specifically skin fibroblasts taken from a patient biopsy, to create induced pluripotent stem cells, or patient iPSCs. These patient iPSCs can be used to generate various types of neurons in the laboratory, with the genetic sequence of a patient with neurodegenerative disease. Yumanity can also induce toxicity in human neurons by forcing the elevated expression of disease-relevant misfolded proteins. In the case of both patient-derived neurons and inducted toxicity neuron models, Yumanity develops and maintains these cells to validate the rescue activity discovered in the yeast phenotypic screen. This translation from yeast to human cells, first published in Science, gives Yumanity confidence that the discovery in yeast is relevant in a human context.

Reprogramming patient cells to create human neurons in culture

 

Integration of Technology Platforms

Yumanity’s discovery engine integrates the three technology platforms described above: phenotypic screening in yeast, target identification, and human cell translation. Phenotypic screening provides unbiased hits that rescue toxicity via biological targets that may be previously unknown in neurodegeneration. The target identification platform allows Yumanity to understand the genes implicated in such rescue, both in yeast and their corresponding genes in humans. The human cell translation platform leverages iPSC technology to translate the rescue activity observed in yeast to human cells, specifically rescuing diseased patient neurons.

An important element of this design is that it enables Yumanity to move back and forth between yeast cells and human patient neurons in a highly iterative and parallel fashion. For example, if Yumanity identifies an interesting target through a library screening hit, but the compound used to discover the hit is not an optimal drug-like candidate, Yumanity can optimize the compound though chemistry or re-screen the target for better compounds. Also, if Yumanity has identified multiple closely related genes across different screening and target identification campaigns, Yumanity can profile them individually to determine which gene gives Yumanity the optimal rescue response. Thus, Yumanity can continually build on lessons learned from multiple protein pathologies in order to accelerate the discovery of novel therapies.

 

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To date, Yumanity has successfully implemented its discovery engine to discover over one dozen new targets in neurodegeneration. Yumanity has also confirmed that some previously identified targets for other indications are in fact active within neurodegenerative toxicity cascades. Yumanity’s first target in Parkinson’s disease, SCD, is a novel target that was not previously known to be involved in Parkinson’s disease. Yumanity’s lead drug candidate, YTX-7739 and its second drug candidate, YTX-9184, address the toxicity caused by α-synuclein, the protein that causes some forms of Parkinson’s disease and dementia with Lewy bodies. Yumanity is also pursuing targets in ALS and FTLD that were not previously known to be involved in these indications, and Yumanity is moving forward to develop novel therapies for some of these targets in collaboration with Merck.

Drug Candidate Selection Process

Once Yumanity has identified a promising target and molecule that modulates that target using its discovery engine, Yumanity then uses chemistry to optimize the molecule to determine which ones have the most drug-like properties. Yumanity uses a wide array of tests to evaluate drug candidates and to identify those that generally have the desired molecular weight, solubility and other characteristics that Yumanity believes provides the potential to cross the blood brain barrier, access the targets and deliver the potent rescue to the cell. The optimized rescuing molecules are then advanced toward IND-enabling studies. Examples of such tests and general acceptability ranges are shown below.

 

Yumanity’s Programs

Yumanity has leveraged its discovery engine to identify more than one dozen diverse biological targets not previously linked to neurodegenerative disease that Yumanity believes are suitable for a future disease-modifying drug discovery program. Yumanity’s lead program, YTX-7739 for the potential treatment and disease-modification of Parkinson’s disease, is currently in Phase 1 clinical trials. Yumanity’s second program, YTX-9184, has a distinct profile and is from a different chemical series than YTX-7739. YTX-9184 entered IND-enabling studies in the second quarter of 2020. In collaboration with Merck, Yumanity is also currently in the lead optimization process for Yumanity’s potential third program for the potential treatment of ALS and FTLD. Yumanity believes these potential programs and the others in its portfolio will enable Yumanity to reach its goal of one new program entering human clinical trials every year. The status of Yumanity’s pipeline is reflected below:

 

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Yumanity’s Lead Program – YTX-7739

Yumanity is developing YTX-7739 for the treatment of Parkinson’s disease. YTX-7739 is the first prioritized drug candidate identified by Yumanity’s discovery engine and is designed to reduce α-synuclein toxicity by inhibiting SCD, an enzyme that metabolizes saturated fatty acids to their monounsaturated form.

Parkinson’s Disease Overview

Parkinson’s disease is a chronic, progressive neurological disorder of the central nervous system and the second most prevalent neurodegenerative disorder in the United States after Alzheimer’s disease, with an estimated 500,000 to one million prevalent cases. More than 10 million people worldwide are believed to have Parkinson’s disease. In patients with Parkinson’s disease, the premature death of neurons in the brain reduces levels of the neurotransmitter dopamine, causing motor dysfunction including tremor, slow movement, muscle rigidity, and difficulty with balance, falling, swallowing, speech, and writing. Other changes in the brain associated with the disease may result in cognitive and sensory symptoms. Additional features of the disease include disruptions in nerves connecting the brain to other systems such as cardiovascular, gastrointestinal, and urogenital systems, as well as sleep disturbances, constipation, and loss of sense of smell. Later-stage Parkinson’s disease is severely debilitating, and its symptoms make sufferers more likely to experience life-threatening medical issues. As a result, while Parkinson’s does not directly cause death, it is nevertheless the fourteenth leading cause of death in the United States.

Approximately 60,000 people are diagnosed with Parkinson’s disease in the United States each year, most often after the age of 50. The National Institutes of Health estimates the annual cost of treating Parkinson’s disease in the United States to be $14 billion, with indirect costs such as lost productivity adding at least another $6 billion. As with many other neurodegenerative diseases, the greatest risk factor for Parkinson’s disease is increasing age. The growing population of older adults and longer average lifespans are therefore likely to increase the number of Parkinson’s patients and the need for effective treatments. Currently, it is estimated that the number people diagnosed with Parkinson’s disease in the United States will double by the year 2040.

Although certain Parkinson’s disease cases have been associated with rare gene mutations, both hereditary and environmental factors are likely to contribute to the occurrence of Parkinson’s disease in the majority of cases. Additionally, while the biological cause of most cases of Parkinson’s disease is not clear, the core pathology of Parkinson’s disease is degeneration of the dopaminergic neurons in the midbrain. In certain cases, cell loss occurs in association with the formation of intraneuronal Lewy inclusion bodies. Abnormally aggregated α-synuclein is the principal component of Lewy bodies, which are the pathological hallmark of Parkinson’s disease. The presence of Lewy bodies and other associated fibrils is correlated with neuron loss and death, decline in motor function and cognitive dysfunction.

 

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Limitations of Current Therapies

There is currently no known cure for Parkinson’s disease. Pharmacological therapies for Parkinson’s disease are aimed at either temporarily replenishing dopamine or mimicking the action of dopamine. They generally help reduce muscle rigidity, improve speed and coordination of movement and lessen tremor.

The dopamine precursor levodopa is the most commonly prescribed pharmacotherapy. While extremely helpful overall, some symptoms do not respond as well to levodopa, like difficulty with balance, falling, difficulty with speech and swallowing, and memory issues. It can also be challenging to titrate and find the optimal dose and patients may experience “on” and “off” periods when the drug concentration falls to below their individual needs. Unfortunately, the long-term use of levodopa is frequently associated with the development of additional motor complications, for example dyskinesias, or uncontrolled, involuntary movements. Additional therapies attempt to slow the degradation of dopamine using monoamine oxidase-B inhibitors. Catechol-o-methyltransferase inhibitors and carbidopa may be used to reduce levodopa degradation. Amantadine, an N-methyl-D-aspartate, or NMDA, receptor antagonist, is also used and may act through more than one mechanism. Drug treatment for Parkinson’s disease is commonly individualized by patient and disease characteristics, and patients may receive multiple drug therapies throughout their course of disease, including other medications for comorbid conditions and symptomatic management such as antidepressants, anxiolytics, and anti-psychotics. While these therapies address the symptoms of Parkinson’s disease, they are unable to halt disease progression over the longer-term. As a result, these symptomatic therapies lose their efficacy over time, leaving patients with few treatment options.

Outside of drug therapy, electrical deep brain stimulation is also be used to control motor symptoms of Parkinson’s disease, typically in the advanced stages of disease. In addition to pharmacotherapy, a holistic approach to treatment is encouraged and patients may gain benefit from regular exercise, psychological, physical, occupational and speech therapy, nutrition consultation, education, support groups, and the use of assistive devices and caregiver relief.

There are currently a small number of early clinical trials investigating the potential of directly reducing α-synuclein to change the course of the disease. These programs, however, are predominantly based on antibody therapy which, due to their large size, do not readily enter the brain or brain cells and are believed to interact only with extracellular α-synuclein that has been secreted or released from cells. Formation of pathological α-synuclein aggregates, known as Lewy bodies, occurs inside of cells, and the ability of therapeutic antibodies to impact consequent toxic α-synuclein cascades is unclear.

Yumanity’s Solution

Yumanity is developing YTX-7739 as a small molecule therapy to slow or halt disease progression in patients suffering with Parkinson’s disease. Using Yumanity’s discovery engine and Parkinson’s disease patient cell lines, Yumanity identified SCD as a biological target enzyme for diseases caused by α-synuclein-mediated toxicity. YTX-7739 is designed to inhibit SCD to reduce α-synuclein-mediated toxicity within cells.

The α-Synuclein Toxicity Cascade

Aggregated α-synuclein protein is the primary constituent of the pathological Lewy bodies formed in the brains of patients with Parkinson’s disease. Although its precise molecular function is poorly understood, α-synuclein is known to be a membrane-associated lipid binding protein and has been implicated in vesicle trafficking, a process by which cells transport materials between different cellular destinations, as well as in membrane curvature and fusion.

In yeast, the overexpression of α-synuclein causes severe cellular toxicity by disrupting multiple cellular mechanisms, including vesicle trafficking. These disruptions occur in both yeast models and mammalian systems, where mutations or overexpression of α-synuclein increases the amount of membrane-associated α-synuclein, which in turn impairs vesicle trafficking and increases cellular stress and toxicity. Importantly, human genetic studies indicate mutations and overexpression of α-synuclein lead to severe and rapidly progressing forms of Parkinson’s disease, and this relationship to disease severity almost certainly involves toxic effects of α-synuclein aggregates on the functions of cell membranes.

 

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YTX-7739’s Target

Yumanity discovered SCD as a result of its unbiased phenotypic screening efforts, which identified a series of compounds that potently protected cells against α-synuclein-mediated toxicity. Using Yumanity’s discovery engine’s target identification capability, Yumanity was able to identify that the specific biological target implicated in this protection was inhibition of Ole1, the single yeast fatty-acid desaturase enzyme and direct counterpart of SCD in humans.

Ole1 in yeast and SCD in humans are enzymes that metabolize saturated lipids and break them down into their unsaturated lipid components. Unsaturated lipids are important components of cell membranes because of the processes they regulate, including membrane fluidity, curvature, and fusion. Paradoxically, the greater the level of unsaturated lipid in membranes, the greater the vesicle trafficking impairment and toxicity caused by α-synuclein. Inhibiting SCD enzymatic activity reduces the levels of unsaturated lipids, which ameliorates the detrimental vesicle trafficking defects associated with increased α-synuclein expression. Yumanity’s hypothesis is that reducing SCD activity will reduce abnormal vesicle trafficking within cells caused by α-synuclein, thereby reducing the accumulation of neurotoxicity and slowing the progression of neurologic impairment in patients with Parkinson’s disease and related disorders.

