UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ |
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2018
OR
☐ |
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission File Number: 001-37833
Audentes Therapeutics , Inc.
(Exact name of registrant as specified in its charter)
Delaware |
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46-1606174 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification Number) |
600 California Street, 17th Floor
San Francisco, California 94108
(Address of principal executive offices and zip code)
(415) 818-1001
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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☐ |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31, 2018, there were 42,689,894 shares of the Registrant’s Common Stock, $0.00001 par value per share, outstanding.
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Page |
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Item 1. |
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Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017 |
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2 |
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3 |
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4 |
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Notes to Unaudited Interim Condensed Consolidated Financial Statements |
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5 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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14 |
Item 3. |
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24 |
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Item 4. |
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24 |
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Item 1. |
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25 |
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Item 1A. |
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25 |
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Item 2. |
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60 |
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Item 3. |
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60 |
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Item 4. |
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60 |
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Item 5. |
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60 |
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Item 6. |
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60 |
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61 |
1
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUDENTES THERAPEUTICS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except shares and per share amounts)
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September 30, 2018 |
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December 31, 2017 |
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Assets |
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(Unaudited) |
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Current assets: |
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Cash and cash equivalents |
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$ |
104,339 |
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$ |
38,967 |
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Short-term investments |
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176,347 |
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94,638 |
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Restricted cash |
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— |
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90 |
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Prepaid expenses and other current assets |
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4,642 |
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3,315 |
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Total current assets |
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285,328 |
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137,010 |
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Restricted cash - long-term |
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3,604 |
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3,604 |
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Long-term investments |
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1,252 |
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— |
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Property and equipment, net |
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30,653 |
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24,372 |
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Goodwill |
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3,631 |
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3,631 |
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Intangible assets |
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8,000 |
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8,000 |
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Other assets |
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5,305 |
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2,045 |
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Total assets |
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$ |
337,773 |
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$ |
178,662 |
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Liabilities and Stockholders' Equity |
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Current liabilities: |
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Accounts payable |
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$ |
3,224 |
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$ |
3,853 |
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Accrued liabilities |
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15,580 |
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8,832 |
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Contingent acquisition consideration payable |
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— |
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4,643 |
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Deferred rent |
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442 |
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384 |
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Total current liabilities |
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19,246 |
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17,712 |
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Deferred rent and asset retirement obligation - long-term |
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4,590 |
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3,278 |
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Contingent acquisition consideration payable - long-term |
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2,316 |
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- |
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Other long-term liabilities |
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52 |
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60 |
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Deferred tax liability, net |
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1,014 |
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1,014 |
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Total liabilities |
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27,218 |
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22,064 |
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Stockholders' equity: |
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Preferred stock, $0.00001 par value, 10,000,000 shares authorized as of September 30, 2018 and December 31, 2017; 0 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively |
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— |
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— |
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Common stock, $0.00001 par value, 300,000,000 shares authorized as of September 30, 2018 and December 31, 2017; 37,453,129 and 29,901,368 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively |
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— |
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— |
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Additional paid-in capital |
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594,480 |
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347,327 |
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Accumulated deficit |
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(283,878 |
) |
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(190,649 |
) |
Accumulated other comprehensive loss |
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(47 |
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(80 |
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Total stockholders' equity |
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310,555 |
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156,598 |
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Total liabilities and stockholders' equity |
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$ |
337,773 |
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$ |
178,662 |
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See accompanying notes to unaudited interim condensed consolidated financial statements.
2
AUDENTES THERAPEUTICS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except shares and per share amounts)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2018 |
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2017 |
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2018 |
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2017 |
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Operating expenses: |
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Unaudited |
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Research and development |
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$ |
29,918 |
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$ |
20,868 |
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$ |
76,157 |
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$ |
54,231 |
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General and administrative |
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7,817 |
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4,342 |
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20,617 |
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12,065 |
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Total operating expenses |
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37,735 |
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25,210 |
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96,774 |
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66,296 |
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Loss from operations |
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(37,735 |
) |
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(25,210 |
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(96,774 |
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(66,296 |
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Interest income, net |
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1,509 |
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221 |
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3,662 |
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483 |
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Other expense, net |
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(65 |
) |
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(20 |
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(117 |
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(50 |
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Net loss |
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(36,291 |
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(25,009 |
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(93,229 |
) |
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(65,863 |
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Unrealized (losses) gains on short-term investments |
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(4 |
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20 |
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33 |
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12 |
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Comprehensive loss |
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$ |
(36,295 |
) |
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$ |
(24,989 |
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$ |
(93,196 |
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$ |
(65,851 |
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Net loss per share, basic and diluted |
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$ |
(0.97 |
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$ |
(0.88 |
) |
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$ |
(2.57 |
) |
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$ |
(2.59 |
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Weighted-average number of shares used in computing net loss per share, basic and diluted |
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37,359,877 |
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28,388,145 |
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36,302,803 |
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25,476,261 |
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See accompanying notes to unaudited interim condensed consolidated financial statements.
3
AUDENTES THERAPEUTICS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
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Nine Months Ended September 30, |
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2018 |
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2017 |
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Cash flows from operating activities: |
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Unaudited |
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Net loss |
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$ |
(93,229 |
) |
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$ |
(65,863 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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3,948 |
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2,410 |
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Stock-based compensation |
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12,115 |
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4,053 |
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Accretion of discount on marketable securities |
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(856 |
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(174 |
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Change in fair value of contingent acquisition consideration payable |
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(2,327 |
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160 |
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Other |
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83 |
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272 |
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Changes in operating assets and liabilities: |
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Prepaid expenses and other current assets |
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(1,212 |
) |
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(976 |
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Other assets |
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(3,260 |
) |
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(2,000 |
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Accounts payable |
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(724 |
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1,211 |
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Accrued liabilities |
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4,635 |
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(1,547 |
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Deferred rent and asset retirement obligation |
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1,332 |
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1,187 |
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Net cash used in operating activities |
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(79,495 |
) |
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(61,267 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(8,074 |
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(5,031 |
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Proceeds from maturities of marketable securities |
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127,880 |
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83,528 |
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Purchases of marketable securities |
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(209,952 |
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(117,374 |
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Net cash used in investing activities |
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(90,146 |
) |
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(38,877 |
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Cash flows from financing activities: |
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Proceeds from exercise of stock options |
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3,199 |
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643 |
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Proceeds from issuance of common stock, net of offering costs |
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231,724 |
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117,023 |
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Net cash provided by financing activities |
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234,923 |
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117,666 |
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Net increase in cash, cash equivalents and restricted cash |
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65,282 |
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17,522 |
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Cash, cash equivalents and restricted cash at beginning of period |
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42,661 |
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40,109 |
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Cash, cash equivalents and restricted cash at end of period |
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$ |
107,943 |
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$ |
57,631 |
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Noncash investing and financing activities: |
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Change in accounts payable, accrued liabilities and facility lease obligations related to property and equipment purchases |
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$ |
2,200 |
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$ |
1,158 |
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Deferred financing costs for follow-on offering |
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$ |
115 |
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$ |
— |
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Issuance of common stock warrant related to debt financing facility |
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$ |
— |
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$ |
83 |
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See accompanying notes to unaudited interim condensed consolidated financial statements.
4
AUDENTES THERAPEUTICS, INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
1. |
Organization and Basis of Presentation |
Audentes Therapeutics, Inc., or the Company, was incorporated in the State of Delaware on November 13, 2012. The Company is a clinical stage biotechnology company focused on developing and commercializing innovative gene therapy products for patients living with serious, life-threatening rare diseases caused by single gene defects. The Company operates in one business segment, with its corporate headquarters located in San Francisco, California and its manufacturing and research operations located in South San Francisco, California.
The accompanying consolidated financial statements include the accounts of Audentes Therapeutics, Inc., and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Equity Offerings
On January 29, 2018, the Company completed an underwritten public offering of 6,612,500 shares of common stock (inclusive of 862,500 shares of common stock pursuant to the underwriters’ option to purchase additional shares) at a price of $35.00 per share. The aggregate net proceeds received by the Company were $217.2 million, net of underwriting discounts, commissions and offering costs.
On March 29, 2018, the Company filed an automatic universal shelf registration statement. Pursuant to the registration statement, the Company entered into an “at-the-market” program and sales agreement, or ATM, with Cowen and Company, LLC., or Cowen, under which the Company may, from time to time, offer and sell common stock having an aggregate offering value of up to $150.0 million. During the nine months ended September 30, 2018, the Company sold 400,024 shares of common stock under the ATM for aggregate net proceeds of $14.6 million.
Liquidity
In the course of its development activities, the Company has sustained operating losses and expects such losses to continue over the next several years. The Company’s ultimate success largely depends on the outcome of its research and development activities. The Company has incurred net losses from operations since inception and as of September 30, 2018 had an accumulated deficit of $283.9 million. The Company intends to raise additional capital through the issuance of additional equity, borrowing under debt arrangements, or potentially through strategic alliances with partner companies. If additional financing is not available at adequate levels or on acceptable terms, the Company may need to reevaluate its operating plans. Management believes its currently available resources will provide sufficient funds to enable the Company to meet its operating plans for at least the next twelve months. However, if the Company’s anticipated operating results are not achieved in future periods, planned expenditures may need to be reduced in order to extend the time period over which the then-available resources would be able to fund the Company’s operations.
2. |
Summary of Significant Accounting Policies |
There were no significant changes to the accounting policies during the nine months ended September 30, 2018, from the significant accounting policies described in Note 2 of the “Notes to Consolidated Financial Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Basis of Preparation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, and applicable rules and regulations of the SEC regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2017 has been derived from audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the Company’s financial information. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other interim period or for any other future year.
The accompanying unaudited interim condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2017 included in the Company’s audited financial statements filed in its Annual Report on Form 10-K for the year ended December 31, 2017.
5
Use of Estimates
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of any expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to accrued liabilities, acquisition contingent consideration, income taxes, and stock-based compensation. Management bases its estimates on historical experience, and on various other market-specific relevant assumptions that management believes to be reasonable, under the circumstances. Actual results may differ from those estimates.
Concentration of Manufacturing and Third-Party Services Risk
The Company is subject to certain risks with respect to sources of supply of manufactured materials and drug product for use in its preclinical and clinical studies. Due to the technical aspects of manufacturing drug product for gene therapies, there exist few alternative sources of manufacturing. The Company is reliant upon its own internal manufacturing capability and a small number of third-party vendors to produce drug product in sufficient quantities and quality to conduct its research and development activities.
Recent Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting , which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. This pronouncement will become effective for the Company beginning January 1, 2019, with earlier adoption permitted, although no earlier than the adoption date of Topic 606. It is the Company’s expectation that adoption of this pronouncement will not have a material impact to its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment , which eliminates Step 2 from the goodwill impairment test. In addition, ASU 2017-04 eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures . It is the Company’s expectation that adoption of this pronouncement will not have a material impact to its consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash . The amendments in this update require that amounts generally described as restricted cash and restricted cash equivalents to be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 became effective January 1, 2018. As a result of adopting ASU 2016-18, the Company includes its restricted cash balance in the cash and cash equivalents reconciliation of operating, investing and financing activities.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, (with the exception of leases with terms of 12 months or less) at the commencement date, lessees will be required to recognize a lease liability and a right-of-use asset. Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This pronouncement will become effective for the Company beginning January 1, 2019. Early adoption is permitted. The pronouncement requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. During March 2018, the FASB approved amendments to create an optional transition method that will provide an option to use the effective date of Topic 842 as the date of initial application of the transition. The Company established an implementation team that has been reassessing business processes, drafting an internal policy to address the new standard, determining a process to identify and update the Company’s incremental borrowing rate and understanding the impact on disclosures. The team is also determining which practical expedients to elect. The Company is still finalizing its evaluation of the impact of the new lease standard on its consolidated financial statements and related disclosures.
6
3. Investments
Investments consist of available-for-sale securities as follows:
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September 30, 2018 |
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Amortized Cost |
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Unrealized Gains |
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Unrealized Losses |
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Fair Value |
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(in thousands) |
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Commercial paper |
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$ |
56,137 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
56,137 |
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Corporate securities |
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|
36,488 |
|
|
|
1 |
|
|
|
(17 |
) |
|
|
36,472 |
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U.S. treasury bills |
|
|
42,251 |
|
|
|
— |
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|
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(12 |
) |
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|
42,239 |
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U.S. government agency securities |
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|
26,178 |
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|
|
— |
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(6 |
) |
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|
26,172 |
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U.S. agency bonds |
|
|
13,601 |
|
|
|
— |
|
|
|
(11 |
) |
|
|
13,590 |
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U.S. agency discount securities |
|
|
2,989 |
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|
|
— |
|
|
|
- |
|
|
|
2,989 |
|
Total available-for-sale securities |
|
$ |
177,644 |
|
|
$ |
1 |
|
|
$ |
(46 |
) |
|
$ |
177,599 |
|
|
|
December 31, 2017 |
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Amortized Cost |
|
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Unrealized Gains |
|
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Unrealized Losses |
|
|
Fair Value |
|
||||
|
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(in thousands) |
|
|||||||||||||
Commercial paper |
|
$ |
38,552 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
38,552 |
|
Corporate securities |
|
|
23,812 |
|
|
|
— |
|
|
|
(40 |
) |
|
|
23,772 |
|
U.S. treasury bills |
|
|
17,875 |
|
|
|
— |
|
|
|
(24 |
) |
|
|
17,851 |
|
U.S. government agency securities |
|
|
14,479 |
|
|
|
— |
|
|
|
(16 |
) |
|
|
14,463 |
|
Total available-for-sale securities |
|
$ |
94,718 |
|
|
$ |
— |
|
|
$ |
(80 |
) |
|
$ |
94,638 |
|
|
|
|
|
|
|
|
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|
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|
The Company’s long-term investments as of September 30, 2018 consist of U.S. agency bonds.
4. Fair Value Measurements
Fair value accounting is applied for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Financial instruments include cash and cash equivalents, restricted cash, accounts payable and accrued liabilities that approximate fair value due to their relatively short maturities.
Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 – Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3 – Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
7
Assets Measured at Fair Value
Financial assets subject to fair value measurements on a recurring basis and the level of inputs used in such measurements are as follows:
|
|
September 30, 2018 |
|
|||||||||||||
|
|
Fair Value Measurements Using |
|
|||||||||||||
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Money market funds |
|
$ |
45,061 |
|
|
$ |
45,061 |
|
|
$ |
— |
|
|
$ |
— |
|
Commercial paper |
|
|
86,537 |
|
|
|
— |
|
|
|
86,537 |
|
|
|
— |
|
Corporate securities |
|
|
41,174 |
|
|
|
— |
|
|
|
41,174 |
|
|
|
— |
|
U.S. treasury bills |
|
|
42,239 |
|
|
|
— |
|
|
|
42,239 |
|
|
|
— |
|
U.S. government agency securities |
|
|
36,168 |
|
|
|
— |
|
|
|
36,168 |
|
|
|
— |
|
Agency bond instruments |
|
|
17,941 |
|
|
|
— |
|
|
|
17,941 |
|
|
|
— |
|
Agency discount instruments |
|
|
5,482 |
|
|
|
— |
|
|
|
5,482 |
|
|
|
— |
|
Total financial assets |
|
$ |
274,602 |
|
|
$ |
45,061 |
|
|
$ |
229,541 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017 |
|
|||||||||||||
|
|
Fair Value Measurements Using |
|
|||||||||||||
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Money market funds |
|
$ |
16,075 |
|
|
$ |
16,075 |
|
|
$ |
— |
|
|
$ |
— |
|
Commercial paper |
|
|
46,423 |
|
|
|
— |
|
|
|
46,423 |
|
|
|
— |
|
Corporate securities |
|
|
23,772 |
|
|
|
— |
|
|
|
23,772 |
|
|
|
— |
|
U.S. treasury bills |
|
|
17,851 |
|
|
|
— |
|
|
|
17,851 |
|
|
|
— |
|
U.S. government agency securities |
|
|
14,463 |
|
|
|
— |
|
|
|
14,463 |
|
|
|
— |
|
Total financial assets |
|
$ |
118,584 |
|
|
$ |
16,075 |
|
|
$ |
102,509 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The financial assets listed above do not include cash held in the Company’s primary operating bank accounts of $7.3 million and $15.0 million as of September 30, 2018 and December 31, 2017, respectively.
Liabilities Measured at Fair Value
The Company’s contingent acquisition consideration payable, resulting from the acquisition of Cardiogen Sciences, Inc., or Cardiogen, in August 2015, is estimated using a probability-based income approach utilizing an appropriate discount rate. Key assumptions used by management to estimate the fair value of contingent acquisition consideration payable include estimated probability of occurrence, the estimated timing of when the milestone may be attained and assumed discount period and discount rate, which are Level 3 inputs. Changes in the fair value of the contingent acquisition consideration payable, resulting from management’s revision of key assumptions are recorded in research and development expense in the consolidated statement of operations and comprehensive loss. The probability-based income approach used by management to estimate the fair value of the contingent acquisition consideration is most sensitive to changes in the estimated probability of occurrence. The Company revised its estimated probability and the timing for triggering a milestone payment pursuant to the Cardiogen acquisition agreement in the first and second quarter of 2018, respectively, that resulted in a $2.3 million decrease to the estimated fair value of the contingent liability and a corresponding $2.3 million reduction of research and development expenses. The change in estimate was attributable to the Company’s assessment of various factors related to the CPVT program, including an evaluation of ongoing patient identification efforts, and how those efforts may affect the timing and decisions regarding resource allocation among the Company’s various product development candidates.
In conjunction with this assessment, the Company also considered the potential impact on the valuation of the indefinite lived intangible asset associated with the intellectual property and determined that there was no impairment.
8
The following is a summary of the contingent acquisition consideration payable recorded in the accompanying consolidated ba lance sheets:
|
|
|
|
Amount |
|
|
|
|
|
|
(in thousands) |
|
|
Balance, December 31, 2017 |
|
|
|
$ |
4,643 |
|
Change in fair value of contingent acquisition consideration payable |
|
|
(2,327 |
) |
||
Balance, September 30, 2018 |
|
|
|
$ |
2,316 |
|
5. |
Balance Sheet Components |
Property and Equipment, Net
Property and equipment, net, consist of the following:
|
|
September 30, 2018 |
|
|
December 31, 2017 |
|
||
|
|
(in thousands) |
|
|||||
|
|
|
|
|
|
|
|
|
Furniture and office equipment |
|
$ |
1,398 |
|
|
$ |
1,049 |
|
Computer equipment |
|
|
918 |
|
|
|
160 |
|
Software |
|
|
495 |
|
|
|
305 |
|
Leasehold improvements |
|
|
19,944 |
|
|
|
13,368 |
|
Laboratory equipment |
|
|
8,262 |
|
|
|
5,698 |
|
Manufacturing equipment |
|
|
6,405 |
|
|
|
5,996 |
|
Construction in progress and deposits on equipment |
|
|
2,229 |
|
|
|
2,899 |
|
Total property and equipment |
|
|
39,651 |
|
|
|
29,475 |
|
Less accumulated depreciation and amortization |
|
|
(8,998 |
) |
|
|
(5,103 |
) |
Property and equipment, net |
|
$ |
30,653 |
|
|
$ |
24,372 |
|
|
|
|
|
|
|
|
|
|
Property and equipment depreciation and amortization expense for the three months ended September 30, 2018 and 2017 was $1.5 million and $0.9 million, respectively. Property and equipment depreciation and amortization expense for the nine months ended September 30, 2018 and 2017 was $3.9 million and $2.4 million, respectively.
Accrued Liabilities
Accrued liabilities consist of the following:
|
|
September 30, 2018 |
|
|
December 31, 2017 |
|
||
|
|
(in thousands) |
|
|||||
|
|
|
|
|
|
|
|
|
Accrued payroll and related expenses |
|
$ |
6,508 |
|
|
$ |
5,460 |
|
Accrued research and development expenses |
|
|
6,074 |
|
|
|
2,590 |
|
Accrued property and equipment |
|
|
2,105 |
|
|
|
540 |
|
Accrued professional services |
|
|
700 |
|
|
|
162 |
|
Other |
|
|
193 |
|
|
|
80 |
|
Total accrued liabilities |
|
$ |
15,580 |
|
|
$ |
8,832 |
|
|
|
|
|
|
|
|
|
|
Facility Lease Obligations
Long-term deferred rent and asset retirement obligations consist of the following:
|
|
September 30, 2018 |
|
|
December 31, 2017 |
|
||
|
|
(in thousands) |
|
|||||
|
|
|
|
|
|
|
|
|
Deferred rent |
|
$ |
4,078 |
|
|
$ |
2,535 |
|
Asset retirement obligation |
|
|
512 |
|
|
|
743 |
|
|
|
$ |
4,590 |
|
|
$ |
3,278 |
|
|
|
|
|
|
|
|
|
|
9
6. |
License and Collaboration Agreements |
During the three months ended March 31, 2018, the Company paid a $0.4 million milestone that was triggered by the first clinical dosing of a patient for the Crigler-Najjar program. There were no further milestone payments during the nine months ended September 30, 2018. For more information regarding the Company’s material license and collaboration agreements, see Note 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
7. Stock Compensation and Employee Benefit Plans
Stock-based compensation expense by category was as follows for the three and nine months ended September 30, 2018 and 2017:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Research and development |
|
$ |
2,611 |
|
|
$ |
956 |
|
|
$ |
6,930 |
|
|
$ |
2,321 |
|
General and administrative |
|
|
2,022 |
|
|
|
574 |
|
|
|
5,185 |
|
|
|
1,732 |
|
Total stock-based compensation expense |
|
$ |
4,633 |
|
|
$ |
1,530 |
|
|
$ |
12,115 |
|
|
$ |
4,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees |
|
$ |
4,285 |
|
|
$ |
1,492 |
|
|
$ |
11,656 |
|
|
$ |
3,951 |
|
Non-employees |
|
|
348 |
|
|
|
38 |
|
|
|
459 |
|
|
|
102 |
|
Total stock-based compensation expense |
|
$ |
4,633 |
|
|
$ |
1,530 |
|
|
$ |
12,115 |
|
|
$ |
4,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive Plans
Under the Company’s 2012 Equity Incentive Plan, or the 2012 Plan, a total of 3,107,517 shares were reserved for issuance. In July 2016, the Company ceased granting awards under the 2012 Plan and rolled the remaining 705,862 shares available for grant into the 2016 Equity Incentive Plan, or 2016 Plan, which was adopted on July 18, 2016. Under the terms of the 2012 Plan, options were granted at an exercise price not less than fair market value. For employees holding more than 10% of the voting rights of all classes of stock, the exercise prices for incentive and non-statutory stock options were not to be less than 110% of fair market value, as determined by the board of directors. The terms of options granted under the 2012 Plan do not exceed ten years. As options from the 2012 Plan are forfeited or canceled, they are rolled into the 2016 Plan.
A total of 1,500,000 shares were reserved for issuance under the 2016 Plan in addition to the 705,862 shares rolled into the 2016 Plan from the 2012 Plan. At September 30, 2018, 1,208,258 shares were available for future grant. The number of shares reserved for issuance under the 2016 Plan will increase automatically on January 1 of each calendar year continuing through the tenth calendar year during the term of the 2016 Plan by a number of shares equal to 5% of the total outstanding shares of the Company’s common stock as of the immediately preceding December 31. However, the board of directors at its discretion may reduce the amount of increase in any particular year. On January 1, 2018, 1,495,068 additional shares were added to the 2016 Plan reserve for issuance per this provision. Under the terms of the 2016 Plan, in general, options vest over a four-year period. However, options may vest based on time or achievement of performance conditions. The term of options granted under the 2016 Plan is limited to ten years.
10
The following table summarizes option activity for the nine months en ded September 30, 2018 :
|
|
Shares Available for Grant |
|
|
Number of Options Outstanding |
|
|
Weighted- Average Exercise Price Per Option |
|
|
Weighted- Average Remaining Contract Term (Years) |
|
|
Aggregate Intrinsic Value |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
Balance, December 31, 2017 |
|
|
202,547 |
|
|
|
5,073,132 |
|
|
$ |
15.03 |
|
|
|
8.53 |
|
|
$ |
82,271 |
|
Increase to authorized shares |
|
|
1,495,068 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(703,000 |
) |
|
|
703,000 |
|
|
$ |
35.72 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
— |
|
|
|
(533,437 |
) |
|
$ |
6.00 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
213,417 |
|
|
|
(213,417 |
) |
|
$ |
19.54 |
|
|
|
|
|
|
|
|
|
Options cancelled |
|
|
226 |
|
|
|
(226 |
) |
|
$ |
27.39 |
|
|
|
|
|
|
|
|
|
Balance, September 30, 2018 |
|
|
1,208,258 |
|
|
|
5,029,052 |
|
|
$ |
18.69 |
|
|
|
8.25 |
|
|
$ |
105,220 |
|
Exercisable, September 30, 2018 |
|
|
|
|
|
|
2,020,481 |
|
|
$ |
11.43 |
|
|
|
7.47 |
|
|
$ |
56,902 |
|
Vested and expected to vest, September 30, 2018 |
|
|
|
|
|
|
4,708,937 |
|
|
$ |
18.14 |
|
|
|
8.20 |
|
|
$ |
101,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic values of options outstanding, exercisable, vested and expected to vest were calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of September 30, 2018. During the nine months ended September 30, 2018, options to purchase 533,437 shares of common stock with an intrinsic value of approximately $16.3 million were exercised, generating approximately $3.2 million of cash received.
The weighted average grant date fair value of employee options granted during the three months ended September 30, 2018 and 2017 was $24.20 and $15.49 per share, respectively. The weighted average grant date fair value of employee options granted during the nine months ended September 30, 2018 and 2017 was $23.61 and $11.48 per share, respectively. As of September 30, 2018, the total unrecognized compensation expense related to unvested employee options, net of estimated forfeitures, was approximately $37.7 million, which the Company expects to recognize over an estimated weighted average period of 2.61 years. To the extent the actual forfeiture rate is different from what the Company has estimated, stock-based compensation related to these awards will be different from its expectations.
The fair value of stock options granted to employees was estimated using a Black-Scholes option pricing model with the following assumptions:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||
|
|
2018 |
|
|
2017 |
|
2018 |
|
2017 |
|
Expected term (in years) |
|
|
6.1 |
|
|
6.0-6.1 |
|
5.5-6.1 |
|
5.8-6.1 |
Expected volatility |
|
70% |
|
|
76-77% |
|
70-76% |
|
76-78% |
|
Risk-free interest rate |
|
2.8-3.0% |
|
|
1.9-2.0% |
|
2.3-3.0% |
|
1.9-2.2% |
|
Expected dividend yield |
|
0% |
|
|
0% |
|
0% |
|
0% |
|
|
|
|
|
|
|
|
|
|
|
|
There were no non-employee options granted during the three and nine months ended September 30, 2018 and 2017. Options and awards to non-employees are recorded at fair value and remeasured at the end of each period. As of September 30, 2018, the total unrecognized compensation expense related to unvested non-employee options was approximately $1.5 million, which the Company expects to recognize over an estimated weighted average period of 2.00 years. To the extent the actual forfeiture rate is different from what the Company has estimated, stock-based compensation related to these awards will be different from its expectations.
The fair value of stock options for non-employees was estimated using a Black-Scholes option pricing model with the following assumptions:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||
|
|
2018 |
|
2017 |
|
2018 |
|
2017 |
Expected term (in years) |
|
6.5-9.2 |
|
7.8-8.6 |
|
6.5-9.2 |
|
6.7-9.1 |
Expected volatility |
|
69-71% |
|
76-90% |
|
69-75% |
|
76-91% |
Risk-free interest rate |
|
2.8-3.1% |
|
2.0-2.2% |
|
2.3-3.1% |
|
2.0-2.4% |
Expected dividend yield |
|
0% |
|
0% |
|
0% |
|
0% |
|
|
|
|
|
|
|
|
|
11
2016 Employee Stock Purchase Plan
On July 19, 2016, the 2016 Employee Stock Purchase Plan, or the 2016 ESPP was adopted. The Company initially reserved 210,000 shares of common stock for issuance under the 2016 ESPP. The number of shares reserved for issuance under the 2016 ESPP will increase automatically on January 1 of each calendar year beginning after the first offering date and continuing through the first ten calendar years by the number of shares equal to 1% of the total outstanding shares of the Company’s common stock as of the immediately preceding December 31.
The 2016 ESPP commenced on May 1, 2018. Under the 2016 ESPP, employees may purchase common stock through payroll deductions at a price equal to 85% of the lower of the fair market value at the beginning of the offering period or at the end of each applicable purchase period. The 2016 ESPP generally provides for offering periods of six months in duration with purchase periods ending on either May 15 or November 15. Contributions under the 2016 ESPP are limited to a maximum of 15% of an employee’s eligible compensation and purchases are settled with common stock from the ESPP’s previously authorized and available pool of shares. The expense for the three and nine months ended September 30, 2018 was based on the fair value of rights granted upon the commencement of an offering and calculated using the following assumptions: expected term in years is 0.5; volatility is 63.5%; the risk-free interest rate is 2.09%; and no dividend yield.
Employee Benefit Plan
Defined Contribution Plans – The Company sponsors a defined contribution Section 401(k) plan for its employees. The plan provides for the elective deferral of employee compensation under Section 401(k) of the Internal Revenue Code of 1986, as amended (“Section 401(k)”), and a Company discretionary matching contribution. The discretionary matching contribution was implemented by the Company during the first quarter of 2018. Direct costs related to this defined contribution plan were $0.2 million and $1.0 million for the three and nine months ended September 30, 2018. There were no direct costs for the three and nine months ended September 30, 2017.
Common Stock Warrants
During the nine months ended September 30, 2018, 9,914 common stock warrants, previously granted pursuant to a committed debt arrangement, with an exercise price of $15.13, were exercised on a cashless basis at a fair market value of $36.47 per share, resulting in the issuance of 5,800 shares of common stock.