The chart below demonstrates the impact of inhibiting the SCD enzyme in a diseased human cell line prepared from a patient with Parkinson’s disease. This patient had a single amino acid mutation in the α-synuclein protein sequence. The red line shows the risk of cell death in cells containing the α-synuclein mutation. The black line, which shows lower risk of death, is a control cell line – genetically identical to the Parkinson’s disease patient cell line but with a correction of the α-synuclein mutation generated using CRISPR technology. The increasing shades of blue lines represent the survival of the mutation-containing cells upon exposure to increasing concentrations of a potent SCD inhibitor. As the chart shows, inhibition of SCD reduces cell death in the mutation-containing cell line down to the levels of the mutation-corrected control. The improved survival effect is clearly dependent upon the concentration of SCD inhibitor.

Cell death in Parkinson’s patient cell line corrected by inhibition of SCD

 

In addition to demonstrating that inhibition of SCD can protect human neurons grown in a dish, Yumanity has also explored the effects of SCD inhibition in a new mouse model of Parkinson’s disease. This mouse was engineered to express a mutant version of human α-synuclein, which leads to progressive motor deficits and pathological neuron cell loss in the brain that are similar to the progression seen in Parkinson’s disease. Dopamine replacement therapy, the standard of care in Parkinson’s therapy, can partially reverse the motor deficits in these engineered mice, demonstrating the disease-relevance of the model. When these mice were administered YTX-7739 for 4 months, the expected motor deficits never developed, whereas similar mice in the same study that received placebo evidenced the expected altered motor behaviors. Interestingly, when the SCD1 gene was removed in these engineered α-synuclein mice, known as a gene knockout, which would mimic the effects of an SCD inhibitor, these mice also had

 

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significantly reduced motor deficits and pathological neuron loss. These studies demonstrate the consistent therapeutic effect of reducing SCD activity and validate SCD as a target for reducing the toxic effects of α-synuclein in disease-relevant models.

While Yumanity has established that SCD inhibition protects cells from α-synuclein toxicity, the precise mechanism of protection has not been defined. Yumanity believes there are at least three possible mechanisms of action: (1) SCD inhibition reverses a toxic increase in fatty acid desaturation triggered by α-synuclein aggregation, (2) SCD inhibition directly antagonizes toxic effects of α-synuclein on membrane properties and/or trafficking, or (3) reduced fatty acid desaturation ameliorates a direct toxic interaction of α-synuclein with cell membranes.

The knowledge of SCD enzyme biology also allows Yumanity to define a biomarker that can be used to measure target inhibition. Specifically, because the substrates for SCD are sixteen-carbon, or C16, or eighteen-carbon, or C18, saturated fatty acids, and the products are C16 and C18 monounsaturated fatty acids, Yumanity can therefore monitor drug effects on SCD by measuring the amount, or ratio, of the C16 and C18 precursors and their monounsaturated products. The result of this analysis gives Yumanity the fatty-acid desaturation index, or FA-DI, expressed as a ratio of the amount of monounsaturated C16 or C18 substrates divided by the amount of corresponding saturated fatty acid. The FA-DI gives Yumanity a biomarker that allows it to measure the effects of its compounds on SCD in vitro and in vivo.

Preclinical Studies

Preclinical in vivo pharmacokinetic and pharmacodynamics studies were conducted on YTX-7739 to demonstrate that YTX-7739 achieves sufficient exposure to inhibit the SCD enzyme in the brain, plasma, and other body tissues and biofluids.

As shown below, single dose pharmacokinetic studies in rats demonstrate that YTX-7739 achieves sustained and dose-dependent exposures in both plasma and the brain. As the dose increases, the exposure levels increase. Yumanity has observed similar findings using twice-daily dose schedules, and in both single and repeat dose studies. At lower doses of YTX-7739, consistent dose-proportional exposure was achieved in both the plasma as well as the brain, and YTX-7739 also exhibited good brain penetration. In addition to rats, Yumanity has also performed these studies in other species, including mice, guinea pigs, dogs, and monkeys with similarly successful results.

Single dose pharmacokinetic data for YTX-7739, plasma (left) and brain (right)

 

In addition, pharmacodynamics studies of YTX-7739 to date have shown that YTX-7739 inhibits SCD enzymatic activity as intended, which can be measured by the target engagement biomarker C16 FA-DI. As the chart below demonstrates, YTX-7739 has achieved clear, exposure-dependent target engagement in both the brain and plasma of monkeys treated for 14 days. As concentrations of YTX-7739 increase in either the brain or plasma, the levels of C16 FA-DI correspondingly decrease. These studies have been conducted across multiple species, with similar relationships between pharmacokinetics and pharmacodynamic responses. Moreover, at drug doses and exposures that produce substantial reductions in C16 FA-DI in the brain, treatment with YTX-7739 appears to be very well tolerated.

 

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YTX-7739 Pharmacodynamics: exposure-dependent target inhibition in brain (left) and plasma (right)

 

Yumanity has a reliable and quality-controlled manufacturing process for the active pharmaceutical ingredient, or API, of YTX-7739 to support future clinical trials. IND-enabling safety pharmacology and toxicology studies have been completed and YTX-7739 is currently in Phase 1 clinical trials.

Clinical Trials

YTX-7739 is currently in Phase 1 clinical development consisting of a single ascending dose (SAD) study in healthy volunteers, a multiple ascending dose (MAD) study in healthy volunteers, and a Phase 1b study in patients with Parkinson’s disease. The SAD study has completed enrollment and was a randomized, double-blind, placebo-controlled single ascending dose study to investigate the safety, tolerability, and pharmacokinetics of YTX-7739 in healthy volunteers. The SAD study was conducted in three parts. The first part was to investigate the safety, tolerability and pharmacokinetics of increasing doses of YTX-7739 in healthy subjects. The second and third parts were to study the effect of food on the pharmacokinetics of YTX-7739 after administration in a fed state in healthy subjects.

Fifty-six healthy volunteers were dosed in the SAD study. Safety assessments included, but were not limited to, adverse events, serious adverse events, safety laboratory tests, vital signs and electrocardiograms (ECG). In addition, plasma drug levels were collected to assess pharmacokinetic variables and a pharmacodynamic biomarker was also included to explore the potential of YTX-7739 to change plasma levels of fatty acids.

While final results are pending, preliminary data indicate that all adverse events were mild or moderate, of short duration and self-limiting. There were no serious or unexpected adverse events reported.

The most frequently reported adverse event for subjects receiving YTX-7739 was headache, which was observed in 11 subjects. There were no clinically-relevant changes or dose related trends identified in blood chemistry, hematology, urinalysis, vital signs or ECGs. There were dose-linear increases in the maximum serum concentration achieved and the 24-hour area under the concentration-time curve observed at 5 mg, 10 mg, 30 mg and 250 mg dose levels in the fed state, suggesting dose-proportionality of YTX-7739 exposure in the 5 – 250 mg dose range, when administered in a fed state.

The safety and biopharmaceutical profile observed after single oral doses in healthy volunteers supported progression to a multiple ascending dose (MAD) study. Yumanity initiated a Phase 1 MAD study in healthy volunteers in the third quarter of 2020 with results anticipated in the first quarter of 2021. A subsequent Phase 1b trial in patients with Parkinson’s disease will assess the safety, tolerability and pharmacokinetics of YTX-7739 and will explore biomarkers of target engagement as well as potential correlative clinical markers such as neuroimaging measurements to monitor for early effects of YTX-7739. Early results from the Phase 1b trial are expected in the second quarter of 2021 assuming no delays due to the COVID-19 pandemic.

Yumanity’s Second Program

Yumanity’s second program in development, known as YTX-9184, also inhibits SCD and is being investigated as a potential treatment for dementia with Lewy Bodies and may also provide a potential back-up to YTX-7739. YTX-

 

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9184 started IND-enabling toxicology and safety pharmacology in the second quarter of 2020. Yumanity plans to continue development for YTX-9184 with the goal of advancing it as its second drug candidate into the clinic in 2021. YTX-9184 is chemically distinct from YTX-7739 and has different properties, but functions by inhibiting the same enzyme, SCD. Pharmacokinetic and pharmacodynamic studies have been completed with YTX-9184, and YTX-9184 exhibits similar dose and exposure dependent effects on the brain and plasma C16 FA-DI across several small and large animal species.

Yumanity’s Potential Third and Fourth Programs

Yumanity is currently performing lead optimization to identify compounds that inhibit the activity of the enzyme that is the target of Yumanity’s potential third program as a potential treatment for ALS and FTLD. The undisclosed target in Yumanity’s potential third program is implicated in the rescue of toxicity created by a gene linked to ALS and FTLD. Yumanity’s potential fourth program is currently in the hit-to-lead stage of identifying small molecule inhibitors for its target enzyme. Inhibition of this target has been correlated with prevention of neurodegeneration associated with alterations in a gene, which has been correlated with increased risk of developing ALS. Both of these potential programs are being progressed through a research collaboration with Merck, and Merck will be responsible for IND-enabling toxicology and safety pharmacology studies, as well as subsequent clinical development and commercialization.

ALS and FTLD Disease Overview

ALS, also referred to as Lou Gehrig’s disease, is a neurodegenerative disease that affects nerve cells in the brain and the spinal cord. In healthy individuals, upper motor neurons in the brain send signals to lower motor neurons in the spinal cord and brainstem, which send signals to muscles, thereby generating body movement. In ALS, both the upper motor neurons and the lower motor neurons degenerate or die, resulting in loss of muscle function with progression to severe impairment of mobility, speech, and communication.

Early symptoms of ALS usually include muscle weakness or stiffness, and over time, all muscles under voluntary control are affected. As ALS progresses, individuals lose their strength and the ability to speak, eat and move. Many sufferers lose the muscular ability to maintain breathing, requiring permanent ventilatory support. Individuals with ALS usually retain their ability to perform higher mental processes such as reasoning, remembering, understanding, and problem solving, so they are entirely aware of their progressive loss of muscle function. Continued deterioration of muscle control leads to respiratory failure and death, with an average survival time of three years. About 20 percent of people with ALS live five years, 10 percent will survive 10 years and 5 percent will live 20 years or longer.

According to the ALS Association, in 2016, between 14,000 and 15,000 Americans had ALS. ALS is most commonly diagnosed between the ages of 55 and 75, and only ten percent of people with ALS will survive for ten years or more. Medical and non-medical costs of ALS, including lost income, range between $256 million and $433 million each year in the United States, with annual costs from ALS exceeding $60,000 per patient.

FTLD is an umbrella term for a group of related syndromes and processes, often also called frontotemporal lobar dementia, frontotemporal degeneration or dementia or Pick’s disease, that impacts the frontal and temporal lobes of the brain. Formally, the process of frontotemporal degeneration results in the condition of frontotemporal dementia. Disease processes cause the degeneration of neurons and shrinking of the frontal and temporal brain regions, which causes progressive alterations in personality, behavior, and language. There are different types of FTLD, which manifest as a frontal or behavioral variant affecting behavior and personality, or as a primary progressive aphasia variant, which results in difficulty communicating due to loss of speech and inability to use and understand language. FTLD patients often exhibit aggressive and compulsive behaviors and have various changes in sexual behaviors.

It is believed that the prevalence of FTLD in the United States is around 60,000 cases. There is a wide range of onset, from 21 to 80 years of age, with most cases occurring between 45 and 64 years of age. Given the younger age of onset as compared to Alzheimer’s disease, FTLD has been cited as the most common form of dementia in people under 60. Annual medical and nonmedical costs of FTLD are estimated at approximately $120,000 per patient, indicating a societal disease impact in the United States alone of over $7 billion annually.

 

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These conditions are generally believed to exist as a spectrum disorder, with “pure” ALS as a neuromuscular disorder at one end of the spectrum, and “pure” FTLD as a dementia-related disorder at the other. Many patients exhibit varying degrees of both types of symptoms on this spectrum.

Limitations of Current Therapies

There is no known cure for ALS. The cause of ALS in 90% or more of cases is unknown. Known as sporadic ALS, genetic and environmental factors may play a role in these cases. In contrast, up to 10% of all ALS cases are of an inherited familial form. A number of genetic mutations have been implicated in familial ALS, most frequently C9orf72 and SOD1. In all cases of ALS, upper and lower motor neurons are lost, causing muscle dysfunction and atrophy. Two drugs have been approved in the United States for the treatment of ALS, riluzole and edaravone. Riluzole has demonstrated a survival benefit and edaravone delayed decline in an assessment of daily functioning.

There are also no known cures for FTLD, nor are there any approved medications for this disease. Patients are sometimes proscribed Riluzole, although its effectiveness in this indication is uncertain. To manage quality of life, antidepressants are prescribed to help with anxiety and obsessive-compulsive behaviors, and anti-psychotics can sometimes help control irrational and risky behavior. Sleep aids are also prescribed to help with insomnia and sleep disturbances.

Yumanity’s Solution

Yumanity is currently optimizing small molecule therapies to potentially slow or halt disease progression in patients suffering with ALS and FTLD. Yumanity has identified two undisclosed targets involved in the neurotoxic cascades which are hallmark toxicities observed in ALS and FTLD. Yumanity is advancing these two undisclosed targets through its collaboration with Merck.

Competition

The biotechnology and pharmaceutical industries, including in the neurodegenerative disease field, are highly competitive and subject to rapid and significant technological change. While Yumanity believes that its discovery engine platform and its employees and consultants, scientific knowledge and development experience provide Yumanity with competitive advantages, Yumanity faces potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical, and biotechnology companies, academic institutions, governmental agencies, and public and private research institutions. Several of these entities have commercial products, robust drug pipelines, readily available capital, and established research and development organizations. Many of Yumanity’s competitors may have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals, and marketing approved products than Yumanity does. Mergers and acquisitions in the pharmaceutical, biotechnology, and diagnostic industries may result in even more resources being concentrated among a smaller number of Yumanity’s competitors. These competitors also compete with Yumanity in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, Yumanity’s programs. Small or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. The key competitive factors affecting the success of Yumanity’s product candidates, if approved, are likely to be their efficacy, safety, convenience, price, the level of branded and generic competition, and the availability of reimbursement from government and other third-party payors.

Any product candidates that Yumanity successfully develops and commercializes will compete with existing therapies and new therapies that may become available in the future, including but not limited to:

 

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Parkinson’s disease: Currently available therapies for Parkinson’s disease include Levodopa, D2/D3-preferring agonists, monoamine oxidase B inhibitors as monotherapy or in combination, anticholinergics as well as deep brain stimulation devices by Medtronic Inc. and St. Jude Medical Inc., among others. Yumanity is also aware of several large and specialty pharmaceutical and biotechnology companies developing potentially disease modifying therapeutics for Parkinson’s disease, including Denali, Prothena, F. Hoffman-la Roche, Novartis, AbbVie (in partnership with BioArctic AB), Voyager Therapeutics, Prevail Therapeutics, Sage Therapeutics, Sanofi, Neurocrine Biosciences, Eli Lilly, Biogen (in partnership with Ionis and Neurimmune), AstraZeneca, Takeda, IRLAB Therapeutics, Avanir Pharmaceuticals, Lysosomal Therapeutics and Lundbeck, that are in various stages of clinical development.

 

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Dementia with Lewy bodies: Currently available therapies to alleviate symptoms in dementia with Lewy bodies include cholinesterase inhibitors, carbidopa/levodopa, memantine, “atypical” antipsychotics, melatonin, and clonazepam. Yumanity is also aware of several large and specialty pharmaceutical and biotechnology companies and academic institutes developing potentially disease modifying therapeutics for dementia with Lewy bodies, including Lawson Health Research Institute, Sun Pharma Advanced Research Company, Georgetown University, Pfizer, Eisai, Allergan and Novartis, that are in various stages of clinical development.

 

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ALS: Currently available therapies for ALS include riluzole (Rilutek®) and edaravone (Radicava®). Yumanity is also aware of several large and specialty pharmaceutical and biotechnology companies and academic institutions developing potentially disease modifying therapeutics for ALS, including Denali, Avanir Pharmaceuticals, Amylyx Pharmaceuticals, Biogen (in partnership with Ionis), Neuropore Therapies, Cytokinetics and Mallinckrodt, that are in various stages of clinical development.

 

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FTLD: There are no currently available therapies indicated for FTLD, however some patients are prescribed riluzole (Rilutek®) and other medications to manage symptoms such as antidepressants, antipsychotics and sleep aids. Yumanity is also aware of several large and specialty pharmaceutical and biotechnology companies developing potentially disease modifying therapeutics for FTLD, including Alector, Bristol-Myers Squibb/Biogen, TauRx Therapeutics and Bayer, that are in various stages of clinical development.

 

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Alzheimer’s disease: Currently available therapies for Alzheimer’s disease include donepezil (AriceptTM), galantamine (RazadyneTM), memantine (EbixaTM), rivastigmine (Exelon™), suvorexant (Belsomra) and tacrine (CognexTM).Yumanity is also aware of several large and specialty pharmaceutical and biotechnology companies developing potentially disease modifying therapeutics for Alzheimer’s disease, including Axon Neuroscience, AbbVie, Aracion Biotech, AC Immune, Janssen, Alector, AstraZeneca, Allergan, Affiris, Pfizer, Biogen (in partnership with Neurimmune), Eli Lilly, GlaxoSmithKline, Novartis, and F. Hoffman-la Roche (including Genentech, its wholly owned subsidiary), that are in various stages of clinical trials.

Collaboration Agreement with Merck

In June 2020, Yumanity entered into an exclusive license and research collaboration agreement, or the Merck Collaboration Agreement, with Merck to support the research, development and commercialization of products for the treatment of ALS and FTLD.

Pursuant to the Merck Collaboration Agreement, Yumanity granted Merck an exclusive, worldwide license with the right to grant and authorize sublicenses, under certain intellectual property rights related to two certain undisclosed targets in connection with Yumanity’s ALS and FTLD programs to make, have made, use, import, offer to sell and sell compounds and products covered by such intellectual property rights. In the event that the exploitation of such compound or product would infringe during the term of the Merck Collaboration Agreement a claim of an issued patent controlled by Yumanity, Yumanity also granted Merck a non-exclusive, sublicensable, royalty-free license under such issued patent to exploit such compound and product.

Under the terms of the Merck Collaboration Agreement, Yumanity and Merck are each responsible to perform certain research activities in accordance with a mutually agreed upon research plan. Upon the completion of certain

 

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stages of the research plan, Merck will elect to either advance or terminate the applicable research program. Following completion of the research program, Merck is responsible for the development and commercialization of the compounds developed pursuant to the research program and any product containing such compounds.

As consideration for the licenses granted to Merck under the Merck Collaboration Agreement, Merck paid Yumanity a one-time upfront payment and also purchased Class C preferred units of Holdings. Under the terms of the Merck Collaboration Agreement, Yumanity is eligible to receive up to $280 million upon achievement of specified research and development milestones, and up to $250 million upon achievement of specified sales-based milestones as well as a tiered, mid-single digit royalty on net sales of licensed products, subject to customary reductions. Merck’s royalty obligations for each licensed product continue on a country-by-country basis until the later of (i) the last-to-expire valid claim of the patent rights in such country or (ii) the tenth anniversary of the first commercial sale of such product in such country.

Unless terminated earlier, the Merck Collaboration Agreement will continue in full force and effect until one or more products has received marketing authorization and, thereafter, until expiration of all royalty obligations under the Merck Collaboration Agreement. Yumanity or Merck may terminate the Merck Collaboration Agreement upon an uncured material breach by the other party or insolvency of the other party. Merck may also terminate the Merck Collaboration Agreement for any reason upon certain notice to Yumanity.

License Agreement with Whitehead Institute

In February 2016, Yumanity entered into a tangible property and exclusive patent license agreement or the Whitehead License Agreement, with the Whitehead Institute which was subsequently amended in April 2016, August 2016 and July 2018. Pursuant to the Whitehead License Agreement, the Whitehead Institute granted Yumanity a worldwide license under certain patent rights to develop, commercialize and sell products and to develop and perform processes covered by such patents for the treatment of any disease in humans other than certain specified treatments for infectious diseases and cancer. The Whitehead Institute also granted Yumanity a non-exclusive, worldwide license to use certain know-how and to use and make certain biological materials.

The patent rights licensed to Yumanity under the Whitehead License Agreement relate to Yumanity’s discovery engine and are directed to compositions and methods for identifying novel disease-modifying therapies for neurodegenerative diseases. Such patent rights include patent rights developed or co-developed by Dr. Lindquist as an employee of Howard Hughes Medical Institute, as well as patents owned or jointly owned by the University of Chicago, the University of Washington, the Massachusetts Institute of Technology, the Curators of the University of Missouri and Pfizer, Inc. Yumanity’s license under such patent rights is exclusive, subject to certain retained rights and certain patent rights previously licensed by the Whitehead Institute. Additionally, Yumanity’s exclusivity with respect to patent rights jointly owned by Pfizer, Inc. only applies to the Whitehead Institute’s right as a joint owner of such patents.

Under the terms of the Whitehead License Agreement, Yumanity must use commercially reasonable efforts to develop licensed products or processes and to introduce such licensed products or processes into the commercial market. Thereafter, Yumanity is required to use commercially reasonable efforts to make such licensed products or processes reasonably available to the public. In addition, in any given year until the first regulatory approval of a licensed product, Yumanity has diligence requirements to achieve a certain development milestone with respect to a licensed product or expend a minimum amount of money for platform development and/or development of licensed products or processes.

As consideration for the licenses granted to Yumanity under the Whitehead License Agreement, Yumanity paid an initial license fee and reimbursed the Whitehead Institute for certain expenses incurred in connection with the patent rights. Holdings also issued 3,000 common units (which, following a 100:1 unit split, currently represent 300,000 units) to the Whitehead Institute and certain persons and entities as directed by the Whitehead Institute in satisfaction of the Whitehead Institute’s policy on equity sharing. Under the terms of the Whitehead License Agreement, Yumanity is also required to pay an annual license maintenance fee which is creditable against royalties on net sales earned during the same calendar year. In addition, Yumanity is obligated to make payments to the Whitehead Institute upon achievement of certain milestones, the amount of which depends on the licensed product and indication, with up to an aggregate of $1.9 million for each of the first two licensed products for the first

 

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indication and less for subsequent licensed products and additional indications. Yumanity is also required to pay the Whitehead Institute a low single digit royalty percentage of net sales of licensed products and a low single digit royalty on net sales of products determined to have biological activity or utility by the use of a licensed product or process, or Identified Products. Additionally, Yumanity is required to pay a mid single to low double digit percentage of certain income received from sublicensees and certain partners. Yumanity’s royalty obligation continues on a licensed product-by-licensed product and country-by-country basis for so long as the manufacture, use or sale of such licensed product in such country infringes a valid claim of the patent rights or, with respect to each Identified Product, for ten years after the first sale for consumption by an end user patient of such Identified Product.

Unless terminated earlier, the Whitehead License Agreement will expire upon the expiration or abandonment of all issued patents and filed patent applications within the licensed patent rights, which is currently projected to occur in 2035. The Whitehead Institute may terminate the Whitehead License Agreement upon notice to Yumanity if Yumanity ceases to carry on its business related to the Whitehead License Agreement, if Yumanity fails to make required payments within a certain period time or if Yumanity commits a material breach and fails to cure such breach within a certain period of time. The Whitehead Institute may also terminate the Whitehead License Agreement and/or the licenses granted to Yumanity if Yumanity brings or assists others in bringing a patent challenge against the Whitehead Institute. Yumanity may terminate the Whitehead License Agreement for any reason upon certain notice to the Whitehead Institute.