8. |
Income Taxes |
The Company did not record a federal or state income tax provision or benefit for the nine months ended September 30, 2018 and 2017 as it has incurred net losses since inception. In addition, the net deferred tax assets generated from net operating losses have been fully reserved as the Company believes it is not more likely than not that the benefit will be realized.
9. |
Commitments and Contingencies |
In August 2018, the Company entered into a lease agreement for approximately 37,071 square feet of research and development office and warehouse space in South San Francisco, California, that commences in May 2019 for an eight-year term with minimum aggregate lease payments of $7.9 million.
In April 2016, the Company entered into a sublease agreement for approximately 8,983 square feet of research and development laboratory space in South San Francisco, California with an initial term that expired in January 2018. In July 2017, the Company executed a long-term lease agreement for this space, plus an additional 17,570 square feet for an aggregate space of 26,553 square feet, that commenced in February 2018 for an eight-year term with minimum aggregate lease payments of $13.5 million.
12
10. Net Loss per Share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period and excludes any potential dilutive effects of common stock equivalents. Diluted net loss per share is computed giving effect to all potential dilutive common shares, including common stock issuable upon exercise of stock options, convertible preferred stock, and unvested restricted common stock. As the Company had net losses for the three and nine months ended September 30, 2018 and 2017, all potential common shares were determined to be anti-dilutive and were therefore excluded from the calculation of diluted net loss per share.
The following table sets forth the computation of basic and diluted net loss per share of common stock during the nine months ended September 30, 2018 and 2017:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
|
|
(in thousands, except per share data) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(36,291 |
) |
|
$ |
(25,009 |
) |
|
$ |
(93,229 |
) |
|
$ |
(65,863 |
) |
Weighted-average number of shares used in computing net loss per share |
|
|
37,359,877 |
|
|
|
28,388,145 |
|
|
|
36,302,803 |
|
|
|
25,476,261 |
|
Net loss per share, basic and diluted |
|
$ |
(0.97 |
) |
|
$ |
(0.88 |
) |
|
$ |
(2.57 |
) |
|
$ |
(2.59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been anti-dilutive:
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2018 |
|
|
2017 |
|
||
|
|
|
|
|
|
|
|
|
Stock options to purchase common stock |
|
|
5,029,052 |
|
|
|
3,689,020 |
|
Common stock warrants |
|
|
— |
|
|
|
9,914 |
|
|
|
|
5,029,052 |
|
|
|
3,698,934 |
|
|
|
|
|
|
|
|
|
|
11. Related Party Transactions
There were no material related party transactions during the three and nine months ended September 30, 2018 and 2017.
12. Subsequent Events
On October 11, 2018, the Company completed an underwritten public offering of 5,980,000 shares of common stock (inclusive of 780,000 shares of common stock pursuant to the underwriters’ option to purchase additional shares exercised on November 2, 2018) at a price of $29.00 per share. The aggregate net proceeds received were approximately $162.8 million, net of underwriting discounts, commissions and estimated offering costs.
On October 30, 2018, the Company’s board of directors approved the 2018 Equity Inducement Plan, or 2018 Plan. The number of shares available for awards under the 2018 Plan was set to 1,250,000. The exercise price of each stock-based award issued under the 2018 Plan is required to be no less than the fair value of the Company’s common stock on the date of grant. The vesting and exercise provisions of options or restricted awards granted are determined individually with each grant. Stock options have a 10-year life and expire if not exercised within that period or if not exercised within three months of cessation of employment with the Company or such longer period of time as specified in the option agreement.
13
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of this Quarterly Report on Form 10-Q. These forward-looking statements may include, but are not limited to, statements regarding our future results of operations and financial position, business strategy, market size, potential growth opportunities, timing and results of preclinical and clinical development activities, and potential regulatory approval and commercialization of product candidates. In some cases, forward looking-statements may be identified by terminology such as “believe,” “may,” “will,” “should”, “predict”, “goal”, “strategy”, “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect,” “seek” and similar expressions and variations thereof. These words are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.
As used in this Quarterly Report on Form 10-Q, the terms “Audentes,” “the Company,” “we,” “us,” and “our” refer to Audentes Therapeutics, Inc. and, where appropriate, its consolidated subsidiary, unless the context indicates otherwise.
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report and with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2017, included in our Annual Report on Form 10-K .
Business Overview
We are a clinical stage biotechnology company focused on developing and commercializing gene therapy products for patients living with serious, life-threatening rare diseases caused by single gene defects. We believe that gene therapy has powerful potential to treat these diseases through delivery of a functional copy of the gene to affected cells, resulting in production of the normal protein. We have built a compelling portfolio of product candidates, including AT132 for the treatment of X-Linked Myotubular Myopathy, or XLMTM, AT982 for the treatment of Pompe disease, AT342 for the treatment of Crigler-Najjar Syndrome, or Crigler-Najjar, and AT307 for the treatment of the CASQ2 subtype of Catecholaminergic Polymorphic Ventricular Tachycardia, or CASQ2-CPVT. We have ongoing Phase 1/2 clinical trials of AT132 for the treatment of XLMTM and AT342 for the treatment of Crigler-Najjar. We have an active Investigational New Drug application, or IND, for AT307 for the treatment of CASQ2-CPVT, and we are conducting IND-enabling preclinical studies of AT982 for the treatment of Pompe disease, for which we plan to submit an IND in 2019. We have a research initiative underway focused on the design and development of a novel AAV-based therapeutic for a rare neuromuscular disease with significant unmet medical need and meaningful commercial potential. We maintain full global rights to all of our product candidates.
We have developed a proprietary in-house cGMP manufacturing capability to produce our adeno-associated viral vector, or AAV, product candidates, providing us with a core strategic capability, and enabling superior control over development timelines, costs and intellectual property. Our manufacturing facility is located in South San Francisco and supports our process and analytical development, fill-finish, quality control testing and manufacturing operations in accordance with current Good Manufacturing Practices, or cGMP, requirements. We have designed and commissioned the facility to support the unique licensing requirements as promulgated by both the U.S. Food and Drug Administration, or FDA, and European Medicines Agency, or EMA, and we have initiated Biologic License Application, or BLA, readiness and validation activities for our XLMTM program. Operating at a 2x500 liter bioreactor scale, we believe our current manufacturing capacity is sufficient to meet the anticipated global commercial demands of our XLMTM and Crigler Najjar product candidates, and the development needs of our Pompe disease program and our research
14
initiative for a rare neuromuscular disease . Additionally, we have the ability to add up to 5,000 liters of additional capa city within our existing lease footprint. We plan to continue investment in these capabilities to maintain our manufacturing leadership and enable the cost-effective production of high-quality AAV vectors to support our clinical development and commerciali zation activities.
AT132
On October 5, 2018, we presented new positive interim data from ASPIRO, our Phase 1/2 clinical study of AT132 in XLMTM, at the 23rd International Annual Congress of the World Muscle Society (WMS). The data reported in this presentation included follow-up assessments ranging from 4 to 48 weeks for the first eight patients enrolled in ASPIRO, including the seven patients enrolled in Cohort 1 (1x10 14 vg/kg dose; six treated and one untreated control) and one patient enrolled to date in Cohort 2 (3x10 14 vg/kg dose). Key assessments included neuromuscular function as measured by CHOP INTEND; respiratory function as measured by maximal inspiratory pressure (MIP) and ventilator dependence; and vector transduction, transgene expression and histological improvement as assessed via muscle biopsy.
As of the WMS presentation, AT132 was generally well tolerated with a manageable safety profile at doses up to 3x10 14 vg/kg. Data showed significant improvements in neuromuscular and respiratory function as assessed via CHOP INTEND and MIP in all treated patients, including the Cohort 2 sentinel patient. All treated patients in Cohort 1 showed significant reductions in ventilator use, and three patients had achieved ventilator independence. Week 24 muscle biopsies showed evidence of highly efficient tissue transduction as indicated by vector copy number and robust myotubularin protein expression as assessed by Western blot. Histological analyses also showed significant improvements in myofiber size, nuclear peripheralization and organelle localization .
Subsequent to the presentation at WMS, we have completed enrollment in Cohort 2 of ASPIRO, including three patients treated at a dose of 3x10 14 vg/kg and one untreated control patient. In the fourth quarter of 2018, we plan interactions with the U.S. Food and Drug Administration (FDA) and the European Medicines Agency (EMA) under our recently awarded RMAT and PRIME designations, respectively. Our goal in these meetings is to initiate discussions regarding the development plans and potential registration pathway for AT132.
AT982
Earlier in the year, we presented the results of a comprehensive construct selection study conducted in a Pompe mouse model, and subsequently announced our intent to progress an AT982 candidate vector into clinical development. This vector incorporated a novel hybrid promoter designed to express the GAA protein in skeletal and cardiac muscle, and the nervous system, and included a liver enhancer element which was shown in animal models to provide a favorable immunogenicity profile. In order to
15
strengthen our planned global clinical trial applications, we also announced our intent to conduct a toxicology study in non-human primates, or NHPs, to support our expanded vision to develop AT982 for both infantile and late onset Pompe disease patients. Last quarter, we reported that d uring the conduct of this NHP study, we observed a dose-dependent safety signal, resulting in the early termination of the study .
A thorough analysis of our nonclinical studies has now been completed, and we have determined the mechanism of the dose dependent safety signal observed in the NHP toxicology study. Additional IND-enabling studies are underway in the Pompe mouse model and we plan to file an IND in our Pompe program in 2019.
License Agreements
We have built our portfolio of product candidates in part by engaging in license and collaboration agreements as well as strategic transactions with third parties. In July 2013, we entered into a license agreement with REGENXBIO Inc., or REGENXBIO, pursuant to which we obtained intellectual property rights related to AT132 and AT982. In January 2014, we entered into an agreement with Genethon pursuant to which we acquired intellectual property rights related to AT132 in exchange for the payment of certain development milestones and royalties on net sales. In August 2015, in connection with our acquisition of Cardiogen Sciences, Inc., or Cardiogen, we acquired a license agreement with Fondazione Salvatore Maugeri, or FSM, pursuant to which we obtained a license to FSM’s intellectual property rights related to AT307 and certain other products that we may develop related to the treatment of several additional inherited arrhythmias. That agreement was subsequently amended in May 2017 with FSM’s successor, Istituti Clinici Scientifici Maugeri S.p.A SB, or ICSM, providing us with rights to develop gene therapies in indications related to CPVT along with an option for development in additional cardiac indications. In November 2015, we entered into two additional license agreements with REGENXBIO, pursuant to which we obtained intellectual property rights related to AT307 and AT342. In May 2016, we entered into a license and collaboration agreement with The Trustees of the University of Pennsylvania, or the University of Pennsylvania, pursuant to which we obtained a license to develop and commercialize a gene therapy product for Crigler-Najjar.
Under these licensing, collaboration, and strategic arrangements for technologies that are incorporated into our product candidates, we are contractually committed to payments for licensing fees, services, and royalties, in addition to contingent payments upon achievement of certain development and commercialization milestones.
Financial Overview
Since our inception, we have devoted substantially all of our resources to: identifying, acquiring, and developing our product candidate portfolio; organizing and staffing our company; raising capital; developing our manufacturing capabilities; and providing general and administrative support for these operations. We have never generated revenue and have incurred significant net losses since inception. We do not expect to receive any revenue from any product candidates that we develop until we obtain regulatory approval and commercialize our product candidates or enter into collaborative agreements with third parties. Our net losses were $90.2 million, $59.7 million and $26.5 million for the years ended December 31, 2017, 2016 and 2015, respectively, and $93.2 million and $65.9 million for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, we had an accumulated deficit of $283.9 million. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially as we:
|
• |
invest significantly to further develop and seek regulatory approval for our existing product candidates; |
|
• |
further expand our pipeline of potential product candidates; |
|
• |
continue to develop our proprietary in-house manufacturing facility and capabilities; |
|
• |
hire additional clinical, scientific, management and administrative personnel; |
|
• |
seek regulatory and marketing approvals for any product candidates that we may develop; |
|
• |
ultimately establish a sales, marketing and distribution infrastructure to commercialize any drugs for which we may obtain marketing approval; |
|
• |
maintain, expand and protect our intellectual property portfolio; |
|
• |
acquire or in-license other assets and technologies; and |
|
• |
add additional operational, financial and management information systems and processes to support our ongoing development efforts, any future manufacturing or commercialization efforts and our administrative and compliance obligations as a public company. |
We have funded our operations to date primarily from the issuance and sale of our convertible preferred stock, through the issuance and sale of our common stock pursuant to our initial public offering, or IPO, in July 2016, a follow-on offering in April 2017,
16
pursuant to an “at-the-market” program and sales agreement, or ATM, we entered into with Cowen and Company, LLC, or Cowen from August 2017 through January 2018 , an additional follow-on offering in January 2018 , a n additio nal ATM facility with Cowen that began in March 2018 and an additional follow-on offering in October 2018 . As of September 30, 2018 , we had cash, cash equivalents , marketable securities and restricted cash of $ 285.5 million, which includes approximately $ 3 .6 million of restricted cash and approximately $ 1.3 million of long-term investments .
To fund our current operating plans, we will need additional capital, which we may obtain through one or more equity offerings, debt financings or other third-party funding, including potential strategic alliances and licensing or collaboration arrangements. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our preclinical and clinical development efforts. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities.
Financial Operations Overview
Research and Development Expenses
Research and development direct program expenses consist primarily of external costs incurred for the development of our product candidates, which include:
|
• |
expenses incurred under agreements with consultants, third-party service providers and investigative clinical trial sites that conduct research and development activities on our behalf; |
|
• |
laboratory and vendor expenses related to the execution of preclinical studies and clinical trials; |
|
• |
costs related to production of preclinical and clinical materials, including fees paid to contract manufacturers and manufacturing input costs for use in internal manufacturing processes; and |
|
• |
costs related to in-licensing of rights to develop and commercialize our product candidate portfolio. |
Personnel, non-program and unallocated program expenses include costs associated with activities performed by our internal research and development organization and generally benefit multiple programs. These costs are not allocated by product candidate and consist primarily of:
|
• |
personnel costs, which include salaries, benefits and stock-based compensation expense; |
|
• |
facilities and other expenses, which include expenses for rent and maintenance of facilities, depreciation and amortization expense; |
|
• |
lab supplies and equipment used for internal research and development activities; |
|
• |
unallocated manufacturing expenses; and |
|
• |
the change in fair value of contingent acquisition consideration payable. |
We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks performed by others using information and data provided to us by our vendors, collaborators and third-party service providers. Nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and capitalized. The capitalized amounts are then expensed as the related goods are delivered and as services are performed.
The largest component of our operating expenses has historically been our investment in research and development activities. We do not allocate personnel and other costs, such as salaries, benefits, stock-based compensation expense and certain internal program costs to product candidates on a program-specific basis.