Intellectual Property

The proprietary nature of, or protection for, Yumanity’s product candidates and methods of manufacture and clinical use are an important part of Yumanity’s strategy to develop and commercialize novel therapies. Yumanity has filed numerous patent applications pertaining to its product candidates and clinical use. Yumanity strives to protect and enhance the proprietary technology, inventions, and improvements that are commercially important to the development of its business by seeking, maintaining and defending Yumanity’s intellectual property, whether developed internally or licensed from third parties. Yumanity also relies on trade secrets, know-how, continuing technological innovation, and potential in-licensing opportunities to develop, strengthen, and maintain its proprietary position in the field of neurodegenerative diseases and protein misfolding. Additionally, Yumanity intends to rely on regulatory protection afforded through data exclusivity and market exclusivity, as well as patent term extensions, where available.

As of September 4, 2020, Yumanity’s patent portfolio as it pertains to certain of its product candidates included:

 

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Yumanity’s Lead Program – YTX-7739:one pending international patent (PCT) application, one pending U.S. non-provisional patent application, and fourteen pending patent applications outside the U.S., which, if pursued and granted, would be expected to expire in 2038-2039, without taking a potential patent term adjustment or extension into account,with composition of matter claims directed to the YTX-7739 compounds and method claims directed to the treatment of neurological disorders, for example SCD-associated disorders, or inhibiting toxicity in a cell relating to a protein;

 

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Yumanity’s Second Program – YTX-9184:three pending U.S. non-provisional patent applications, one pending international patent (PCT) application, one pending U.S. provisional patent application, and nineteen pending patent applications outside the U.S., which, if pursued and granted in the U.S., would be expected to expire in2037-2040, without taking a potential patent term adjustment or extension into account, with composition of matter claims directed to YTX-9184 and method claims directed to the treatment of neurological disorders, for example SCD-associated disorders, or inhibiting toxicity in a cell relating to a protein;

 

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Yumanity’s Potential Third Program: five pending U.S. provisional patent applications, which, if pursued and granted in the U.S., would be expected to expire in 2041, without taking a potential patent term adjustment or extension into account, with composition of matter and claims directed to compounds and method claims directed to the treatment of neurological disorders using inhibitors of Yumanity’s undisclosed target.

 

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Yumanity’s Potential Fourth Program: four pending U.S. provisional patent applications, which, if pursued and granted in the U.S., would be expected to expire in 2041, without taking a potential patent term adjustment or extension into account, with composition of matter claims directed to compounds and methods claims directed to the treatment of neurological disorders using inhibitors of Yumanity’s undisclosed target.

In addition, Yumanity has in-licensed an estate of patents and patent applications relating to Yumanity’s discovery engine from the Whitehead Institute which is directed to compositions and methods for identifying novel disease-modifying therapies for neurodegenerative diseases such as Alzheimer’s disease, Parkinson’s disease and ALS. For example, this estate includes granted and pending claims to a number of yeast models of protein misfolding and methods of use thereof. As of September 4, 2020, this estate includes twenty-two granted U.S. patents, projected to expire between 2022-2035; three pending U.S. patent applications, which if granted in the U.S., would be expected to expire between 2034-2038, without taking a potential patent term adjustment or extension into account; thirty-three granted foreign patents, projected to expire between 2022-2035; and fourteen pending foreign patent applications, which if granted, would be expected to expire between 2034-2038. Yumanity does not control the prosecution and maintenance of all of its in-licensed patents and patent applications, and Yumanity’s rights to enforce the patents are limited in certain ways. For additional detail regarding the risks associated with Yumanity’s license agreements, see “Risk Factors—Risks Related to Yumanity’s Intellectual Property.”

The term of individual patents may vary based on the countries in which they are obtained. Generally, patents issued for applications filed in the United States are effective for 20 years from the earliest effective non-provisional filing date in the absence, for example, of a terminal disclaimer shortening the term of the patent or patent term adjustment increasing the term of the patent. In addition, in certain instances, a patent term can be extended to recapture a portion of the term effectively lost as a result of FDA regulatory review periods. The restoration period cannot be longer than five years and the total patent term, including the restoration period, must not exceed 14 years following FDA approval. The duration of patents outside of the United States varies in accordance with provisions of applicable local law, but typically is also 20 years from the earliest effective non-provisional filing date.

In addition to patents and patent applications that Yumanity owns and license, Yumanity relies on trade secrets and know-how to develop and maintain its competitive position. However, trade secrets can be difficult to protect. Yumanity seeks to protect its proprietary technology and processes, and obtain and maintain ownership of certain technologies, in part, through confidentiality agreements and invention assignment agreements with its employees, consultants, scientific advisors, contractors, and commercial partners.

Yumanity’s future commercial success depends, in part, on Yumanity’s ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions and know-how related to Yumanity’s business; defend and enforce Yumanity’s patents; preserve the confidentiality of Yumanity’s trade secrets; and operate without infringing valid enforceable patents and proprietary rights of third parties. Yumanity’s ability to stop third parties from making, using, selling, offering to sell, or importing its products may depend on the extent to which Yumanity has rights under valid and enforceable patents or trade secrets that cover these activities. With respect to Yumanity’s intellectual property, Yumanity cannot be sure that patents will issue from any of the pending patent applications to which Yumanity owns or that Yumanity may file in the future, nor can Yumanity be sure that any patents that may be issued in the future to Yumanity will be commercially useful in protecting Yumanity’s product candidates and methods of using or manufacturing the same. Moreover, Yumanity may be unable to obtain patent protection for certain aspects of its product candidates generally, as well as with respect to certain indications. See the section titled “Risk Factors—Risks Related to Yumanity’s Intellectual Property” for a more comprehensive description of risks related to Yumanity’s intellectual property.

Manufacturing

Yumanity does not have any manufacturing facilities or personnel. Yumanity currently relies, and expects to continue to rely, on third parties for the manufacturing of its product candidates for preclinical and clinical testing, as well as for commercial manufacturing if Yumanity’s product candidates receive marketing approval.

Currently,all of Yumanity’s product candidates are small molecules and are manufactured in reliable and reproducible synthetic processes from readily available starting materials. The chemistry does not require unusual equipment in the manufacturing process. Yumanity expects to continue to develop product candidates that can be produced at contract manufacturing facilities.

 

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Commercialization

Yumanity intends to develop and, if approved by the FDA, to commercialize its product candidates alone or in collaboration with others. Yumanity may work in combination with one or more large pharmaceutical partners for certain indications, where specialist capabilities are needed. For specialized indications, Yumanity intends to commercialize its product candidates independently. For example, Yumanity believes the patient and prescriber populations for Parkinson’s disease are relatively concentrated and can be addressed with a focused sales team. Yumanity also does not believe any existing pharmaceutical companies have significant expertise in the commercialization of disease-modifying therapies for neurodegenerative diseases. Yumanity will, however, continuously review its partnering strategy in the light of new clinical data and market understanding. Yumanity may enter into distribution or licensing arrangements for commercialization rights for other regions outside the United States.

Government Regulation

Government authorities in the United States at the federal, state and local level and in other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of drug products. Generally, before a new drug can be marketed, considerable data demonstrating its quality, safety and efficacy must be obtained, organized into a format specific to each regulatory authority, submitted for review and approved by the regulatory authority.

U.S. Drug Development

In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations. Drugs are also subject to other federal, state and local statutes and regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval may subject an applicant to administrative or judicial sanctions. These sanctions could include, among other actions, the FDA’s refusal to approve pending applications, withdrawal of an approval, a clinical hold, untitled or warning letters, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement, or civil or criminal penalties. Additionally, a manufacturer may need to recall a product from the market. Any agency or judicial enforcement action could have a material adverse effect on Yumanity.

Yumanity’s product candidates must be approved by the FDA through the NDA process before they may be legally marketed in the United States. The process required by the FDA before a drug may be marketed in the United States generally involves the following:

 

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completion of extensive nonclinical laboratory tests, animal studies and formulation studies in accordance with applicable regulations, including the FDA’s Good Laboratory Practice, or GLP, regulations;

 

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submission to the FDA of an IND application, which must become effective before human clinical trials may begin;

 

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approval by an independent institutional review board, or IRB, or ethics committee at each clinical trial site before each study may be initiated;

 

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performance of adequate and well-controlled human clinical trials in accordance with applicable IND and other clinical trial-related regulations, referred to as Good Clinical Practices, or GCPs, to establish the safety and efficacy of the proposed drug for each proposed indication;

 

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submission to the FDA of an NDA for a new drug;

 

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a determination by the FDA within 60 days of its receipt of an NDA to file the NDA for review;

 

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satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities where the drug is produced to assess compliance with current Good Manufacturing Practices, or cGMP, requirements to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity;

 

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potential FDA audit of the nonclinical study and/or clinical trial sites that generated the data in support of the NDA; and

 

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FDA review and approval of the NDA, including consideration of the views of any FDA advisory committee, prior to any commercial marketing or sale of the drug in the United States.

The nonclinical and clinical testing and approval process requires substantial time, effort and financial resources, and Yumanity cannot be certain that any approvals for Yumanity’s product candidates will be granted on a timely basis, if at all.

The data required to support an NDA are generated in two distinct development stages: nonclinical and clinical. For new chemical entities, the nonclinical development stage generally involves synthesizing the active component, developing the formulation and determining the manufacturing process, as well as carrying out non-human toxicology, pharmacology and drug metabolism studies in the laboratory, which support subsequent clinical testing. These nonclinical tests include laboratory evaluation of product chemistry, formulation, stability and toxicity, as well as animal studies to assess the characteristics and potential safety and efficacy of the product. The conduct of the nonclinical tests must comply with federal regulations, including GLPs. The sponsor must submit the results of the nonclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of the IND. An IND is a request for authorization from the FDA to administer an investigational drug product to humans. Some nonclinical testing may continue even after the IND is submitted, but an IND must become effective before human clinical trials may begin. The central focus of an IND submission is on the general investigational plan and the protocol(s) for human trials. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA raises concerns or questions regarding the proposed clinical trials, including concerns that human research subjects will be exposed to unreasonable health risks, and places the IND on clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. The FDA may also impose clinical holds on a drug candidate at any time before or during clinical trials due to safety concerns or non-compliance. Accordingly, Yumanity cannot be sure that submission of an IND will result in the FDA allowing clinical trials to begin, or that, once begun, issues will not arise that could cause the study to be suspended or terminated.

The clinical stage of development involves the administration of the drug candidate to healthy volunteers or patients under the supervision of qualified investigators, generally physicians not employed by or under the trial sponsor’s control, in accordance with GCPs, which include the requirement that all research subjects provide their informed consent for their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria and the parameters to be used to monitor subject safety and assess efficacy. Each protocol, and any subsequent amendments to the protocol, must be submitted to the FDA as part of the IND. Further, each clinical trial must be reviewed and approved by an IRB at or servicing each institution at which the clinical trial will be conducted. An IRB is charged with protecting the welfare and rights of trial participants and considers such items as whether the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the informed consent form that must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until completion. There are also requirements governing the reporting of ongoing clinical trials and completed clinical trial results to public registries.

As part of the 21st Century Cures Act, or the Cures Act, which was signed into law on December 13, 2016, upon request, the FDA is to establish a process for the qualification of drug development tools. A drug development tool includes a biomarker including a surrogate endpoint, a clinical outcome assessment including a patient-reported outcome, and any other method, material or measure that the FDA determines aids drug development and regulatory review. A drug development tool is qualified if the FDA has determined that the tool and its proposed context of use

 

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can be relied upon to have a specific interpretation and application in drug development and regulatory review. A qualified drug development tool may be used to support the investigational use of a drug or support or obtain NDA approval.

A sponsor who wishes to conduct a clinical trial outside the United States may, but need not, obtain FDA authorization to conduct the clinical trial under an IND. If a foreign clinical trial is not conducted under an IND, the sponsor may submit data from the clinical trial to the FDA in support of an NDA so long as the clinical trial is conducted in compliance with GCP and the FDA is able to validate the data through an onsite inspection if the agency deems it necessary.

Clinical Trials

Clinical trials are generally conducted in three sequential phases that may overlap, known as Phase 1, Phase 2 and Phase 3 clinical trials.

 

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Phase 1 clinical trials generally involve a small number of healthy volunteers who are initially exposed to a single dose and then multiple doses of the product candidate. The primary purpose of these clinical trials is to assess the metabolism, pharmacologic action, side effect tolerability and safety of the drug.

 

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Phase 2 clinical trials typically involve studies in disease-affected patients to determine the dose required to produce the desired benefits and provide a preliminary evaluation of efficacy. At the same time, safety and further pharmacokinetic and pharmacodynamic information is collected, as well as identification of possible adverse effects and safety risks.

 

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Phase 3 clinical trials generally involve large numbers of patients at multiple sites (from several hundred to several thousand subjects) and are designed to provide the data necessary to demonstrate the effectiveness of the product for its intended use, its safety in use and to establish the overall benefit/risk relationship of the product and provide an adequate basis for physician labeling. Phase 3 clinical trials may include comparisons with placebo and/or comparator treatments.

Post-approval studies, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These studies are used to gain additional experience from the treatment of patients in the intended therapeutic indication. In certain instances, the FDA may mandate the performance of Phase 4 clinical trials as a condition of approval of an NDA.

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA. Written IND safety reports must be submitted to the FDA and the investigators within 15 calendar days for serious and unexpected suspected adverse events, finding from other studies or animal or in vitro testing that suggests a significant risk for human subjects, and any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. Additionally, a sponsor must notify the FDA of any unexpected fatal or life-threatening suspected adverse reaction within seven calendar days. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board or committee. This group provides authorization for whether or not a study may move forward at designated check points based on access to certain data from the study.

Pursuant to the Cures Act, the manufacturer of an investigational drug for a serious disease or condition is required to make available, such as by posting on its website, its policy on evaluating and responding to requests for individual patient access to such investigational drug. This requirement applies on the earlier of the first initiation of a Phase 2 or Phase 3 study of the investigational drug, or as applicable, 15 days after the drug receives a designation as a breakthrough therapy, fast track product, or regenerative advanced therapy.

 

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Concurrently with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the drug as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug candidate and, among other things, the sponsor must develop methods for testing the identity, strength, quality and purity of the final drug product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life.

NDA and FDA Review Process

The results of the nonclinical studies and clinical trials, together with other detailed information, including extensive manufacturing information and information on the composition of the drug and proposed labeling, are submitted to the FDA in the form of an NDA requesting approval to market the drug for one or more specified indications. The FDA reviews an NDA to determine, among other things, whether a drug is safe and effective for its intended use and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity, strength, quality, and purity. FDA approval of an NDA must be obtained before a drug may be offered for sale in the United States.

In addition, under the Pediatric Research Equity Act, or PREA, an NDA or supplement to an NDA must contain data to assess the safety and efficacy of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of pediatric data or full or partial waivers.

Under the Prescription Drug User Fee Act, or PDUFA, as amended, each NDA must be accompanied by a user fee. The FDA adjusts the PDUFA user fees on an annual basis. According to the FDA’s fee schedule, effective from October 1, 2020 through September 30, 2021, the user fee for an application requiring clinical data, such as an NDA, is $2,875,842. PDUFA also imposes an annual prescription drug product program fee for human drugs ($336,432). Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for the first application filed by a small business.

The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA for filing. The FDA must make a decision on accepting an NDA for filing within 60 days of receipt. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under the goals and policies agreed to by the FDA under PDUFA, for drugs that contain a new chemical entity, or NCE, the FDA has 10 months from the filing date in which to complete its initial review of a standard NDA and respond to the applicant, and six months from the filing date for a priority NDA. For drugs that do not contain an NCE, these 10 and six month review timeframes are from the receipt date of an NDA. The FDA does not always meet its PDUFA goal dates for standard and priority NDAs, and the review process is often significantly extended by FDA requests for additional information or clarification.

After the NDA submission is accepted for filing, the FDA reviews the NDA to determine, among other things, whether the proposed product is safe and effective for its intended use, and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity, strength, quality and purity. Before approving an NDA, the FDA will conduct a pre-approval inspection of the manufacturing facilities for the new product to determine whether they comply with cGMPs. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. In addition, before approving an NDA, the FDA may also audit data from clinical trials to ensure compliance with GCP requirements. Additionally, the FDA may refer applications for novel drug products or drug products which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions. The FDA will likely re-analyze the clinical trial data, which could result in extensive discussions between the FDA and the applicant during the review process. The review and evaluation of an NDA by the FDA is extensive and time consuming and may take longer than originally planned to complete, and Yumanity may not receive a timely approval, if at all.

 

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After the FDA evaluates an NDA, it may issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the application is complete and the application is not ready for approval. A Complete Response Letter usually describes all of the specific deficiencies in the NDA identified by the FDA. The Complete Response Letter may require additional clinical data and/or an additional pivotal Phase 3 clinical trial(s), and/or other significant and time-consuming requirements related to clinical trials, nonclinical studies or manufacturing. If a Complete Response Letter is issued, the applicant may resubmit the NDA addressing all of the deficiencies identified in the letter, withdraw the application, or request an opportunity for a hearing. Even if such data and information is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than Yumanity interprets the same data.

There is no assurance that the FDA will ultimately approve a drug product for marketing in the United States and Yumanity may encounter significant difficulties or costs during the review process. If a product receives marketing approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings, or precautions be included in the product labeling or may condition the approval of the NDA on other changes to the proposed labeling, development of adequate controls and specifications, or a commitment to conduct post-marketing testing or clinical trials and surveillance to monitor the effects of the approved product. For example, the FDA may require Phase 4 testing which involves clinical trials designed to further assess a drug’s safety and efficacy and may require testing and surveillance programs to monitor the safety of approved products that have been commercialized. The FDA also may place other conditions on approvals including the requirement for a risk evaluation and mitigation strategy, or REMS, to assure the safe use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposed REMS. The FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of products. Product approvals may be withdrawn for non-compliance with regulatory requirements or if problems occur following initial marketing.

Orphan Drug Designation

Under the Orphan Drug Act, the FDA may grant orphan designation to a drug intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United

States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making the product available in the United States for this type of disease or condition will be recovered from sales of the product.

Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.

If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications to market the same drug for the same indication for seven years from the date of such approval, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity by means of greater effectiveness, greater safety, or providing a major contribution to patient care, or in instances of drug supply issues. Competitors, however, may receive approval of either a different product for the same indication or the same product for a different indication but that could be used off-label in the orphan indication. Orphan drug exclusivity also could block the approval of one of Yumanity’s products for seven years if a competitor obtains approval before Yumanity does for the same product, as defined by the FDA, for the same indication Yumanity is seeking approval, or if Yumanity’s product is determined to be contained within the scope of the competitor’s product for the same indication or disease. If one of Yumanity’s products designated as an orphan drug receives marketing approval for an indication broader than that which is designated, it may not be entitled to orphan drug exclusivity. Orphan drug status in the European Union has similar, but not identical, requirements and benefits.

 

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Expedited Development and Review Programs

The FDA has a Fast Track program that is intended to expedite or facilitate the process for reviewing new drugs that meet certain criteria. Specifically, new drugs are eligible for Fast Track designation if they are intended to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the product and the specific indication for which it is being studied. The sponsor of a new drug may request the FDA to designate the drug as a Fast Track product at any time during the clinical development of the product. Unique to a Fast Track product, the FDA may review sections of the marketing application on a rolling basis before the complete NDA is submitted, if the sponsor provides a schedule for the submission of the sections of the application, the FDA agrees to accept sections of the application and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the application.

Any product submitted to the FDA for marketing, including under the Fast Track program, may be eligible for other types of FDA programs intended to expedite development and review, such as priority review. A product is eligible for priority review if it has the potential to provide safe and effective therapy where no satisfactory alternative therapy exists or offers a significant improvement in the treatment, diagnosis or prevention of a disease compared to marketed products. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug designated for priority review in an effort to facilitate the review.

Additionally, a drug may be eligible for designation as a breakthrough therapy if the drug is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The benefits of breakthrough therapy designation include the same benefits as fast track designation, plus intensive guidance from FDA to ensure an efficient drug development program. Fast Track designation, priority review, and breakthrough designation do not change the standards for approval but may expedite the development or approval process.

Pediatric Trials

The FDCA requires that a sponsor who is planning to submit a marketing application for a drug that includes a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration submit an initial Pediatric Study Plan, or PSP, within sixty days of an end-of-Phase 2 meeting or as may be agreed between the sponsor and the FDA. The initial PSP must include an outline of the pediatric study or studies that the sponsor plans to conduct, including study objectives and design, age groups, relevant endpoints and statistical approach, or a justification for not including such detailed information, and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement to provide data from pediatric studies along with supporting information. The FDA and the sponsor must reach agreement on the PSP. A sponsor can submit amendments to an agreed-upon initial PSP at any time if changes to the pediatric plan need to be considered based on data collected from nonclinical studies, early phase clinical trials and/or other clinical development programs.

Post-Marketing Requirements

Following approval of a new product, a pharmaceutical company and the approved product are subject to continuing regulation by the FDA, including, among other things, monitoring and recordkeeping activities, reporting to the FDA of adverse experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution requirements and complying with promotion and advertising requirements, which include, among others, standards for direct-to-consumer advertising, restrictions on promoting drugs for uses or in patient populations that are not described in the drug’s approved labeling (known as “off-label use”), limitations on industry-sponsored scientific and educational activities and requirements for promotional activities involving the internet. Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or promote such off-label uses. Prescription drug promotional materials must be submitted to the FDA in

 

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conjunction with their first use. Further, if there are any modifications to the drug, including changes in indications, labeling, or manufacturing processes or facilities, the applicant may be required to submit and obtain FDA approval of a new NDA or NDA supplement, which may require the applicant to develop additional data or conduct additional nonclinical studies and clinical trials. As with new NDAs, the review process is often significantly extended by FDA’s requests for additional information or clarification. Any distribution of prescription drug products and pharmaceutical samples must comply with the U.S. Prescription Drug Marketing Act, or the PDMA, a part of the FDCA.

In the United States, once a product is approved, its manufacture is subject to comprehensive and continuing regulation by the FDA. The FDA regulations require that products be manufactured in specific facilities and in accordance with cGMP. Yumanity relies, and expects to continue to rely, on third parties for the production of clinical and commercial quantities of its products in accordance with cGMP regulations. NDA holders using contract manufacturers, laboratories or packagers are responsible for the selection and monitoring of qualified firms, and, in certain circumstances, qualified suppliers to these firms. These manufacturers must comply with cGMP regulations that require among other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation and the obligation to investigate and correct any deviations from cGMP. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance. The discovery of violative conditions, including failure to conform to cGMP, could result in enforcement actions that interrupt the operation of any such facilities or the ability to distribute products manufactured, processed or tested by them. Discovery of problems with a product after approval may result in restrictions on a product, manufacturer, or holder of an approved NDA, including, among other things, recall or withdrawal of the product from the market.

Discovery of previously unknown problems with a product or the failure to comply with applicable FDA requirements can have negative consequences, including judicial or administrative enforcement, warning letters from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties, among others. Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications, and also may require the implementation of other risk management measures. Also, new government requirements, including those resulting from new legislation, may be established, or the FDA’s policies may change, which could delay or prevent regulatory approval of Yumanity’s products under development. Changes in statutes, regulations, or the interpretation of existing regulations could impact Yumanity’s business in the future by requiring, for example: (i) changes to Yumanity’s manufacturing arrangements; (ii) additions or modifications to product labeling; (iii) the recall or discontinuation of Yumanity’s products; or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect the operation of Yumanity’s business.