17
The fol lowing table summarizes our research and development expenses incurred during the respective periods:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
AT132 direct program costs |
|
$ |
7,311 |
|
|
$ |
7,230 |
|
|
$ |
14,380 |
|
|
$ |
17,816 |
|
AT982 direct program costs |
|
|
1,812 |
|
|
|
271 |
|
|
|
7,156 |
|
|
|
307 |
|
AT342 direct program costs |
|
|
992 |
|
|
|
1,523 |
|
|
|
3,774 |
|
|
|
4,874 |
|
AT307 direct program costs |
|
|
23 |
|
|
|
1,242 |
|
|
|
600 |
|
|
|
2,494 |
|
Personnel, non-program, and unallocated program costs |
|
|
19,780 |
|
|
|
10,602 |
|
|
|
50,247 |
|
|
|
28,740 |
|
Total research and development expenses |
|
$ |
29,918 |
|
|
$ |
20,868 |
|
|
$ |
76,157 |
|
|
$ |
54,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, including anticipated increase in headcount and investments in manufacturing, as our programs advance into later stages of development and as we conduct clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs, facilities costs, including rent and maintenance of facilities, depreciation and amortization expense and other expenses for outside professional services, including legal, human resources, audit and accounting services. Personnel costs consist of salaries, bonuses, payroll taxes, benefits and stock-based compensation expense. We expect our general and administrative expenses to increase for the foreseeable future due to anticipated increases in headcount to advance and support the development of our product candidates and as a result of our operations as a public company, including expenses related to compliance with the rules and regulations of the Securities and Exchange Commission, The Nasdaq Global Market, and other governing bodies in addition to insurance expenses, investor relations activities and other administration, accounting and professional services.
Interest Income
Interest income consists of interest earned on our cash, cash equivalents and investments.
Other Income (Expense), Net
Other income (expense), net primarily consists of gains and losses on disposals of property and equipment, investment management fees and foreign currency transaction gains and losses incurred during the period.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies related to business combinations and contingent consideration payable are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
There have been no significant changes in our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Operations included in our Annual Report on Form 10-K for the year ended December 31, 2017.
18
Recent A ccounting Pronouncements
Except as described in Note 2 to the Unaudited Interim Condensed Consolidated Financial Statements under the heading “Recent Accounting Pronouncements,” there have been no new accounting pronouncements or changes to accounting pronouncements during the nine months ended September 30, 2018, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2017, that are significant to us.
Results of Operations
Comparison of the Three Months Ended September 30, 2018 and 2017
|
|
Three Months Ended September 30, |
|
|||||||||
|
|
2018 |
|
|
2017 |
|
|
Change |
|
|||
|
|
(in thousands) |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
29,918 |
|
|
$ |
20,868 |
|
|
$ |
9,050 |
|
General and administrative |
|
|
7,817 |
|
|
|
4,342 |
|
|
|
3,475 |
|
Total operating expenses |
|
|
37,735 |
|
|
|
25,210 |
|
|
|
12,525 |
|
Loss from operations |
|
|
(37,735 |
) |
|
|
(25,210 |
) |
|
|
(12,525 |
) |
Interest income, net |
|
|
1,509 |
|
|
|
221 |
|
|
|
1,288 |
|
Other (expense) income, net |
|
|
(65 |
) |
|
|
(20 |
) |
|
|
(45 |
) |
Net loss |
|
$ |
(36,291 |
) |
|
$ |
(25,009 |
) |
|
$ |
(11,282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
Research and development expenses increased by $9.0 million, or 43%, to $29.9 million for the three months ended September 30, 2018. The increase was primarily the result of a $1.7 million increase for non - cash stock-based compensation expense due to increased headcount to support our growth and increasing fair values for new stock option awards, a $3.0 million increase in personnel and travel costs and a $1.4 million increase for facilities and overhead related costs primarily due to increased headcount and investment in manufacturing, a $1.8 million increase in manufacturing supplies, a $0.6 million increase in clinical trials cost as we continue to progress in these trials, a, $0.4 million increase in other expenses related to expanded research and development, and a $0.6 million increase in depreciation and amortization expense due to capitalization of equipment and leasehold improvements to support our manufacturing activities, offset by a decrease of $0.8 million in license and milestone payments. Our AT342 and AT307 program expenses decreased by $0.5 million and $1.2 million, respectively for the three months ended September 30, 2018 as we shifted more spending to our AT982 program in preparation for planned clinical studies. Our AT982 program expenses increased by $1.5 million, as we increased manufacturing of study materials and incurred additional consulting and initiation costs in preparation for planned clinical studies. We anticipate that research and development expenses in aggregate will continue to increase as we continue to expand our operations and research and development activities.
General and administrative expenses increased by $3.5 million, or 80%, to $7.8 million for the three months ended September 30, 2018. The increase was primarily the result of a $1.4 million increase in stock-based compensation expense due to increased headcount and increasing fair values for new stock option awards, a $0.6 million increase in personnel costs due to increased headcount, a $0.4 million increase in consulting expense to support our continued compliance efforts as a public company and a $1.0 million increase for facilities and overhead related costs.
Interest Income, net
Interest income, net increased by $1.3 million, or 583%, to $1.5 million for the three months ended September 30, 2018, as we invested a portion of the funds received from our public equity offerings into short duration fixed-income securities.
19
Comparison of the Nine Months Ended September 30, 2018 and 2017
|
|
Nine Months Ended September 30, |
|
|||||||||
|
|
2018 |
|
|
2017 |
|
|
Change |
|
|||
|
|
(in thousands) |
|
|||||||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
76,157 |
|
|
$ |
54,231 |
|
|
$ |
21,926 |
|
General and administrative |
|
|
20,617 |
|
|
|
12,065 |
|
|
|
8,552 |
|
Total operating expenses |
|
|
96,774 |
|
|
|
66,296 |
|
|
|
30,478 |
|
Loss from operations |
|
|
(96,774 |
) |
|
|
(66,296 |
) |
|
|
(30,478 |
) |
Interest income, net |
|
|
3,662 |
|
|
|
483 |
|
|
|
3,179 |
|
Other expense, net |
|
|
(117 |
) |
|
|
(50 |
) |
|
|
(67 |
) |
Net loss |
|
$ |
(93,229 |
) |
|
$ |
(65,863 |
) |
|
$ |
(27,366 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
Research and development expenses increased by $21.9 million, or 40%, to $76.2 million for the nine months ended September 30, 2018. The increase was primarily the result of a $4.6 million increase for non-cash stock-based compensation expense due to increased headcount to support our growth and increasing fair values for new stock option awards, a $9.9 million increase in personnel and travel costs and a $2.4 million increase for facility and overhead related costs primarily due to increased headcount and investment in manufacturing, a $2.5 million increase in manufacturing supplies, an $0.8 million increase in clinical trials cost as we continue to progress in these trials, and a $2.2 million increase in other expenses related to expanded research and development, offset by a decrease of $0.6 million in license and milestone payments. Our AT132, AT307, and AT342 program expenses decreased by $3.4 million, $1.9 million, and $1.1 million, respectively, as we shifted some spending to our AT982 program. Our AT982 program expenses increased by $6.8 million, as we increased manufacturing of study materials and incurred additional consulting and initiation costs in preparation for planned clinical studies, while AT132 expenses decreased when compared to prior year’s expense due to substantial clinical trial initiation costs incurred in 2017. During the nine months ended September 30, 2018, we revised our estimated probability and timing for triggering a milestone payment pursuant to the Cardiogen acquisition agreement that resulted in a $2.3 million decrease to the estimated fair value of the contingent liability and a related $2.3 million reduction of research and development expense. The change in estimate is attributable to our assessment of various factors related to the AT307 program, including an evaluation of ongoing patient identification efforts, and how those efforts may affect the development timeline and decisions regarding resource allocation among our various product development candidates. We anticipate that research and development expenses in aggregate will continue to increase as we expand our operations and research and development activities.
General and Administrative
General and administrative expenses increased by $8.6 million, or 71%, to $20.6 million for the nine months ended September 30, 2018. The increase was primarily the result of a $3.5 million increase in stock-based compensation expense due to increased headcount and increasing fair values for new stock option awards, a $2.3 million increase in personnel costs due to increased headcount, a $1.0 million increase in consulting expense to support our continued compliance efforts as a public company, and a $1.5 million increase for facilities and overhead related costs.
Interest Income, net
Interest income, net increased by $3.2 million, or 658%, to $3.7 million for the nine months ended September 30, 2018, as we invested a portion of the funds received from our public equity offerings into short duration fixed-income securities.
Liquidity, Capital Resources and Plan of Operations
Since our inception in 2012 through September 30, 2018, our operations have been financed solely by net proceeds of $135.8 million from the sale of shares of our convertible preferred stock and $426.7 million from the sale of common stock from our public equity offerings. As of September 30, 2018, we had $285.5 million in cash, cash equivalents, marketable securities and restricted cash, which includes restricted cash of approximately $3.6 million and long-term investments of approximately $1.3 million, and an accumulated deficit of $283.9 million.
On October 11, 2018, we completed an underwritten public offering of 5,980,000 shares of common stock (inclusive of 780,000 shares of common stock pursuant to the underwriters’ option to purchase additional shares) at a price of $29.00 per share. The aggregate net proceeds received by us were approximately $162.8 million, net of underwriting discounts, commissions and estimated offering costs.
20
On March 29, 2018, we filed an automatic universal shelf registration statement. In connection with the filing of the registration statement, we entered into an “at-the-market” equity offering program and sales agreement, or ATM, with Cow en and Company, LLC., or Cowen, under which we may, from time to time, offer and sell common stock having an aggregate offering value of up to $150.0 million. During the nine months ended September 30, 2018, the Company sold 400,024 shares of common stock under the ATM for aggregate net proceeds of $14.6 million.
On January 29, 2018, we completed an underwritten public offering of 6,612,500 shares of common stock (inclusive of 862,500 shares pursuant to the underwriters’ option to purchase additional shares) at a price of $35.00 per share. The aggregate net proceeds received by us were $217.2 million, net of underwriting discounts, commissions and offering costs.
To fund our current operating plans, we will need additional capital, which we may obtain through one or more equity offerings, debt financings or other third-party funding, including potential strategic alliances and licensing or collaboration arrangements. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our preclinical and clinical development efforts. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities. Our primary use of cash is to fund operating expenses, which consist of research and development expenditures and general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.
We believe that our existing cash, cash equivalents and investments will be sufficient to meet our anticipated cash and capital expenditure requirements for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. We will continue to require additional financing to advance our current product candidates through clinical development, to develop, acquire or in-license other potential product candidates and to fund operations for the foreseeable future. We will continue to seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms, or at all. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies.
Further, our operating plans may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development activities. We currently have no credit facility or committed sources of capital. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures that will be needed for our current and anticipated product development programs to achieve commercial success.
If we need to raise additional capital to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our clinical trials, research and development programs or commercialization efforts. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, and collaborations or licensing arrangements. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If additional funding is required, there can be no assurance that additional funds will be available to us on acceptable terms on a timely basis, if at all. If we are unable to raise capital, we will need to curtail planned activities to reduce costs. Doing so will likely have an unfavorable effect on our ability to execute our business plans.
The following table summarizes our cash flows for the periods indicated:
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2018 |
|
|
2017 |
|
||
|
|
(in thousands) |
|
|||||
Cash used in operating activities |
|
$ |
(79,495 |
) |
|
$ |
(61,267 |
) |
Cash used in investing activities |
|
|
(90,146 |
) |
|
|
(38,877 |
) |
Cash provided by financing activities |
|
|
234,923 |
|
|
|
117,666 |
|
Net increase in cash, cash equivalents and restricted cash |
|
$ |
65,282 |
|
|
$ |
17,522 |
|
|
|
|
|
|
|
|
|
|
21
Cash Flows from Operating Activities
Cash used in operating activities for the nine months ended September 30, 2018 was $79.5 million. Our net loss was $93.2 million, which was partially offset by noncash charges of $13.0 million, consisting primarily of $12.1 million of stock-based compensation expense and $3.9 million of depreciation and amortization expense, offset by $0.9 million related to the accretion of discounts on marketable securities and a $2.3 million reduction in the fair value of the contingent acquisition consideration liability. The change in our net operating assets was primarily the result of an increase in prepaid expenses of $1.2 million, payment of a $3.2 million lease security deposit and a $0.7 million decrease in accounts payable offset by an increase of $4.6 million in accrued liabilities. These increases in prepaid expenses and accrued liabilities are based on timing of invoicing for services, primarily for research and development expenses.
Cash used in operating activities for the nine months ended September 30, 2017 was $61.3 million. Our net loss was $65.9 million, which was partially offset by noncash charges of $6.7 million consisting primarily of $4.1 million of stock-based compensation expense, $2.4 million of depreciation and amortization expense, and a $0.2 million change in the fair value of the contingent acquisition consideration liability. The change in our net operating assets was primarily the result of an increase in our prepaid expenses, primarily for contractual research and development services, and other current assets by $0.9 million; a $2.0 million increase in long-term deposits; and a decrease in our accounts payable and accrued liabilities by a net $0.3 million.
Cash Flows from Investing Activities
Cash used in investing activities was $90.1 million for the nine months ended September 30, 2018, primarily due to purchases of marketable securities of $210.0 million and purchases of property and equipment and leasehold improvements of $8.1 million, partially offset by the sale or maturity of marketable securities of $127.9 million.
Cash used in investing activities was $38.9 million for the nine months ended September 30, 2017, primarily due to purchases of marketable securities of $117.4 million and purchases of property and equipment and leasehold improvements of $5.0 million, partially offset by the sale or maturity of marketable securities of $83.5 million.
Cash Flows from Financing Activities
Cash provided by financing activities for the nine months ended September 30, 2018 was related to net proceeds from our follow-on offering of $217.2 million and from our ATM program of $14.6 million, net of underwriting discounts, commissions and offering costs, and proceeds from the exercise of stock options of $3.2 million.
Cash provided by financing activities for the nine months ended September 30, 2017 included proceeds from the exercise of stock options of $0.6 million, $80.6 million in net proceeds from our follow-on offering and $36.4 million in net proceeds from the ATM, net of underwriting discounts, commissions and offering costs.
Off-Balance Sheet Arrangements
At September 30, 2018, we were not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
22
Contractual Obligations and Other Commitments
The following table summarizes our contractual obligations, as of September 30, 2018, over the next five years and thereafter:
|
|
Payments Due by Period |
|
|||||||||||||||||||||||||
|
|
Less than 1 year |
|
|
2 years |
|
|
3 years |
|
|
4 years |
|
|
5 years |
|
|
More than 5 years |
|
|
Total |
|
|||||||
|
|
(in thousands) |
|
|||||||||||||||||||||||||
Operating lease obligations |
|
$ |
5,036 |
|
|
$ |
5,647 |
|
|
$ |
5,737 |
|
|
$ |
5,925 |
|
|
$ |
5,284 |
|
|
$ |
11,097 |
|
|
$ |
38,726 |
|
Total contractual obligations |
|
$ |
5,036 |
|
|
$ |
5,647 |
|
|
$ |
5,737 |
|
|
$ |
5,925 |
|
|
$ |
5,284 |
|
|
$ |
11,097 |
|
|
$ |
38,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Agreements
In August 2018, we entered into a lease agreement for approximately 37,071 square feet of research and development office and warehouse space in South San Francisco, California, that commences in May 2019 for an eight-year term with minimum aggregate lease payments of $7.9 million.