Orange Book Listing

Section 505 of the FDCA describes three types of marketing applications that may be submitted to the FDA to request marketing authorization for a new drug. A Section 505(b)(1) NDA is an application that contains full reports of investigations of safety and efficacy. A Section 505(b)(2) NDA is an application in which the applicant, in part, relies on investigations that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted. Section 505(j) establishes an abbreviated approval process for a generic version of approved drug products through the submission of an Abbreviated New Drug Application, or ANDA. An ANDA provides for marketing of a generic drug product that has the same active ingredients, dosage form, strength, route of administration, labeling, performance characteristics and intended use, among other things, to a previously approved product. Limited changes must be preapproved by the FDA via a suitability petition. ANDAs are termed “abbreviated” because they are generally not required to include nonclinical and clinical data to establish safety and efficacy. Instead, generic applicants must scientifically demonstrate that their product is bioequivalent to, or performs in the same manner as, the innovator drug through in vitro, in vivo, or other testing. The generic version must deliver the same amount of active ingredients into a subject’s bloodstream in the same amount of time as the innovator drug and can often be substituted by pharmacists under prescriptions written for the reference listed drug.

 

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In seeking approval for a drug through an NDA, including a 505(b)(2) NDA, applicants are required to list with the FDA certain patents having claims that cover the applicant’s product and method of use. Upon approval of an NDA, each of the patents listed in the application for the drug is then published in Approved Drug Products with Therapeutic Equivalence Evaluations, also known as the Orange Book. These products may be cited by potential competitors in support of approval of an ANDA or 505(b)(2) NDA.

Any applicant who files an ANDA seeking approval of a generic equivalent version of a drug listed in the Orange Book or a 505(b)(2) NDA referencing a drug listed in the Orange Book must make patent certifications to the FDA that (1) no patent information on the drug or method of use that is the subject of the application has been submitted to the FDA; (2) the patent has expired; (3) the date on which the patent has expired and approval will not be sought until after the patent expiration; or (4) the patent is invalid or will not be infringed upon by the manufacture, use, or sale of the drug product for which the application is submitted. The last certification is known as a paragraph IV certification. Generally, the ANDA or 505(b)(2) NDA cannot be approved until all listed patents have expired, except where the ANDA or 505(b)(2) NDA applicant challenges a listed patent through a paragraph IV certification or if the applicant is not seeking approval of a patented method of use. If the applicant does not challenge the listed patents or does not indicate that it is not seeking approval of a patented method of use, the ANDA or 505(b)(2) NDA application will not be approved until all of the listed patents claiming the referenced product have expired.

If the competitor has provided a paragraph IV certification to the FDA, the competitor must also send notice of the paragraph IV certification to the holder of the NDA for the reference listed drug and the patent owner within 20 days after the application has been accepted for filing by the FDA. The NDA holder or patent owner may then initiate a patent infringement lawsuit in response to the notice of the paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a paragraph IV certification notice prevents the FDA from approving the ANDA or 505(b)(2) application until the earlier of 30 months from the date of the lawsuit, expiration of the patent, settlement of the lawsuit, a decision in the infringement case that is favorable to the applicant or such shorter or longer period as may be ordered by a court. This prohibition is generally referred to as the 30-month stay.

In instances where an ANDA or 505(b)(2) NDA applicant files a paragraph IV certification, the NDA holder or patent owners regularly take action to trigger the 30-month stay, recognizing that the related patent litigation may take many months or years to resolve. Thus, approval of an ANDA or 505(b)(2) NDA could be delayed for a significant period of time depending on the patent certification the applicant makes and the reference drug sponsor’s decision to initiate patent litigation.

U.S. Marketing Exclusivity

Marketing exclusivity provisions under the FDCA can also delay the submission or the approval of certain marketing applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to obtain approval of an NDA for an NCE. A drug is an NCE if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an ANDA or a 505(b)(2) NDA submitted by another company for another drug based on the same active moiety, regardless of whether the drug is intended for the same indication as the original innovator drug or for another indication, where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement to one of the patents listed with the FDA by the innovator NDA holder. The FDCA also provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA, if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example for new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the modification for which the drug received approval on the basis of the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the active agent for the original indication or condition of use. Three-year and five-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the nonclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and efficacy. Pediatric exclusivity is another type of regulatory market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be granted based on the voluntary completion of a pediatric trial in accordance with an FDA-issued “Written Request” for such a trial.

 

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U.S. Patent-Term Extension

Depending upon the timing, duration and specifics of FDA approval of Yumanity’s current product candidates or any future product candidate, some of Yumanity’s U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch Waxman Act. The Hatch Waxman Act permits extension of the patent term of up to five years as compensation for patent term lost during FDA regulatory review process. Patent term extension, however, cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term extension period is generally one half the time between the effective date of an IND and the submission date of an NDA plus the time between the submission date of an NDA and the approval of that application, except that the review period is reduced by any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved drug is eligible for the extension (and only those patent claims covering the approved drug, a method for using it or a method for manufacturing it may be extended), and the application for the extension must be submitted prior to the expiration of the patent. A patent that covers multiple products for which approval is sought can only be extended in connection with one of the approvals. The USPTO, in consultation with the FDA, reviews and approves the application for any patent term extension. In the future, Yumanity may apply for extension of a patent term for its currently owned patents to add patent life beyond its current expiration date, depending on the expected length of the clinical trials and other factors involved in the filing of the relevant NDA. However, there can be no assurance that the USPTO will grant Yumanity any requested patent term extension, either for the length Yumanity requests or at all.

Healthcare Reform

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

For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, ACA, enacted in the United States in March 2010, has already had, and is expected to continue to have, a significant impact on the healthcare industry. The ACA expanded coverage for the uninsured while at the same time containing overall healthcare costs. With regard to pharmaceutical products, the ACA, among other things, addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected, increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extended the rebate program to individuals enrolled in Medicaid managed care organizations, established annual fees and taxes on manufacturers of certain branded prescription drugs, and a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% (increased to 70% in 2019 pursuant to subsequent legislation) point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D.

Since its enactment there have been judicial, administrative, executive, and Congressional challenges to certain aspects of the ACA, as well as recent efforts by the current administration to repeal or replace certain aspects of the ACA. For example, various portions of the ACA are currently undergoing legal and constitutional challenges in the United States Supreme Court, and since January 2017, President Trump has signed various Executive Orders and other directives which eliminated cost sharing subsidies and various provisions that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Additionally, Congress has introduced several pieces of

 

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legislation aimed at significantly repealing or repealing and replacing all or part of the ACA. While Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the ACA such as removing penalties, starting January 1, 2019, for not complying with the ACA’s individual mandate to carry health insurance, delaying the implementation of certain ACA-mandated fees, and increasing the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D. It unclear whether the ACA will be overturned, repealed, replaced, or further amended.

More recently, in December 2018, the Centers for Medicare and Medicaid Services, or CMS, published a final rule permitting further collections and payments to and from certain ACA-qualified health plans and health insurance issuers under the ACA risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. Since then, the ACA risk adjustment program payment parameters have been updated annually. In addition, CMS published a final rule that would give states greater flexibility, starting in 2020, in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces.

In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. For example, on August 2, 2011, the Budget Control Act of 2011 among other things, created measures for spending reductions by Congress. Specifically, the Joint Select Committee on Deficit Reduction was created to recommend to Congress proposals in spending reductions. The Joint Select Committee on Deficit Reduction did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2012 through 2021, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, started in April 2013 and which, due to subsequent legislative amendments will stay in effect through 2030 unless additional Congressional action is taken. However, pursuant to the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, the 2% Medicare sequester reductions have been suspended from May 1, 2020 through December 31, 2020 due to the COVID-19 pandemic. Additionally, on January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA. The ATRA, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

Recently, there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products. Such scrutiny has resulted in several recent U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the cost of drugs under Medicare and reform government program reimbursement methodologies for drug products. At the federal level, the Trump administration’s budget proposal for fiscal year 2021 includes a $135 billion allowance to support legislative proposals seeking to reduce drug prices, increase competition, lower out-of-pocket drug costs for patients, and increase patient access to lower-cost generic and biosimilar drugs. On March 10, 2020, the Trump administration sent “principles” for drug pricing to Congress, calling for legislation that would, among other things, cap Medicare Part D beneficiary out-of-pocket pharmacy expenses, provide an option to cap Medicare Part D beneficiary monthly out-of-pocket expenses, and place limits on pharmaceutical price increases. Additionally, the current administration previously released a ‘‘Blueprint’’ to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. On July 24, 2020, President Trump signed four Executive Orders aimed at lowering drug prices. The Executive Orders direct the Secretary of HHS to: (1) eliminate protection under an Anti-Kickback Statute safe harbor for certain retrospective price reductions provided by drug manufacturers to sponsors of Medicare Part D plans or pharmacy benefit managers that are not applied at the point-of-sale; (2) allow the importation of certain drugs from other countries through individual waivers, permit the re-importation of insulin products, and prioritize finalization of FDA’s December 2019 proposed rule to permit the importation of drugs from Canada; (3) ensure that payment by the Medicare program for certain Medicare Part B drugs is not higher than the payment by other comparable countries (depending on whether pharmaceutical manufacturers agree to other measures); and (4) allow certain low-income individuals receiving insulin and epinephrine purchased by a Federally Qualified Health Center, or FQHC, as part of the 340B drug program to purchase those drugs at the discounted price paid by the FQHC. On August 6, 2020, President Trump signed an additional Executive Order directing U.S. government agencies to encourage the domestic procurement of Essential Medicines, Medical Countermeasures, and

 

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Critical Inputs, which include among other things, active pharmaceutical ingredients and drugs intended for use in the diagnosis, cure, mitigation, treatment, or prevention of COVID-19. FDA must release a full list of Essential Medicines, Medical Countermeasures, and Critical Inputs affected by this Order by November 5, 2020. Although a number of these, and other proposed measures will require authorization through additional legislation to become effective, Congress and the current administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

Additionally, on May 30, 2018, the Right to Try Act was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new drug products that have completed a Phase I clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is no obligation for a drug manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act.

Other U.S. Healthcare Laws and Compliance Requirements

Manufacturing, sales, promotion, and other activities following product approval are also subject to regulation by numerous regulatory authorities in addition to the FDA, including, in the United States, CMS, other divisions of HHS including the Office of the Inspector General, the U.S. Department of Justice, the Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety & Health Administration, the Environmental Protection Agency and state and local regulatory authorities. For example, sales, marketing and scientific/educational grant programs may have to comply with state and federal fraud and abuse laws, the privacy and security provisions of the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and similar state laws, each as amended.

The federal Anti-Kickback Statute, makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf) to knowingly and willfully solicit, receive, offer, or pay any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce, or in return for, the referral of an individual, or the purchase, lease, order, or recommendation of any good, facility, item, or service (including the purchase, order, or prescription of a particular drug), for which payment may be made, in whole or in part, under a federal healthcare program, such as Medicare or Medicaid. “Remuneration” has been interpreted broadly to include anything of value. Violations of this law are punishable by up to five years in prison, criminal fines, administrative civil money penalties and exclusion from participation in federal healthcare programs. In addition, the ACA, among other things, amended the intent requirement of the federal Anti-Kickback Statute. A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. Further, courts have found that if “one purpose” of renumeration is to induce referrals, the federal Anti-Kickback statute is violated. Moreover, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities.

Although Yumanity would not submit claims directly to payors, drug manufacturers can be held liable under the federal civil and criminal false claims laws and civil monetary penalty laws, including the False Claims Act, which prohibit, among other things, anyone from knowingly presenting, or causing to be presented, for payment to or approval by federal programs (including Medicare and Medicaid) claims for items or services, including drugs, that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services, knowingly concealing or knowingly and improperly avoiding or decreasing or concealing an obligation to pay money to the federal government. The government may deem manufacturers to have “caused” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or promoting a product off-label. In addition, Yumanity’s activities relating to the reporting of wholesaler or estimated retail prices for its products, the reporting of prices used to calculate Medicaid rebate information and other information affecting federal, state and third-party reimbursement for Yumanity’s products, and the sale and

 

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marketing of its products, are subject to scrutiny under this law. Penalties for a False Claims Act violation include three times the actual damages sustained by the government, plus mandatory civil penalties for each separate false claim, the potential for exclusion from participation in federal healthcare programs, and, although the federal False Claims Act is a civil statute, conduct that results in a False Claims Act violation may also implicate various federal criminal statutes. If the government were to allege that Yumanity were, or convict Yumanity of, violating these false claims laws, Yumanity could be subject to a substantial fine and may suffer a decline in its stock price. In addition, private individuals have the ability to bring actions under the federal False Claims Act and certain states have enacted laws modeled after the federal False Claims Act.