In April 2016, we entered into a sublease agreement for approximately 8,983 square feet of research and development laboratory space in South San Francisco, California with an initial term that expired in January 2018. In July 2017, we executed a long-term lease agreement for this space, plus an additional 17,570 square feet for an aggregate space of 26,553 square feet, that commenced in February 2018 for an eight-year term with minimum aggregate lease payments of $13.5 million.
Material License and Collaboration Agreements
There were no significant changes to our material license and collaboration agreements during the nine months ended September 30, 2018, as compared to our previous disclosure in our Annual Report on Form 10-K for the year ended December 31, 2017.
Other Contracts
We also enter into contracts in the normal course of business with various third parties for services related to preclinical research studies, clinical trials, testing, manufacturing and other services. These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.
23
ITEM 3. QUALITATIVE AND QUANTITATI VE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities. We had cash, cash equivalents, investments and restricted cash of $285.5 million and $137.3 million as of September 30, 2018 and December 31, 2017, respectively, which consisted of bank deposits, money market funds and marketable fixed income securities. Such interest-earning instruments carry a degree of interest rate risk; however, historical fluctuations in interest income have not been significant for us. We had no debt outstanding as of September 30, 2018 or December 31, 2017.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2018.
Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the third quarter of 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, during the third quarter of 2018, we did take measures to enhance our internal control over financial reporting as steps toward continued compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
24
We are not currently a party to any pending legal proceedings. From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. Regardless of outcome, litigation can have an adverse impact on us due to defense and settlement costs, diversion of management resources, negative publicity and reputational harm and other factors.
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this report, including our unaudited interim condensed consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common stock. This list is not exhaustive and the order and presentation does not reflect management’s determination of priority or likelihood. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Product Development and Regulatory Approval
We are early in our development efforts. If we are unable to develop, obtain regulatory approval for and commercialize our product candidates, or experience significant delays in doing so, our business will be materially harmed.
We have invested substantially all of our efforts and financial resources in the identification and development of our current product candidates, AT132 for X-Linked Myotubular Myopathy, or XLMTM, AT342 for the treatment of Crigler-Najjar Syndrome, or Crigler-Najjar, AT982 for the treatment of Pompe disease and AT307 for the treatment of the CASQ2 subtype of Catecholaminergic Polymorphic Ventricular Tachycardia, or CASQ2-CPVT. We have initiated Phase 1/2 clinical studies of AT132 for treatment of XLMTM and AT342 for the treatment of Crigler-Najjar. We have an active Investigational New Drug application, or IND, for AT307 for the treatment of CASQ2-CPVT, and we are conducting IND-enabling preclinical studies of AT982 for the treatment of Pompe disease, for which we plan to file an IND in 2019. Our ability to generate product revenue, which we do not expect will occur for many years, if ever, will depend heavily on the successful development and eventual commercialization of our product candidates, which may never occur. We currently generate no revenue from sales of any product and we may never be able to develop or commercialize a marketable product.
Each of our programs and product candidates will require preclinical and clinical development, regulatory approval in multiple jurisdictions, obtaining preclinical, clinical and commercial manufacturing supply, capacity and expertise, building of a commercial organization, substantial investment and significant marketing efforts before we generate any revenue from product sales. Our product candidates must be authorized for marketing by the U.S. Food and Drug Administration, or the FDA, or certain other foreign regulatory agencies, such as the European Medicines Agency, or EMA, before we may commercialize our product candidates.
The success of our product candidates depends on multiple factors, including:
|
• |
positive results from our clinical programs that are supportive of safety and efficacy and provide an acceptable risk-benefit profile for our product candidates in the intended patient populations; |
|
• |
effective Investigational New Drug applications, or INDs, or Clinical Trial Authorizations, or CTAs, that allow commencement of our planned clinical trials or future clinical trials for our product candidates in relevant territories; |
|
• |
successful completion of preclinical studies, including those compliant with Good Laboratory Practices (GLP), or GLP toxicology studies, biodistribution studies and minimum effective dose studies in animals, and successful enrollment and completion of clinical trials compliant with current Good Clinical Practices, or GCPs; |
|
• |
receipt of regulatory approvals from applicable regulatory authorities; |
|
• |
continued successful development of our internal manufacturing processes, including process development and scale-up activities to supply drug product for preclinical studies, clinical trials and commercial sale; |
|
• |
establishment of arrangements with third-party contract manufacturing organizations, or CMOs, for key materials used in our manufacturing processes and to establish backup sources for clinical and large-scale commercial supply; |
|
• |
establishment and maintenance of patent and trade secret protection and regulatory exclusivity for our product candidates; |
|
• |
commercial launch of our product candidates, if and when approved, whether alone or in collaboration with others; |
|
• |
acceptance of our product candidates, if and when approved, by patients, the medical community and third-party payors; |
25
|
• |
our effective competi tion against other therapies available in the market; |
|
• |
establishment and maintenance of adequate reimbursement from third-party payors for our products; |
|
• |
enforcement and defense of intellectual property rights and claims; and |
|
• |
maintenance of a continued acceptable safety profile of our product candidates following approval. |
If we do not succeed in one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize our product candidates, which would materially harm our business. If we do not receive regulatory approvals for our product candidates, we may not be able to continue our operations.
Success in early preclinical studies or clinical trials may not be indicative of results obtained in later preclinical studies and clinical trials and does not ensure regulatory approval of our product candidates.
Though viral vectors similar to ours have been evaluated by others in clinical trials, our product candidates only recently entered into human clinical trials, and we may experience unexpected or adverse results in the future. We will be required to demonstrate through adequate and well-controlled clinical trials that our product candidates are safe and effective, with a favorable risk-benefit profile, for use in their target indications before we can seek regulatory approvals for their commercial sale. Trial designs and results from previous trials are not necessarily predictive of our future clinical trial designs or results, and if we report interim safety and efficacy results from an ongoing clinical trial, we may not be able to confirm these results upon full analysis of the complete trial data. For example, in ASPIRO, an ongoing Phase 1/2 clinical study of AT132 in XLMTM patients, we have reported encouraging interim data. However, the interim dataset from ASPIRO will differ from the final datasets upon which global regulatory decisions will be based. Potential reasons for these differences include, but are not limited to:
|
• |
interim datasets may be comprised of a small number of patients, and the safety and efficacy results from longer term follow-up in patients dosed earlier in the study, or results from future patients, may not replicate those early results; |
|
• |
interim datasets may be comprised of patients evaluated at a specific dose level, whereas patients enrolled later in a study may receive higher doses with unknown implications for safety and efficacy; |
|
• |
not all patients may demonstrate improvement; |
|
• |
patients may discontinue their involvement in ASPIRO for a number of reasons, including disease progression or a lack of clinical benefit, and discontinuations will impact the amount of data we collect over time; |
|
• |
additional time and patient accrual provide new opportunities to capture new adverse events and further characterize the safety and efficacy of AT132; and |
|
• |
the precise composition of the final datasets is subject to additional regulatory feedback, which is expected to be received closer to the time of submission of a biologics license application or BLA, or equivalent, and the advice may vary by regulatory authority. |
In addition, the safety and efficacy results we observe with our product candidates in preclinical animal models may not be predictive of results from our future clinical trials in humans, or may not translate to humans until higher doses are utilized, if at all. For example, data we reported from the first patient treated with AT342 for Crigler-Najjar Syndrome at the 1.5x10 12 vg/kg dose demonstrated a rapid decline in total bilirubin levels from approximately 11 mg/dL at baseline to 4 mg/dL at week 2 post-dosing, with a gradual return to baseline by week 12. A similar efficacy result was observed with low doses of AT342 in a dose ranging study in the mouse model of Crigler Najjar, while higher doses demonstrated durable bilirubin reduction. We plan to dose escalate to a 6x10 12 vg/kg dose to treat the next patient.
Many companies in the biotechnology industry have suffered significant setbacks in late-stage clinical trials after achieving positive results in early-stage development, and there is a high failure rate for product candidates proceeding through clinical trials. Our product candidates may fail in late-stage clinical development if they do not show the desired safety and efficacy, even if they have successfully advanced through initial clinical trials. In addition, data obtained from preclinical and clinical studies are subject to varying interpretations. If agencies such as the FDA or EMA interpret data from our development programs differently than we do, the regulatory approval of our product candidates may be delayed, limited or prevented.
We cannot commercialize a product candidate until the appropriate regulatory authorities have reviewed and approved the product candidate for licensure. Even if our product candidates meet their safety and efficacy endpoints in clinical trials, the regulatory authorities may not complete their review processes in a timely manner, or we may not be able to obtain regulatory approval. Additional delays may result if an FDA Advisory Committee or other regulatory authority recommends non-approval or restrictions on approval. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory authority policy during the period of product development, clinical trials and the review process.
26
Regulatory authorities also may approve a product candidate for more limited indications t han requested, or they may impose significant limitations in the form of narrow indications, warnings or a Risk Evaluation and Mitigation Strategy, or REMS. These regulatory authorities may require precautions or contra-indications with respect to conditio ns of use or they may grant approval subject to the performance of costly post-marketing clinical trials. In addition, regulatory authorities may not approve the labeling claims that are necessary or desirable for the successful commercialization of our pr oduct candidates. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates and materially and adversely affect our business, financial condition, results of operations and prospects.
If we do not achieve our projected development goals in the time frames we announce and expect, the commercialization of our products may be delayed and, as a result, our stock price may decline.
From time to time, we estimate the timing of the accomplishment of various scientific, clinical, regulatory, manufacturing and other product development goals, which we sometimes refer to as milestones. These milestones may include the commencement or completion of preclinical studies and clinical trials and the submission of regulatory filings. From time to time, we may publicly announce the expected timing of some of these milestones. All of these milestones are, and will be, based on a variety of assumptions. The actual timing of these milestones can vary significantly compared to our estimates, in some cases for reasons beyond our control. We may experience numerous unforeseen events during, or as a result of, any future clinical trials that we conduct that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including:
|
• |
the FDA and other governmental health authorities, Institutional Review Boards, or IRBs, or ethics committees may not authorize or may delay authorizing us or our investigators to commence a clinical trial or conduct a clinical trial at all or at a prospective trial site, such as by requiring us to conduct additional preclinical studies and to submit additional data or imposing other requirements before permitting us to initiate or continue a clinical trial; |
|
• |
we may experience delays in reaching, or fail to reach, agreement on acceptable terms with prospective trial sites and prospective contract research organizations, or CROs, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites; |
|
• |
clinical trials of our product candidates may produce negative or inconclusive results and we may decide, or regulators may require us, to conduct preclinical studies in addition to those we currently have planned or additional clinical trials or we may decide to abandon drug development programs; |
|
• |
the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials or fail to return for post-treatment follow-up at a higher rate than we anticipate; |
|
• |
our third-party suppliers and contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all, or may deviate from the clinical trial protocol or drop out of the trial, which may require that we add new clinical trial sites or investigators; |
|
• |
we may elect to, or regulators, IRBs or ethics committees may require that we or our investigators, suspend or terminate clinical trials for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to health risks; |
|
• |
the cost of planned clinical trials of our product candidates may be greater than we anticipate; |
|
• |
the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate; and |
27
Our product candidates are based on a novel AAV gene therapy technology with which there is limited clinical experience to date, which makes it difficu lt to predict the time and cost of product candidate development and subsequently obtaining regulatory approval.
Our product candidates are based on gene therapy technology and our future success depends on the successful development of this novel therapeutic approach. We cannot assure you that any development problems we or other gene therapy companies experience in the future related to gene therapy technology will not cause significant delays or unanticipated costs in the development of our product candidates, or that such development problems can be solved. In addition, the clinical study requirements of the FDA, EMA and other regulatory agencies and the criteria these regulators use to determine the safety and efficacy of a product candidate vary substantially according to the type, complexity, novelty and intended use and market of the potential products. The regulatory approval process for novel product candidates such as ours can be more expensive and take longer than for other, better known or extensively studied therapeutic modalities. Further, as we are developing novel treatments for diseases in which there is limited clinical experience with new endpoints and methodologies, there is heightened risk that the FDA, EMA or comparable foreign regulatory bodies may not consider the clinical trial endpoints to provide clinically meaningful results, and the resulting clinical data and results may be more difficult to analyze. To date, only one gene therapy product has been approved in the United States and only two gene therapy products have been approved in Europe, which makes it difficult to determine how long it will take or how much it will cost to obtain regulatory approvals for our product candidates in the United States, the European Union, or EU, or other jurisdictions. Further, approvals by one regulatory agency may not be indicative of what other regulatory agencies may require for approval.
Regulatory requirements governing gene therapy products have evolved and may continue to change in the future. For example, the FDA established the Office of Tissues and Advanced Therapies within its Center for Biologics Evaluation and Research, or CBER, to consolidate the review of gene therapy and related products, and the Cellular, Tissue and Gene Therapies Advisory Committee to advise CBER on its review. These and other regulatory review agencies, committees and advisory groups and the requirements and guidelines they promulgate may lengthen the regulatory review process, require us to perform additional preclinical studies or clinical trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of these treatment candidates or lead to significant post-approval limitations or restrictions.
The FDA, the National Institutes of Health, or NIH, the EMA and other regulatory agencies have demonstrated caution in their regulation of gene therapy treatments, and ethical and legal concerns about gene therapy and genetic testing may result in additional regulations or restrictions on the development and commercialization of our product candidates, which may be difficult to predict.
The FDA, NIH, other regulatory agencies at both the federal and state level in the United States, U.S. congressional committees, and the EMA and other foreign governments, have expressed interest in further regulating the biotechnology industry, including gene therapy and genetic testing. For example, the EMA advocates a risk-based approach to the development of a gene therapy product. Any such further regulation may delay or prevent commercialization of some or all of our product candidates. For example, in 1999, a patient died during a gene therapy clinical trial that utilized an adenovirus vector and it was later discovered that adenoviruses could generate an extreme immune system reaction that can be life-threatening. In January 2000, the FDA halted that trial and began investigating 69 other gene therapy trials underway in the United States, 13 of which required remedial action. In 2003, the FDA suspended 27 additional gene therapy trials involving several hundred patients after learning that some patients treated in a clinical trial in France had subsequently developed leukemia. While the new AAV vectors that we use across our portfolio of product candidates have been developed to reduce these side effects, gene therapy is still a relatively new approach to disease treatment and additional adverse side effects could develop.
Regulatory requirements in the United States and abroad governing gene therapy products have changed frequently and may continue to change in the future. Our planned clinical trials may be subject to review by the NIH Office of Biotechnology Activities’ Recombinant DNA Advisory Committee, or RAC, even though none have been required to date. As of April 2016, the new NIH Guidelines for Research Involving Recombinant or Synthetic Nucleic Acid Molecules, including gene therapy, provide the opportunity for one or more oversight bodies (IRB or the Institutional Biosafety Committee, or IBC) to request a public RAC review based on their own review of the protocol and NIH requirements. Regardless of the request for public review, NIH makes their own assessment as to whether the protocol would significantly benefit from a public RAC review. The NIH’s recommendations are shared with the FDA and the oversight bodies. The RAC can delay the initiation of a clinical trial, even if the FDA has reviewed the trial design and details and has not objected to its initiation or has notified the sponsor that the study may begin. Conversely, the FDA can put an IND on a clinical hold even if the RAC has provided a favorable review or has recommended against an in-depth, public review. If there is a public RAC review, the receipt of the final recommendation letter concludes the protocol registration process and then oversight body approval can be issued. In addition, adverse developments in clinical trials of gene therapy products conducted by others may cause the FDA or other oversight bodies to change the requirements for approval of any of our product candidates. Similarly, the EMA governs the development of gene therapies in the EU and may issue new guidelines concerning the development and marketing authorization for gene therapy products and require that we comply with these new guidelines.
28
These regulatory review committees and advisory groups and the new guidelines they promulgate may lengthen the regulatory review process, require us to perform additional s tudies or trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of our product candidates or lead to significant post-approval limitations or restrictions. As we advance our product candidates, we will be required to consult with these regulatory and advisory groups and comply with applicable guidelines. If we fail to do so, we may be required to delay or discontinue development of such product candidates. These a dditional processes may result in a review and approval process that is longer than we otherwise would have expected. Delays as a result of an increased or lengthier regulatory approval process or further restrictions on the development of our product cand idates can be costly and could negatively impact our ability to complete clinical trials and commercialize our current and future product candidates in a timely manner, if at all.
Even if we complete the necessary clinical trials, we cannot predict when, or if, we will obtain regulatory approval to commercialize a product candidate and the approval may be for a narrower indication than we seek.
Prior to commercialization, our product candidates must be approved by the FDA pursuant to a BLA in the United States and by the EMA and similar regulatory authorities outside the United States. The process of obtaining marketing approvals, both in the United States and abroad, is expensive and takes many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. Failure to obtain marketing approval for a product candidate will prevent us from commercializing the product candidate. We have not received approval to market any of our product candidates from regulatory authorities in any jurisdiction. We have no experience in submitting and supporting the applications necessary to gain marketing approvals, and, in the event regulatory authorities indicate that we may submit such applications, we may be unable to do so as quickly and efficiently as desired. Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing marketing approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the regulatory authorities. Our product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining marketing approval or prevent or limit commercial use. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate.
Approval of our product candidates may be delayed or refused for many reasons, including:
|
• |
the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials; |
|
• |
we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that our product candidates are safe and effective for any of their proposed indications; |
|
• |
the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval; |
|
• |
we may be unable to demonstrate that our product candidates’ clinical and other benefits outweigh their safety risks; |
|
• |
the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical programs or clinical trials; |
|
• |
the data collected from clinical trials of our product candidates may not be sufficient to support the submission of a BLA or other comparable submission in foreign jurisdictions or to obtain regulatory approval in the United States or elsewhere; |
|
• |
our manufacturing facilities, or those of third-party manufacturers with which we contract or procure certain service or raw materials, may not be adequate to support approval of our product candidates; and |
|
• |
the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval. |
Even if our product candidates meet their safety and efficacy endpoints in clinical trials, the regulatory authorities may not complete their review processes in a timely manner, or we may not be able to obtain regulatory approval. Additional delays may result if an FDA Advisory Committee or other regulatory authority recommends non-approval or restrictions on approval. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory authority policy during the period of product development, clinical trials and the review process.
Regulatory authorities also may approve a product candidate for more limited indications than requested or they may impose significant limitations in the form of narrow indications, warnings or Risk Evaluation and Mitigation Strategies, or REMS. These
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regulatory authorities may require precautions or contra-indications with respect to conditions of use or they may grant approval subject to t he performance of costly post-marketing clinical trials. In addition, regulatory authorities may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates and materially and adversely affect our business, financial condition, results of operations and prospects.
Further, the regulatory authorities may require concurrent approval or the CE mark, indicating conformity with applicability with European Community directives, of a companion diagnostic device. For the product candidates we currently are developing, we believe that diagnoses based on symptoms, in conjunction with existing genetic tests developed and administered by laboratories certified under the Clinical Laboratory Improvement Amendments, or CLIA, are sufficient to diagnose patients and will be permitted by the FDA. For future product candidates, however, it may be necessary to use FDA-cleared or FDA-approved diagnostic tests to diagnose patients or to assure the safe and effective use of product candidates in trial subjects. The FDA refers to such tests as in vitro companion diagnostic devices. In August 2014, the FDA issued a final guidance document describing the agency’s current thinking about the development and regulation of in vitro companion diagnostic devices. The final guidance articulates a policy position that, when an in vitro diagnostic device is essential to the safe and effective use of a therapeutic product, the FDA generally will require approval or clearance of the diagnostic device at the same time that the FDA approves the therapeutic product. At this point, it is unclear how the FDA will apply this policy to our current or future gene therapy product candidates. Should the FDA deem genetic tests used for diagnosing patients for our therapies to be in vitro companion diagnostics requiring FDA clearance or approval, we may face significant delays or obstacles in obtaining approval of a BLA for our product candidates. In the EU, the European Commission has proposed substantial revisions to the current regulations governing in vitro diagnostic medical devices. If adopted in their current form, these revisions may impose additional obligations on us that may impact the development and authorization of our product candidates in the EU.
We may never obtain FDA approval for any of our product candidates in the United States, and even if we do, we may never obtain approval for or commercialize any of our product candidates in any other jurisdiction, which would limit our ability to realize their full market potential.
In order to eventually market any of our product candidates in any particular foreign jurisdiction, we must establish and comply with numerous and varying regulatory requirements on a jurisdiction-by-jurisdiction basis regarding safety and efficacy. Approval by the FDA in the United States, if obtained, does not ensure approval by regulatory authorities in other countries or jurisdictions. In addition, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not guarantee regulatory approval in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for us and require additional preclinical studies or clinical trials which could be costly and time-consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our products in those countries. The foreign regulatory approval process involves all of the risks associated with FDA approval. We do not have any product candidates approved for sale in any jurisdiction, including international markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our products will be unrealized.
Delays or disruptions in our manufacturing process development and operations may delay or disrupt our development and commercialization efforts.
We have invested in our own state-of-the-art cGMP manufacturing facility in South San Francisco, California, where we are developing and implementing novel production technologies to supply our preclinical and clinical trials. We believe that development of an internal manufacturing capability provides us with enhanced control of material supply for preclinical and clinical trials and commercial markets, enables the more rapid implementation of process changes and allows for better long-term margins. However, we have limited experience as a company in developing a manufacturing facility and there exist only a small number of CMOs with the experience necessary to manufacture our product candidates. We may have difficulty hiring experts to staff and operate our internal manufacturing facility or finding and maintaining relationships with external CMOs and, accordingly, our production capacity could be limited. Even if we are successful, our manufacturing capabilities could be affected by cost-overruns, unexpected delays, equipment failures, lack of capacity, delays in implementation of novel in-house technologies or scale-up activities, labor shortages, natural disasters, including earthquakes, power failures and numerous other factors that could prevent us from realizing the intended benefits of our manufacturing strategy. The occurrence of any of these factors could have a material adverse effect on our business, financial condition, results of operations, and growth prospects.
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Before we may initiate a clinical trial of our product candidates, we must demonstrate to th e FDA that the chemistry, manufacturing and controls for our product candidates meet applicable requirements, and in the EU, a manufacturing authorization must be obtained from the appropriate EU regulatory authorities. In addition, we must pass a pre-appr oval inspection of our manufacturing facility by the FDA before any of our product candidates can obtain marketing approval. In order to obtain approval, we will need to ensure that all of our processes, methods and equipment are compliant with cGMPs and o ther regulations, and perform extensive audits of vendors, contract laboratories and suppliers. If we, or any of our vendors, contract laboratories or suppliers is found to be out of compliance with cGMPs or other regulations, we may experience delays or d isruptions in manufacturing while we work to remedy the noncompliance or while we work to identify suitable replacement vendors. If we or our CMOs are unable to reliably produce products to specifications acceptable to the FDA or other regulatory authoriti es, we may not obtain or maintain the approvals we need to commercialize such products. Even if we obtain regulatory approval for any of our product candidates, there is no assurance that either we or our CMOs will be able to manufacture the approved produ ct 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 init iation of, or completion of, clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidate, impair commercialization efforts, increase our cost of goods and have an adverse effect on our business, financial condition, results of operations and growth prospects.
We may not be successful in our efforts to build a pipeline of additional product candidates.
Our business model is centered on applying our expertise in rare diseases by establishing focused selection criteria to develop and advance a broad portfolio of gene therapy product candidates through development into commercialization. We may not be able to identify and develop new product candidates, and even if we are successful in continuing to build our pipeline, the potential product candidates that we identify may not receive regulatory approval. For example, during preclinical or clinical development, they may be shown to have harmful side effects or other characteristics that indicate that they are unlikely to be drugs that will receive marketing approval and achieve market acceptance. If we do not successfully develop and commercialize product candidates based upon our approach, we will not be able to obtain product revenue in future periods, which likely would result in significant harm to our financial position and adversely affect our stock price.
Our product candidates based on gene therapy technology may cause undesirable and unforeseen side effects or be perceived by the public as unsafe, which could delay or prevent their advancement into clinical trials or regulatory approval, limit the commercial potential or result in significant negative consequences.
There have been several significant adverse side effects in prior clinical trials of gene therapy product candidates, including reported cases of leukemia and death seen in other trials using other vectors. While new AAV vectors have been developed to reduce these side effects, gene therapy is still a relatively new approach to disease treatment and additional adverse side effects could develop. There also is the potential risk of delayed adverse events following exposure to gene therapy products due to persistent biologic activity of the genetic material or other components of products used to carry the genetic material.
Possible adverse side effects that could occur with treatment with gene therapy products include an immunologic reaction early after administration which could be detrimental to the patient’s health or substantially limit the effectiveness and durability of the treatment. For example, an increasingly anticipated side effect of AAV gene therapy is the development of a T-cell immunological response, most often seen affecting the liver. For example, in ASPIRO, our Phase 1/2 study of AT132, we have seen elevations of liver enzymes, a signal that a T-cell mediated immune response has likely occurred. In addition, in one patient we reported elevated creatine kinase and troponin levels that were deemed to be suggestive of myocarditis and a separate incident of tachycardia, each of which were determined to be probably or possibly related to treatment with AT132. To date, all of the adverse events in ASPIRO have been controlled by treatment; however, if we are unable to clinically manage potential safety events in the future, we may decide or be required to halt or delay further clinical development of our product candidates.
In addition to side effects caused by the product candidate, the administration process or related procedures also can cause adverse side effects. If any such adverse events occur, our clinical trials could be suspended or terminated. If we are unable to demonstrate that any adverse events were caused by the administration process or related procedures, the FDA, the European Commission, the EMA or other regulatory authorities could order us to cease further development of, or deny approval of, our product candidates for any or all targeted indications. Even if we can demonstrate that all future serious adverse events are not product-related, such occurrences could affect patient recruitment or the ability of enrolled patients to complete the trial. Moreover, if we elect, or are required, to not initiate, delay, suspend or terminate any future clinical trial of any of our product candidates, the commercial prospects of such product candidates may be harmed and our ability to generate product revenues from any of these product candidates may be delayed or eliminated. Any of these occurrences may harm our ability to develop other product candidates, and may harm our business, financial condition and prospects significantly.
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Additionally, if any of our product candidates receives mar keting approval, the FDA could require us to adopt a REMS to ensure that the benefits of the product outweigh its risks, which may include, among other things, a Medication Guide outlining the risks of the product for distribution to patients and a communi cation plan to health care practitioners. Furthermore, if we or others later identify undesirable side effects caused by our product candidate, several potentially significant negative consequences could result, including:
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regulatory authorities may suspend or withdraw approvals of such product candidate; |
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regulatory authorities may require additional warnings on the label; |
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we may be required to change the way a product candidate is administered or conduct additional clinical trials; |
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we could be sued and held liable for harm caused to patients; and |
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our reputation may suffer. |
Any of these occurrences may harm our business, financial condition and prospects significantly.
The diseases we seek to treat have low prevalence and it may be difficult to identify patients with these diseases, which may lead to delays in enrollment for our trials or slower commercial revenue if approved.
Genetically defined diseases generally, and especially those for which our current product candidates are targeted, have low incidence and prevalence. For example, we estimate that the incidence of XLMTM is approximately one in 40,000 to one in 50,000 male births, the incidence of Crigler-Najjar is approximately one in 1,000,000 births, and the incidence of Pompe disease is one in 40,000 births. While the literature suggests there may be up to 6,000 people in addressable markets living with CASQ2-CPVT, early results from our patient identification efforts have not been able to confirm these estimates. Our continuing patient identification efforts will help inform the path forward, as it relates to both timing and amount of resource allocation to our CASQ2-CPVT program. In addition, some of our potential patients may have neutralizing antibodies to the AAV capsid serotypes we employ, which may affect the therapeutic efficacy of our product candidates. This could pose obstacles to the timely recruitment and enrollment of a sufficient number of eligible patients into our trials, or limit a product candidate’s commercial potential. Patient enrollment may be affected by other factors including:
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the ability to identify and recruit patients that meet study eligibility criteria; |
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the severity of the disease under investigation; |
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design of the study protocol; |
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the perceived risks, benefits and convenience of administration of the product candidate being studied; |
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our efforts to facilitate timely enrollment in clinical trials; |
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the patient referral practices of physicians; and |
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the proximity and availability of clinical trial sites to prospective patients. |
Our inability to enroll a sufficient number of patients with these diseases for our planned clinical trials would result in significant delays and could require us to not initiate or abandon one or more clinical trials altogether. Enrollment delays in our clinical trials may result in increased development costs for our product candidates, which would cause the value of our company to decline and limit our ability to obtain additional financing.
Additionally, our projections of both the number of people who have XLMTM, Crigler-Najjar, Pompe disease and CASQ2-CPVT, as well as the people with these diseases who have the potential to benefit from treatment with our product candidates, are based on estimates. The total addressable market opportunity for our product candidates will ultimately depend upon, among other things, the final labeling for each of our product candidates, if our product candidates are approved for sale in our target indications, acceptance by the medical community and patient access, drug pricing and reimbursement. The number of patients globally may turn out to be lower than expected, patients may not be otherwise amenable to treatment with our products, or new patients may become increasingly difficult to identify or gain access to, all of which would adversely affect our results of operations and our business. Our products may potentially be dosed on a one-time basis, which means that patients who enroll in our clinical trials may not be eligible to receive our products on a commercial basis if they are approved, leading to lower revenue potential.
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A Regenerative Medicine Advanced Therapy (RMAT) Designation by the FDA, even if granted for any of our product can didates, may not lead to a faster development or regulatory review or approval process and it does not increase the likelihood that our product candidates will receive marketing approval.