HIPAA created new federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private), willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Like the federal Anti-Kickback Statute a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

Many states have similar fraud and abuse statutes or regulations that may be broader in scope and may apply regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs. Additionally, to the extent that any of Yumanity’s product candidates, if approved, are sold in a foreign country, Yumanity may be subject to similar foreign laws.

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, impose requirements relating to the privacy, security and transmission of individually identifiable health information on certain healthcare providers, healthcare clearinghouses, and health plans, known as covered entities, as well as independent contractors, or agents of covered entities that create, receive or obtain individually identifiable health information in connection with providing a service on behalf of a covered entity, known as a business associates. Among other things, HITECH makes HIPAA’s security standards directly applicable to business associates, defined as independent contractors or agents of covered entities that create, receive or obtain protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities and business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, certain state laws govern the privacy and security of health information in certain circumstances, some of which are more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and criminal penalties.

Other regulations may affect other aspects of Yumanity’s business. For example, pricing and rebate programs must comply with the Medicaid rebate requirements of the U.S. Omnibus Budget Reconciliation Act of 1990 and more recent requirements in ACA. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. Products must meet applicable child-resistant packaging requirements under the U.S. Poison Prevention Packaging Act. Manufacturing, sales, promotion and other activities are also potentially subject to federal and state consumer protection and unfair competition laws. There has also been a recent trend of increased federal and state regulation of payments made to physicians. Certain states mandate implementation of compliance programs, impose restrictions on drug manufacturers’ marketing practices and/or require the tracking and reporting of gifts, compensation and other remuneration to physicians. For example, the federal Physician Payment Sunshine Act, or Sunshine Act, created under the ACA, requires manufacturers of drugs, devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to HHS information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Beginning in 2022, applicable manufacturers also will be required to report such information regarding payments and transfers of value provided, as well as ownership and

 

35

investment interests held, during the previous year to certain other healthcare professionals, including physician assistants and nurse practitioners. As noted, many states also govern the reporting of payments or other transfers of value, many of which differ from each other in significant ways, are often not pre-empted, and may have a more prohibitive effect than the Sunshine Act, thus further complicating compliance efforts.

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. If Yumanity’s operations are found to be in violation of any of such laws or any other governmental regulations that apply to Yumanity, Yumanity may be subject to penalties, including, without limitation, administrative, civil and criminal penalties, damages, fines, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, the curtailment or restructuring of Yumanity’s operations, exclusion from participation in federal and state healthcare programs and individual imprisonment, any of which could adversely affect Yumanity’s ability to operate its business and its financial results. Any action against Yumanity for violation of these laws, even if Yumanity successfully defend against it, could cause Yumanity to incur significant legal expenses and divert its management’s attention from the operation of its business.

Coverage and Reimbursement

Sales of Yumanity’s drugs will depend, in part, on the extent to which Yumanity’s drugs will be covered by third-party payors, such as government health programs, commercial insurance, and managed healthcare organizations. Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we may obtain regulatory approval. Coverage and adequate reimbursement from governmental healthcare programs, such as Medicare and Medicaid in the United States, and commercial payors are critical to new product acceptance. Third-party payors decide which drugs they will pay for and establish reimbursement levels. In the United States, the principal decisions about reimbursement for new medicines are typically made by CMS. CMS decides whether and to what extent our products will be covered and reimbursed under Medicare and private payors tend to follow CMS to a substantial degree. Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a therapeutic is:

 

•

a covered benefit under its health plan;

 

•

safe, effective and medically necessary;

 

•

appropriate for the specific patient;

 

•

cost-effective; and

 

•

neither experimental nor investigational.

We cannot be sure that reimbursement will be available for any product that we commercialize and, if coverage and reimbursement are available, we cannot be sure that the level of reimbursement will be adequate. Coverage may also be more limited than the purposes for which the product is approved by the FDA or comparable foreign regulatory authorities. Limited coverage and less than adequate reimbursement may reduce the demand for, or the price of, any product for which we obtain regulatory approval.

These third-party payors are increasingly reducing reimbursements for medical drugs and services. Additionally, the containment of healthcare costs has become a priority of federal and state governments, and the prices of drugs have been a focus in this effort. The U.S. government, state legislatures, and foreign governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic drugs. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit Yumanity’s net revenue and results. Decreases in third-party reimbursement for Yumanity’s drug candidates, if approved, or a decision by a third-party payor to not cover Yumanity’s drug candidates could reduce physician usage of such drugs and have a material adverse effect on Yumanity’s sales, results of operations and financial condition.

 

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The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, established the Medicare Part D program to provide a voluntary prescription drug benefit to Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities that provide coverage of outpatient prescription drugs. Unlike Medicare Part A and B, Part D coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for drugs for which Yumanity obtains marketing approval. However, any negotiated prices for Yumanity’s drugs covered by a Part D prescription drug plan will likely be lower than the prices Yumanity might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.

In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of medicinal drugs for which their national health insurance systems provide reimbursement and to control the prices of medicinal drugs for human use. A member state may approve a specific price for the medicinal drug or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal drug on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical drugs will allow favorable reimbursement and pricing arrangements for any of Yumanity’s drugs. Historically, drugs launched in the European Union do not follow price structures of the United States and generally tend to be significantly lower.

European Union Drug Development

In the European Union, Yumanity’s product candidates may also be subject to extensive regulatory requirements. As in the United States, medicinal products can only be marketed if a marketing authorization from the competent regulatory agencies has been obtained.

Similar to the United States, the various phases of nonclinical and clinical research in the European Union are subject to significant regulatory controls. Although the EU Clinical Trials Directive 2001/20/EC has sought to harmonize the European Union clinical trials regulatory framework, setting out common rules for the control and authorization of clinical trials in the European Union, the European Union Member States have transposed and applied the provisions of the Directive differently. This has led to significant variations in the Member State regimes. Under the current regime, before a clinical trial can be initiated it must be approved in each of the European Union Member States where the study is to be conducted by two distinct bodies: the National Competent Authority, or NCA, and one or more Ethics Committees, or ECs. Under the current regime all suspected unexpected serious adverse reactions to the investigated drug that occur during the clinical trial have to be reported to the NCA and ECs of the Member State where they occurred.

In April 2014, the European Union adopted a new Clinical Trials Regulation (EU) No 536/2014, which is set to replace the current EU Clinical Trials Directive 2001/20/EC. It is expected that the new Clinical Trials Regulation (EU) No 536/2014 will apply following confirmation of full functionality of the Clinical Trials Information System, or CTIS, the centralized European Union portal and database for clinical trials foreseen by the regulation, through an independent audit. The regulation becomes applicable six months after the European Commission publishes notice of this confirmation with a three-year transition period. It will overhaul the current system of approvals for clinical trials in the European Union. Specifically, the new regulation, which will be directly applicable in all member states, aims at simplifying and streamlining the approval of clinical trials in the European Union. For instance, the new Clinical Trials Regulation provides for a streamlined application procedure via a single point and strictly defined deadlines for the assessment of clinical trial applications.

 

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European Union Drug Review and Approval

In the European Economic Area, or EEA, comprising the 27 Member States of the European Union plus Norway, Iceland and Liechtenstein, medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are two types of marketing authorizations: The Community MA is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committee for Medicinal Products for Human Use, or CHMP, of the European Medicines Agency, or EMA, and is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for certain types of products, such as human medicines derived from biotechnology processes or advanced therapy medicinal products (such as gene therapy, somatic cell therapy and tissue engineered products), products that contain a new active substance indicated for the treatment of certain diseases, such as HIV/AIDS, cancer, neurodegenerative disorders, diabetes, autoimmune diseases and other immune dysfunctions, viral diseases, and officially designated orphan medicines. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the European Union.

National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory, are available for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for marketing in a Member State of the EEA, this National MA can be recognized in another Member State through the Mutual Recognition Procedure. If the product has not received a National MA in any Member State at the time of application, it can be approved simultaneously in various Member States through the Decentralized Procedure. Under the Decentralized Procedure an identical dossier is submitted to the competent authorities of each of the Member States in which the MA is sought, one of which is selected by the applicant as the Reference Member State, or RMS. The competent authority of the RMS prepares a draft assessment report, a draft summary of the product characteristics, or SPC, and a draft of the labeling and package leaflet, which are sent to the other Member States (referred to as the Member States Concerned) for their approval. If the Member States Concerned raise no objections, based on a potential serious risk to public health, to the assessment, SPC, labeling, or packaging proposed by the RMS, the product is subsequently granted a national MA in all the Member States (i.e., in the RMS and the Member States Concerned).

Under the above described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

European Union New Chemical Entity Exclusivity

In the European Union, new chemical entities, sometimes referred to as new active substances, qualify for eight years of data exclusivity upon marketing authorization and an additional two years of market exclusivity. The data exclusivity, if granted, prevents regulatory authorities in the European Union from referencing the innovator’s data to assess a generic application for eight years, after which generic marketing authorization can be submitted, and the innovator’s data may be referenced, but not approved for two years. The overall ten year period will be extended to a maximum of eleven years if, during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are determined to bring a significant clinical benefit in comparison with currently approved therapies.

European Union Orphan Designation and Exclusivity

In the European Union, the European Commission, based on the recommendation of the EMA’s Committee for Orphan Medicinal Products, grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of life threatening or chronically debilitating conditions affecting not more than five in 10,000 persons in the European Union (or where it is unlikely that the development of the medicine would generate sufficient return to justify the investment) and for which no satisfactory method of diagnosis, prevention or treatment has been authorized (or, if a method exists, the product would be a significant benefit to those affected).

 

38

In the European Union, orphan drug designation entitles a party to financial incentives such as reduction of fees or fee waivers and ten years of market exclusivity is granted following medicinal product approval. This period is extended by two years for compliance with an agreed upon pediatric investigation plan granted at the time of review of the orphan drug designation. This period may be reduced to six years if the orphan drug designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity. Additionally, marketing authorization may be granted to a similar product for the same indication at any time, if (i) the holder of the marketing authorization for the original orphan medicinal product consents to a second orphan medicinal product application, (ii) the holder of the marketing authorization for the original orphan medicinal product cannot supply sufficient quantities of the orphan medicinal product, or (iii) the second applicant can establish that the second medicinal product, although similar, is safer, more effective or otherwise clinically superior to the authorized orphan medicinal product. Orphan drug designation must be requested before submitting an application for marketing approval. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.

Brexit and the Regulatory Framework in the United Kingdom

In June 2016, the electorate in the United Kingdom voted in favor of leaving the European Union (commonly referred to as “Brexit”). Thereafter, in March 2017, the country formally notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. The United Kingdom formally left the European Union on January 31, 2020. A transition period began on February 1, 2020, during which European Union pharmaceutical law remains applicable to the United Kingdom. This transition period is due to end on December 31, 2020. Since the regulatory framework for pharmaceutical products in the United Kingdom covering quality, safety and efficacy of pharmaceutical products, clinical trials, marketing authorization, commercial sales and distribution of pharmaceutical products is derived from European Union directives and regulations, Brexit could materially impact the future regulatory regime which applies to products and the approval of product candidates in the United Kingdom. It remains to be seen how, if at all, Brexit will impact regulatory requirements for product candidates and products in the United Kingdom.