Established under the 21 st Century Cures Act, the RMAT designation is an expedited program for the advancement and approval of regenerative medicine products where preliminary clinical evidence indicates the potential to address unmet medical needs for life-threatening diseases or conditions. We have received RMAT designation for our AT132 program and plan to seek RMAT designation for our other product candidates if the preliminary clinical data support such designation. Similar to Breakthrough Therapy designation, the RMAT designation allows companies developing regenerative medicine therapies to work more closely and frequently with the FDA, and RMAT-designated products may be eligible for priority review and accelerated approval. In a November 2017 draft guidance document, the FDA stated that gene therapies, including genetically modified cells, that lead to a durable modification of cells or tissues, may meet the definition of a regenerative medicine therapy. For product candidates that have received a RMAT designation, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens.
RMAT designation is within the discretion of the FDA. Accordingly, even if we believe one of our product candidates meets the criteria for RMAT designation, the FDA may disagree and instead determine not to make such designation. In any event, the receipt of RMAT designation for a product candidate may not result in a faster development process, review or approval compared to drugs considered for approval under non-expedited FDA review procedures and does not assure ultimate approval by the FDA. In addition, even if one or more of our product candidates qualify as RMAT therapies, the FDA may later decide that the product no longer meets the conditions for qualification.
A Fast Track Designation by the FDA, or a Priority Medicines (PRIME) designation by the EMA, even if granted for any of our product candidates, may not lead to a faster development or regulatory review or approval process, and does not increase the likelihood that our product candidates will receive marketing approval.
We have received Fast Track Designation for AT132, AT342, and AT307 and in the future, we may seek additional Fast Track Designations for other product candidates. If a drug or biologic, in our case, is intended for the treatment of a serious or life-threatening condition and the biologic demonstrates the potential to address unmet medical needs for this condition, the biologic sponsor may apply for FDA Fast Track Designation. The FDA has broad discretion whether to grant this designation. Even if we believe a particular product candidate is eligible for this designation, we cannot assure you that the FDA would decide to grant it. Even if we do receive Fast Track Designation, we may not experience a faster development process, review or approval compared to conventional FDA procedures. The FDA may withdraw Fast Track Designation if it believes that the designation is no longer supported by data from our clinical development program. Many biologics that have received Fast Track Designation have failed to obtain approval.
We may also seek accelerated approval for products that have obtained Fast Track Designation. Under the FDA’s accelerated approval program, the FDA may approve a biologic for a serious or life-threatening illness that provides meaningful therapeutic benefit to patients over existing treatments based upon a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. For biologics granted accelerated approval, post-marketing confirmatory trials are required to describe the anticipated effect on irreversible morbidity or mortality or other clinical benefit. These confirmatory trials must be completed with due diligence and, in some cases, the FDA may require that the trial be designed and/or initiated prior to approval. Moreover, the FDA may withdraw approval of any product candidate or indication approved under the accelerated approval pathway if, for example:
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the trial or trials required to verify the predicted clinical benefit of the product candidate fail to verify such benefit or do not demonstrate sufficient clinical benefit to justify the risks associated with the biologic; |
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other evidence demonstrates that the product candidate is not shown to be safe or effective under the conditions of use; |
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we fail to conduct any required post-approval trial of the product candidate with due diligence; or |
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we disseminate false or misleading promotional materials relating to the product candidate. |
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In addition to the FDA’s Fast Track and RMAT Designations, oth er regulatory authorities may grant their own priority designations, including the Priority Medicines, or PRIME, designation granted by the EMA. We have received PRIME designation for AT132 and in the future, we may seek additional PRIME designations for o ther product candidates. PRIME designation is subject to risks and uncertainties similar to those described above for Fast Track and RMAT Designations, and our product candidates which have received PRIME designation may not experience a faster development process, review or approval compared to conventional EMA procedures.
We may be unable to maintain the benefits associated with Orphan Drug Designation, including the potential for market exclusivity, for our product candidates, and may be unsuccessful in obtaining Orphan Drug Designation or transfer of designations obtained by others for future product candidates.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs, or biologics in our case, intended to treat relatively small patient populations as orphan drugs. Under the U.S. Orphan Drug Act, the FDA may designate a biologic as an orphan drug if it is intended to treat a rare disease or condition, which is defined as a patient population of fewer than 200,000 individuals in the United States. In the United States, Orphan Drug Designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax credits for qualified clinical research costs, and prescription drug user fee waivers. Similarly, in the EU, the European Commission grants Orphan Drug Designation after receiving the opinion of the EMA’s Committee for Orphan Medicinal Products on an Orphan Drug Designation application. In the EU, Orphan Drug Designation is intended to promote the development of biologics 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 EU and for which no satisfactory method of diagnosis, prevention or treatment has been authorized (or the product would be a significant benefit to those affected). In the EU, Orphan Drug Designation entitles a party to financial incentives such as reduction of fees or fee waivers.
Generally, if a biologic with an Orphan Drug Designation subsequently receives the first marketing approval for the indication for which it has such designation, the biologic is entitled to a period of marketing exclusivity, which precludes EMA or the FDA from approving another marketing application for the same biologic and indication for that time period, except in limited circumstances. If our competitors are able to obtain orphan drug exclusivity prior to us for products that constitute the same active moiety and treat the same indications as our product candidates, we may not be able to have competing products approved by the applicable regulatory authority for a significant period of time. The applicable period is seven years in the United States and ten years in the EU. The EU exclusivity period can be reduced to six years if a drug no longer meets the criteria for Orphan Drug Designation or if the drug is sufficiently profitable so that market exclusivity is no longer justified.
As part of our business strategy, we have sought and received Orphan Drug Designation for AT132 and AT342 in the United States and Europe. Both the FDA and EMA have granted orphan drug designation to prototype versions of AT307 and AT982, which we plan to update to reflect the final constructs we intend to advance into clinical trials. However, Orphan Drug Designation does not guarantee future orphan drug marketing exclusivity.
Additionally, even though we have obtained an Orphan Drug Designation for AT132 and AT342, and prototype versions of AT307 and AT982, and even if we obtain orphan drug exclusivity for these product candidates and other product candidates, that exclusivity may not effectively protect AT132, AT342, AT982 and AT307 from competition because drugs with different active moieties can be approved for the same condition. Even after an orphan drug is approved, the FDA can also subsequently approve a later application for the same drug for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer in a substantial portion of the target populations, more effective or makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. Moreover, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if we are unable to manufacture sufficient quantities of the product to meet the needs of patients with the rare disease or condition. Orphan Drug Designation neither shortens the development time or regulatory review time of a drug nor gives the drug any advantage in the regulatory review or approval process.
A Rare Pediatric Disease designation by the FDA does not guarantee that the NDA or BLA for the product will qualify for a priority review voucher upon approval, and it does not lead to a faster development or regulatory review process, or increase the likelihood that any of our product candidates will receive marketing approval.
Under the Rare Pediatric Disease Priority Review Voucher program, upon the approval of a qualifying BLA or NDA for the treatment of a rare pediatric disease, the sponsor of such an application would be eligible for a rare pediatric disease priority review voucher that can be used to obtain priority review for a subsequent BLA or NDA. In July 2017, the FDA notified us that we obtained Rare Pediatric Disease designations for AT132 for the treatment of XLMTM and AT342 for the treatment of Crigler-Najjar Syndrome. If a product candidate is designated before October 1, 2020, as is the case with AT132 and AT342, it is eligible to receive a voucher if it is approved before October 1, 2022. However, there is no guarantee that any of our product candidates will be approved by that date, or at all, and, therefore, we may not be in a position to obtain priority review vouchers prior to expiration of the program,
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unless Congress further reauthorizes the program. Additionally, designation of a drug for a rare pediatric disease does not guarantee that a BLA will meet the eligibility criteria for a rare pediatric disease priority review vo ucher at the time the application is approved. Finally, a Rare Pediatric Disease designation does not lead to faster development or regulatory review of the product, or increase the likelihood that it will receive marketing approval.
We rely on third parties to conduct our preclinical and clinical studies, and rely on them to perform other tasks for us. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or comply with regulatory requirements, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.
Although we have recruited a team that has experience with clinical trials, as a company we have limited experience in conducting clinical trials. Moreover, we do not have the ability to independently conduct preclinical studies and clinical trials, and we have relied upon, and plan to continue to rely upon medical institutions, clinical investigators, contract laboratories and other third parties, or our CROs, to conduct preclinical studies and clinical trials for our product candidates. We expect to rely heavily on these parties for execution of preclinical and clinical trials for our product candidates and control only certain aspects of their activities. Nevertheless, we will be responsible for ensuring that each of our preclinical and clinical trials is conducted in accordance with the applicable protocol, legal and regulatory requirements and scientific standards and our reliance on CROs will not relieve us of our regulatory responsibilities. For any violations of laws and regulations during the conduct of our preclinical studies and clinical trials, we could be subject to warning letters or enforcement action that may include civil penalties up to and including criminal prosecution.
We and our CROs will be required to comply with regulations, including GCPs for conducting, monitoring, recording and reporting the results of preclinical and clinical trials to ensure that the data and results are scientifically credible and accurate and that the trial patients are adequately informed of the potential risks of participating in clinical trials and their rights are protected. 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 drugs in clinical development. The FDA enforces GCP regulations through periodic inspections of clinical trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our future clinical trials will comply with GCPs. In addition, our clinical trials must be conducted with product candidates produced in accordance with the requirements in cGMP regulations. Our failure or the failure of our CROs to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement action.
Although we intend to design our planned clinical trials for our product candidates, for the foreseeable future CROs will conduct all of our planned clinical trials. As a result, many important aspects of our development programs, including their conduct and timing, will be outside of our direct control. Our reliance on third parties to conduct preclinical studies and clinical trials will also result in less day-to-day control over the management of data developed through preclinical studies and clinical trials than would be the case if we were relying entirely upon our own staff.
If any of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs. 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 our clinical protocols, regulatory requirements or for other reasons, any preclinical studies or clinical trials with which such CROs are associated with may be extended, delayed or terminated. In such cases, we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our financial results and the commercial prospects for our product candidates in the subject indication could be harmed, our costs could increase and our ability to generate revenue could be delayed.
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Any product candidate for which we obtain marketing approval will be subject to extensive post-marketing regulatory requirements and could be subject to post-marketing restrictions or withdrawal from the market, and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our product candidates, when and if any of them are approved.
Our product candidates and the activities associated with their development and potential commercialization, including their testing, manufacture, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMPs, requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, including periodic inspections by the FDA and other regulatory authorities and requirements regarding the distribution of samples to physicians and recordkeeping.
The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacy of any approved product. The FDA closely regulates the post-approval marketing and promotion of drugs and biologics to ensure drugs and biologics are marketed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding use of their products. If we promote our product candidates beyond their potentially approved indications, we may be subject to enforcement action for off-label promotion. Violations of the Federal Food, Drug, and Cosmetic Act relating to the promotion of prescription drugs may lead to investigations alleging violations of federal and state healthcare fraud and abuse laws, as well as state consumer protection laws.
In addition, later discovery of previously unknown adverse events or other problems with our product candidates, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:
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restrictions on such product candidates, manufacturers or manufacturing processes; |
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restrictions on the labeling or marketing of a product; |
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restrictions on product distribution or use; |
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requirements to conduct post-marketing studies or clinical trials; |
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warning or untitled letters; |
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withdrawal of any approved product from the market; |
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refusal to approve pending applications or supplements to approved applications that we submit; |
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recall of product candidates; |
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fines, restitution or disgorgement of profits or revenues; |
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suspension or withdrawal of marketing approvals; |
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refusal to permit the import or export of our product candidates; |
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product seizure; or |
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injunctions or the imposition of civil or criminal penalties. |
Non-compliance with European requirements regarding safety monitoring or pharmacovigilance, and with requirements related to the development of products for the pediatric population, can also result in significant financial penalties. Similarly, failure to comply with Europe’s requirements regarding the protection of personal information can also lead to significant penalties and sanctions.
Our product candidates for which we intend to seek approval may face competition from biosimilars sooner than anticipated.
With the enactment of the Biologics Price Competition and Innovation Act of 2009, or BPCIA, an abbreviated pathway for the approval of biosimilar and interchangeable biological products was created. The abbreviated regulatory pathway establishes legal authority for the FDA to review and approve biosimilar biologics, including the possible designation of a biosimilar as interchangeable based on its similarity to an existing reference product. Under the BPCIA, an application for a biosimilar product cannot be approved by the FDA until 12 years after the original branded product is approved under a biologics license application, or BLA. To date a handful of biosimilar products and no interchangeable products have been approved under the BPCIA. However, the law is complex and is still being interpreted and implemented by the FDA. As a result, its ultimate impact, implementation, and meaning are subject to uncertainty. While it is uncertain when such processes intended to implement BPCIA may be fully adopted by the FDA, any such processes could have a material adverse effect on the future commercial prospects for our biological products.
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We believe that if any of our product candidates are approved as a biological product under a BLA , it should qualify for the 12-year period of exclusivity. However, there is a risk that the FDA will not consider any of our product candidates to be reference products for competing products, potentially creating the opportunity for biosimilar competition sooner than anticipated. Additionally, this period of regulatory e xclusivity does not apply to companies pursuing regulatory approval via their own traditional BLA, rather than via the abbreviated pathway. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing. Finally, there has been public discussion of potentiall y decreasing the period of exclusivity from the current 12 years. If such a change were to be enacted, our product candidates, if approved, could have a shorter period of exclusivity than anticipated.
Enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and may affect the prices we may set.
In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any products for which we obtain marketing approval.
For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the Affordable Care Act, or the ACA, was enacted to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for health care and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. The current federal administration has indicated an intent to repeal the ACA. The President has indicated an intent to address prescription drug pricing and recent Congressional hearings have brought increased public attention to the costs of prescription drugs. These actions and the uncertainty about the future of the ACA and healthcare laws may put downward pressure on pharmaceutical pricing and increase our regulatory burdens and operating costs.
Moreover, the Drug Supply Chain Security Act imposes new obligations on manufacturers of pharmaceutical products related to product tracking and tracing. Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the current regulations, guidance or interpretations will be changed, or what the impact of such changes on our business, if any, may be.
The insurance coverage and reimbursement status of newly-approved gene therapy products is uncertain. We may not be able to obtain or maintain adequate coverage and reimbursement for our product candidate(s), if approved.