European Union Data Collection

The collection and use of personal health data in the European Economic Area (EEA) is governed by the EU General Data Protection Regulation 2016/679, or GDPR, which went into effect on May 25, 2018 and superseded the Data Protection Directive. The GDPR applies to any company established in the EEA and to companies established outside the EEA that provides goods or services to residents in the EEA. This would include companies that process personal data in connection with the offering of goods or services to data subjects in the EU or the monitoring of the behavior of data subjects in the EU. The GDPR enhances data protection obligations for data controllers of personal data (including stringent requirements relating to the consent of data subjects, expanded disclosures about how personal data is used, requirements to conduct privacy impact assessments for “high risk” processing, limitations on retention of personal data, mandatory data breach notification and “privacy by design” requirements), creates direct obligations on service providers acting as data processors, and imposes special protections for “sensitive information,” which includes health and genetic information of data subjects residing in the EU. The GDPR grants individuals the opportunity to object to the processing of their personal information, and allows them to request deletion of personal information in certain circumstances. Additionally, the GDPR also imposes strict rules on the transfer of personal data outside of the EEA to countries that do not ensure an adequate level of protection, like the U.S. Failure to comply with the requirements of the GDPR and the related national data protection laws of the EEA Member States may result in fines of up to 20 million Euros or 4% of a company’s global annual revenues for the preceding financial year, whichever is higher. Moreover, the GDPR grants data subjects the right to claim material and non-material damages resulting from infringement of the GDPR. Given the breadth and depth of changes in data protection obligations, maintaining compliance with the GDPR will require significant time, resources and expense, and Yumanity may be required to put in place additional mechanisms ensuring compliance with the new data protection rules. This may be onerous and adversely affect Yumanity’s business, financial condition, results of operations and prospects. Further, the United Kingdom’s decision to leave the European Union has created uncertainty with regard to data protection regulation in the United Kingdom. In particular, it is unclear how data transfers to and from the United Kingdom will be regulated now that the United Kingdom has left the European Union.

 

39

Rest of the World Regulation

For other countries outside of the European Union and the United States, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases the clinical trials must be conducted in accordance with GCP requirements and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki. If Yumanity fails to comply with applicable foreign regulatory requirements, Yumanity may be subject to, among other things, fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

Employees and Human Capital Resources

As of September 1, 2020, Yumanity employed 41 full-time employees, including 30 in research, 2 in clinical development and 9 in general and administrative, and 3 part-time employees. Twenty of Yumanity’s full-time employees hold M.D. or Ph.D. degrees. Yumanity is highly dependent on its management and scientific and medical personnel, and it is crucial that it continues to attract and retain valuable employees. To facilitate attraction and retention, Yumanity strives to make Yumanity a diverse, inclusive and safe workplace, with opportunities for its employees to grow and develop in their careers, supported by strong compensation and benefits programs. Yumanity has never had a work stoppage, and none of its employees is represented by a labor organization or under any collective-bargaining arrangements. Yumanity considers its relationship with its employees to be good.

Facilities

Yumanity currently has one location in Boston, Massachusetts. Yumanity licenses approximately 27,000 square feet of office and laboratory space from Smart Labs located at 40 Guest Street, Suite 4410, Boston, Massachusetts. Yumanity’s lease on its corporate headquarters expires in April 2023. Yumanity believes its facilities are adequate for its current needs and that it will be able to find suitable additional substitute space when needed.

Legal Proceedings

Between October 14 and December 7, 2020, following the announcement of the proposed merger among Proteostasis Therapeutics, Inc. (“PTI”), Yumanity, Inc. (f/k/a Yumanity Therapeutics, Inc) and Pangolin Merger Sub, Inc. (“Merger Sub”), a wholly owned subsidiary of PTI (the “Merger”), nine lawsuits were filed by purported stockholders of Proteostasis Therapeutics, Inc., challenging the Merger. The first lawsuit, brought as a putative class action, is captioned Aniello v. Proteostasis Therapeutics, Inc., et al., No. 1:20-cv-08578 (S.D.N.Y. filed Oct. 14, 2020). The remaining eight lawsuits, brought by the plaintiffs individually, are captioned Culver v. Proteostasis Therapeutics, Inc., et al., 1:20-cv-08595 (S.D.N.Y. filed Oct. 15, 2020); Donolo v. Proteostasis Therapeutics, Inc. et al., 1:20-cv-01400 (D. Del. filed Oct. 16, 2020); Straube v. Proteostasis Therapeutics, Inc., et al., 1:20-cv-08653 (S.D.N.Y. filed Oct. 16, 2020); Beck v. Proteostasis Therapeutics, Inc., et al., 1:20-cv-08783 (S.D.N.Y. filed Oct. 21, 2020); Dreyer v. Proteostasis Therapeutics, Inc., et al., 1:20-cv-05193 (E.D.N.Y. filed Oct. 28, 2020); Kopkin v. Proteostasis Therapeutics, Inc. et al., No. 1:20-cv-12103 (D. Mass. filed Nov. 23, 2020); Merritt v. Proteostasis Therapeutics, Inc., et al., No. 1:20-cv-10275 (S.D.N.Y. filed Dec. 6, 2020); and Koh v. Proteostasis Therapeutics, Inc., et al., No. 1:20-cv-10296 (S.D.N.Y. filed Dec. 7, 2020). All of the complaints named PTI and the individual members of PTI’s board of directors as defendants. The Aniello complaint also named Yumanity, Inc. as an additional defendant, and the Donolo complaint named Yumanity. Inc. and Merger Sub as additional defendants. The complaints asserted violations of Section 14(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Rule 14a-9 promulgated thereunder against PTI and its directors, and violations of Section 20(a) of the Exchange Act against PTI’s directors. The Donolo complaint asserted an additional violation of Section 20(a) of the Exchange Act against Yumanity, Inc. The Aniello complaint asserted additional claims for breach of fiduciary duty against PTI’s directors and aiding and abetting against PTI and Yumanity, Inc. The plaintiffs contended that the registration statement on Form S-4 filed by PTI with the Securities and Exchange Commission on September 23, 2020 (the “Registration Statement”) or the proxy statement/prospectus on Form 424B3 filed by PTI with the SEC on November 12, 2020 (the “Definitive Proxy”) omitted or misrepresented certain material information regarding the Merger. The complaints sought injunctive relief, rescission, or rescissory damages, dissemination certain information requested by the plaintiffs, and an award of plaintiffs’ costs, including attorneys’ fees and expenses. While PTI and Yumanity, Inc. believed that the disclosures set forth in the Registration Statement and Definitive Proxy complied fully with all applicable law and denied the allegations in the pending actions described

 

40

above, in order to moot plaintiffs’ disclosure claims, avoid nuisance and possible expense and business delays, and provide additional information to its stockholders, on December 9, 2020, PTI filed a Form 8-K voluntarily to supplement certain disclosures in the Definitive Proxy related to plaintiffs’ claims with the supplemental disclosures (the “Supplemental Disclosures”). Following the filing of the Supplemental Disclosures, all of the actions discussed above were voluntarily dismissed by the respective plaintiffs, with the exception of the Merritt action, in which the defendants have not yet been served with the complaint.

 

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Exhibit 99.4

YUMANITY HOLDINGS, LLC

INDEX TO FINANCIAL STATEMENTS

Financial Statements

Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheets			F-3
Consolidated Statements of Operations			F-4
Consolidated Statements of Comprehensive Loss			F-5
Consolidated Statements of Preferred Units and Members’ Deficit			F-6
Consolidated Statements of Cash Flows			F-7
Notes to Consolidated Financial Statements			F-8

 

 

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Members of Yumanity Holdings, LLC

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Yumanity Holdings, LLC and its subsidiary (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, of comprehensive loss, of preferred units and members’ deficit and of cash flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Substantial Doubt about the Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

September 23, 2020

We have served as the Company’s auditor since 2018.

 

F-2

Yumanity Holdings, LLC

Consolidated Balance Sheets

(In thousands, except unit amounts)

 

		December 31,
		2018				2019
Assets
Current assets:
Cash and cash equivalents		$	5,054			$	14,021
Marketable securities			34,911				1,347
Prepaid expenses and other current assets			356				681
Restricted cash			125				125
Total current assets			40,446				16,174
Property and equipment, net			1,439				1,017
Operating lease right-of-use assets			—				275
Deposits			115				40
Restricted cash			—				100
Total assets		$	42,000			$	17,606
Liabilities, Preferred Units and Members’ Deficit
Current liabilities:
Accounts payable		$	1,300			$	1,905
Accrued expenses and other current liabilities			1,825				2,421
Operating lease liabilities			—				291
Current portion of capital (finance) lease obligation			959				343
Current portion of long-term debt			1,389				—
Total current liabilities			5,473				4,960
Long-term debt, net of discount and current portion			8,564				14,470
Capital (finance) lease obligation, net of current portion			458				116
Preferred unit warrant liability			50				261
Total liabilities			14,545				19,807
Commitments and contingencies (Note 13)
Preferred units (Class A and B), 17,515,738 units authorized at December 31, 2018 and 2019; 12,391,101 units issued and outstanding at December 31, 2018 and 2019; liquidation preference of $90,712 at December 31, 2019			89,699				89,699
Members’ deficit:
Common units, 15,492,000 units authorized at December 31, 2018 and 2019; 10,278,698 and 10,259,344 units issued and outstanding at December 31, 2018 and 2019, respectively			3,575				5,120
Accumulated other comprehensive loss			(8	)			—
Accumulated members’ deficit			(65,811	)			(97,020	)
Total members’ deficit			(62,244	)			(91,900	)
Total liabilities, preferred units and members’ deficit		$	42,000			$	17,606

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3

Yumanity Holdings, LLC

Consolidated Statements of Operations

(In thousands)

 

		Year Ended December 31,
		2018				2019
Operating expenses:
Research and development		$	17,822			$	22,969
General and administrative			5,567				7,062
Total operating expenses			23,389				30,031
Loss from operations			(23,389	)			(30,031	)
Other income (expense):
Change in fair value of preferred unit warrant liability			6				12
Interest expense			(740	)			(1,209	)
Interest income and other income (expense), net			536				530
Loss on debt extinguishment			—				(511	)
Total other income (expense), net			(198	)			(1,178	)
Net loss		$	(23,587	)		$	(31,209	)

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4

Yumanity Holdings, LLC

Consolidated Statements of Comprehensive Loss

(In thousands)

 

		Year Ended December 31,
		2018				2019
Net loss		$	(23,587	)		$	(31,209	)
Other comprehensive income (loss):
Unrealized gains (losses) on marketable securities, net of tax of $0			(6	)			8
Comprehensive loss		$	(23,593	)		$	(31,201	)

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5

Yumanity Holdings, LLC

Consolidated Statements of Preferred Units and Members’ Deficit

(In thousands, except unit amounts)

 

		Class A and B Preferred Units								Common Units								Accumulated Other Comprehensive Gain (Loss)				Accumulated Members’ Deficit				Total Members’ Deficit
		Units				Amount				Units				Amount
Balances at December 31, 2017			8,075,629			$	53,657				10,338,698			$	2,678			$	(2	)		$	(42,224	)		$	(39,548	)
Issuance of Class B preferred units, net of issuance costs of $79			4,315,472				36,042				—				—				—				—				—
Forfeiture of unvested incentive units			—				—				(60,000	)			—				—				—				—
Equity-based compensation expense			—				—				—				897				—				—				897
Unrealized losses on marketable securities			—				—				—				—				(6	)			—				(6	)
Net loss			—				—				—				—				—				(23,587	)			(23,587	)
Balances at December 31, 2018			12,391,101				89,699				10,278,698				3,575				(8	)			(65,811	)			(62,244	)
Forfeiture of unvested incentive units			—				—				(19,354	)			—				—				—				—
Equity-based compensation expense			—				—				—				1,545				—				—				1,545
Unrealized gains on marketable securities			—				—				—				—				8				—				8
Net loss			—				—				—				—				—				(31,209	)			(31,209	)
Balances at December 31, 2019			12,391,101			$	89,699				10,259,344			$	5,120			$	—			$	(97,020	)		$	(91,900	)

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6