It is difficult to predict what third-party payors will decide with respect to coverage and reimbursement for our product candidates, as gene and cell therapies are novel products that are generally anticipated to establish premium pricing and are initially intended as a one-time single administration. In the United States, LUXTURNA, a gene therapy product manufactured by Spark Therapeutics, Inc., was approved for marketing by the FDA in December 2017. In October 2017, the FDA approved YESCARTA, a CAR-T cell therapy product manufactured by Kite Pharma, Inc. KYMRIAH, an additional CAR-T cell therapy product manufactured by Novartis AG, was approved for marketing by the FDA in August 2017. While there is no body of established pricing and reimbursement practices for these novel gene and cell therapy products, and no uniform policy of coverage and reimbursement exists among third-party payors, these products may establish a pricing and reimbursement precedent for our product candidates, if approved. The Centers for Medicare and Medicaid Services, or CMS, administers the Medicare and Medicaid programs, which are increasingly used as models for how private payors develop their coverage and reimbursement policies, but coverage and reimbursement for products can differ significantly from payor to payor. It is difficult to predict what the CMS will decide with respect to coverage and reimbursement for a fundamentally novel gene therapy product such as ours, or how the CMS’s decision will affect our ability to obtain coverage and adequate reimbursement from other third-party payors, if any of our product candidates receive FDA approval. Moreover, reimbursement agencies in the European Union may be more conservative than the CMS. For example, several cancer drugs have been approved for reimbursement in the United States but have not been approved for reimbursement in certain European Union Member States.
Our operations and relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to penalties including criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.
Healthcare providers and third-party payors will play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing approval. Our future arrangements with providers, third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial
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arrangements and relationships through which we market, sell and distribute any product candidates for which we obtain marketing approval.
Restrictions under applicable U.S. federal and state healthcare laws and regulations may include the following:
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the federal Anti-Kickback Statute 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; |
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federal false claims laws, including the federal False Claims Act, imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government; |
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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 statements relating to healthcare matters; |
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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health, or HITECH, Act and its implementing regulations, also imposes obligations, including mandatory contractual terms, on certain types of people and entities with respect to safeguarding the privacy, security and transmission of individually identifiable health information; |
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the federal Physician Payment Sunshine Act requires applicable manufacturers of covered drugs, devices, biologics, and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program, with specific exceptions, to report payments and other transfers of value to physicians and teaching hospitals, as well as certain ownership and investment interests held by physicians and their immediate family, which includes annual data collection and reporting obligations; and |
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analogous state and foreign laws and regulations, such as state anti-kickback and false claims 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. |
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 and may require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures. State and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of product candidates from government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs.
Risks Related to Manufacturing and Commercialization
Gene therapy products are novel, complex and difficult to manufacture. We could experience manufacturing problems that result in delays in our development or commercialization programs or otherwise harm our business.
The manufacturing processes used to produce our product candidates are complex, novel and have not been validated for commercial use. Several factors could cause production interruptions, including equipment malfunctions, facility contamination, raw material shortages or contamination, natural disasters, disruption in utility services, human error or disruptions in the operations of our suppliers.
Our product candidates require processing steps that are more complex than those required for most small molecule drugs. Moreover, unlike small molecules, the physical and chemical properties of biologics such as ours generally cannot be fully characterized. As a result, assays of the finished product may not be sufficient to ensure that the product is consistent from lot-to-lot or will perform in the intended manner. Accordingly, we employ multiple steps to control the manufacturing process to assure that the
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process works reproducibly and the product candidate is made strictly and consistently in compliance with the process. Problems with the manufacturing process, even minor deviations from the normal process, could result in pr oduct defects or manufacturing failures that result in lot failures, product recalls, product liability claims or insufficient inventory to conduct clinical trials or supply commercial markets . We may encounter problems achieving adequate quantities and qu ality of clinical-grade materials that meet the FDA, the EMA or other applicable standards or specifications with consistent and acceptable production yields and costs.
In addition, the FDA, the EMA and other foreign regulatory authorities may require us to submit samples of any lot of any approved product together with the protocols showing the results of applicable tests at any time. Under some circumstances, the FDA, the EMA or other foreign regulatory authorities may require that we not distribute a lot until the agency authorizes its release. Slight deviations in the manufacturing process, including those affecting quality attributes and stability, may result in unacceptable changes in the product that could result in lot failures or product recalls. Lot failures or product recalls could cause us to delay product launches or clinical trials, which could be costly to us and otherwise harm our business, financial condition, results of operations and prospects.
We also may encounter problems hiring and retaining the experienced scientific, quality assurance, quality-control and manufacturing personnel needed to operate our manufacturing processes, which could result in delays in production or difficulties in maintaining compliance with applicable regulatory requirements.
Any problems in our manufacturing process or facilities could result in delays in our planned clinical trials and increased costs, and could make us a less attractive collaborator for potential partners, including larger biotechnology companies and academic research institutions, which could limit our access to additional attractive development programs. Problems in our manufacturing process could restrict our ability to meet potential future market demand for our products.
We and our collaborators, third-party manufacturers and suppliers use biological materials and may use hazardous materials, and any claims relating to improper handling, storage or disposal of these materials could be time consuming or costly.
We and our collaborators, third-party manufacturers and suppliers may use hazardous materials, including chemicals and biological agents and compounds that could be dangerous to human health and safety or the environment. Our operations and the operations of our third-party manufacturers and suppliers also produce hazardous waste products. Federal, state and local laws and regulations govern the use, generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations may be expensive, and current or future environmental laws and regulations may impair our product development efforts. In addition, we cannot eliminate the risk of accidental injury or contamination from these materials or wastes. We do not carry specific biological or hazardous waste insurance coverage, and our property, casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended.
Any contamination in our or our third parties’ manufacturing process, shortages of raw materials or reagents or failure of any of our key suppliers to deliver necessary components of our platform could result in delays in our clinical development or marketing schedules.
Given the nature of biologics manufacturing, there is a risk of contamination. Any contamination could materially adversely affect our or our third-party vendor’s ability to produce our gene therapies on schedule and could therefore harm our results of operations and cause reputational damage.
The raw materials required in our and our third-party vendors manufacturing processes are derived from biological sources. We cannot assure you that we or our third-party vendors have, or will be able to obtain on commercially reasonable terms, or at all, sufficient rights to these materials derived from biological sources. Such raw materials are difficult to procure and may also be subject to contamination or recall. A material shortage, contamination, recall, or restriction on the use of biologically derived substances in the manufacture of our product candidates could adversely impact or disrupt the clinical and commercial manufacturing of our product candidates, which could materially and adversely affect our operating results and development timelines.
We rely on third-party suppliers for the supply and manufacture of certain components of our technology. Should our ability to procure these material components from our suppliers be compromised, our ability to continuously operate would be impaired until an alternative supplier is sourced, qualified and tested, which could limit our ability to produce a clinical and commercial supply of our product candidates and harm our business.
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We do not have complete control over any current or futur e third-party manufacturers’ processes and compliance with applicable regulations.
Despite having our own internal cGMP manufacturing capability, we may on occasion utilize third-party manufacturers. Third-party manufacturers may not have the experience or ability to produce our product candidates at clinical or commercial scales within our planned timeframe and cost parameters, and such manufacturers may run into technical or scientific issues that we may be unable to resolve in a timely manner or with available funds.
Additionally, the manufacturing of product candidates for clinical and commercial purposes must comply with the cGMP and other relevant regulatory requirements. The cGMP requirements govern quality control and documentation policies and procedures. Third-party manufacturers’ must demonstrate to the FDA that they can make the product candidate in accordance with the cGMP requirements as part of a pre-approval inspection prior to FDA approval of the product candidate. Failure to pass a pre-approval inspection might significantly delay FDA approval of our product candidates. If any third-party manufacturer fails to comply with FDA or applicable non-U.S. regulatory requirements, we would be subject to possible regulatory action, which could limit the jurisdictions in which we are permitted to sell our products. As a result, our business, financial condition and results of operations may be materially harmed.
The commercial success of any of our product candidates will depend upon its degree of market acceptance by physicians, patients, third-party payors and others in the medical community.
Ethical, social and legal concerns about gene therapy could result in additional regulations restricting or prohibiting our products. Even with the requisite approvals from FDA in the United States, the EMA in the EU and other regulatory authorities internationally, the commercial success of our product candidates will depend, in part, on the acceptance of physicians, patients and health care payors of gene therapy products in general, and our product candidates in particular, as medically necessary, cost-effective and safe. Any product that we commercialize may not gain acceptance by physicians, patients, health care payors and others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenue and may not become profitable. The degree of market acceptance of gene therapy products and, in particular, our product candidates, if approved for commercial sale, will depend on several factors, including:
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the efficacy, durability and safety of such product candidates as demonstrated in clinical trials; |
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the potential and perceived advantages of product candidates over alternative treatments; |
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the cost of treatment relative to alternative treatments; |
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the clinical indications for which the product candidate is approved by the FDA or the European Commission; |
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the willingness of physicians to prescribe new therapies; |
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the willingness of the target patient population to try new therapies; |
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the prevalence and severity of any side effects; |
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product labeling or product insert requirements of the FDA, EMA or other regulatory authorities, including any limitations or warnings contained in a product’s approved labeling; |
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relative convenience and ease of administration; |
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the strength of marketing and distribution support; |
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the timing of market introduction of competitive products; |
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publicity concerning our products or competing products and treatments; and |
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sufficient third-party payor coverage and adequate reimbursement. |
Even if a potential product displays a favorable efficacy and safety profile in preclinical studies and clinical trials, market acceptance of the product will not be fully known until after it is launched.
We face significant competition in an environment of rapid technological change and it is possible that our competitors may achieve regulatory approval before us or develop therapies that are more advanced or effective than ours, which may harm our business and financial condition, and our ability to successfully market or commercialize our product candidates.
The biotechnology and pharmaceutical industries, including the gene therapy field, are characterized by rapidly changing technologies, competition and a strong emphasis on intellectual property. We are aware of several companies focused on developing gene therapies in various indications as well as several companies addressing other methods for modifying genes and regulating gene
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expr ession. We may also face competition from large and specialty pharmaceutical and biotechnology companies, academic research institutions, government agencies and public and private research institutions. To our knowledge, other therapies, products or prod uct candidates currently in development include:
For the treatment of XLMTM, Valerion Therapeutics, LLC, or Valerion, is studying VAL-0620, a fusion protein consisting of an antibody linked to MTM1. Preclinical evaluation of this approach in the MTM1 murine model demonstrated improvements in both muscle structure and function, as reported in a 2013 publication. Working in collaboration with IONIS Pharmaceuticals, Inc., Dynacure S.A.S., or Dynacure, is studying Dyn101, an antisense oligonucleotide designed to downregulate the expression of the DNM2 protein as a potential treatment for centronuclear myopathies. Preclinical evaluation of this approach in a MTM1 knockout mouse model demonstrated a reduction of DNM2 protein expression in muscle, correction of muscle pathology and extended lifespan of affected mice. Neither the Valerion or Dynacure programs have been reported to have progressed to clinical development.
For the treatment of Crigler-Najjar, the current standard of care is phototherapy, and upon disease progression, liver transplant. There are currently no products approved specifically for the treatment of Crigler-Najjar. Genethon, a French not-for-profit organization, and has announced that it initiated a clinical trial for its AAV-UGT1A1 gene therapy for the treatment of Crigler-Najjar Syndrome. LogicBio Therapeutics, Inc. is studying LB-301, an AAV vector designed to insert a functional copy of the UGT1A1 gene into the albumin locus by homologous recombination, in the liver. LB-301 is currently in the discovery phase of development. Promethera has received orphan drug designation from the FDA and European Commission for the treatment of Crigler-Najjar Syndrome for HepaStem, a product that comprises heterologous human adult liver progenitor cells. Promethera previously completed a Phase 1/2 study that enrolled patients with Crigler-Najjar Syndrome or ornithine transcarbamylase deficiency. No further development in Crigler-Najjar Syndrome has been announced for HepaStem. Additionally, Alexion and Moderna had been collaborating to develop a messenger RNA product candidate for the treatment of Crigler-Najjar. The collaboration has been terminated and it is unknown whether Moderna will continue development of this program on its own.
For the treatment of Pompe disease, the current standard of care is enzyme replacement therapy (ERT) with recombinant GAA protein. Genzyme Corporation currently markets MYOZYME and LUMIZYME, which are ERTs for the treatment of Pompe disease. Multiple companies, including Genzyme Corporation, Amicus Therapeutics, Inc., Valerion Therapeutics, LLC and Oxyrane UK Limited are currently reported to be developing next generation ERT to treat Pompe disease. The furthest advanced of these is neoGAA from Genzyme Corporation. In addition, there are currently six companies researching alternative gene therapy approaches to treating Pompe disease, including Spark Therapeutics, Inc., AVROBIO, Inc., Lacerta Therapeutics, Inc., Regeneron Pharmaceuticals, Inc., Amicus Therapeutics, Inc., and Actus Therapeutics, Inc. Of these, only Actus Therapeutics, Inc. is clinically active and recruiting patients for a screening study to determine eligibility for a future Phase 1/2 interventional human clinical trial.
For the treatment of CASQ2-CPVT, patients commonly receive nadolol or propranolol as first-line treatment, sometimes with the addition of a calcium channel blocker. Flecainide, a sodium channel blocker, beta-blockers, and implantable cardioverter defibrillators, are also used in the treatment of CASQ2-CPVT. Although infrequent, refractory cases may receive a heart transplant. There are no known investigational therapies in development for CASQ2-CPVT.
Many of our potential competitors, alone or with their strategic partners, have substantially greater financial, technical and other resources than we do, such as larger research and development, clinical, marketing and manufacturing organizations. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated among a smaller number of competitors. Our commercial opportunity could be reduced or eliminated if 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 product candidates that we may develop. Competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market, if ever. Additionally, new or advanced technologies developed by our competitors may render our current or future product candidates uneconomical or obsolete, and we may not be successful in marketing our product candidates against competitors.
To become and remain profitable, we must develop and eventually commercialize product candidates with significant market potential, which will require us to be successful in a range of challenging activities. These activities can include completing preclinical studies and initiating and completing clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those products that are approved and satisfying any post marketing requirements. We may never succeed in any or all of these activities and, even if we do, we may never generate revenues that are significant or large enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our company also could cause you to lose all or part of your investment.
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The pricing, insurance coverage and reimbursement status of newly approved products is unc ertain. Failure to obtain or maintain adequate coverage and reimbursement for our product candidates, if approved, could limit our ability to market those products and decrease our ability to generate product revenue.
Our target indications, including XLMTM, Crigler-Najjar, Pompe disease and CASQ2-CPVT, are indications with small patient populations. In order for products that are designed to treat smaller patient populations to be commercially viable, the reimbursement for such products must be higher, on a relative basis, to account for the lack of volume. Accordingly, we will need to implement a coverage and reimbursement strategy for any approved product candidate that accounts for the smaller potential market size. If we are unable to establish or sustain coverage and adequate reimbursement for any future product candidates from third-party payors, the adoption of those products and sales revenue will be adversely affected, which, in turn, could adversely affect the ability to market or sell those product candidates, if approved.
We expect the cost of a single administration of gene therapy products, such as those we are developing, to be substantial when and if they achieve regulatory approval. Therefore, we expect that coverage and reimbursement by government and private payors will be essential for most patients to be able to afford these treatments. Accordingly, sales of any of our product candidates will depend substantially, both domestically and internationally, on the extent to which the costs of our product candidates will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or will be reimbursed by government authorities, private health coverage insurers and other third-party payors. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to realize a sufficient return on our investment.
There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. In the United States, the principal decisions about reimbursement by government authorities for new products are typically made by the CMS, since CMS decides whether and to what extent a new product will be covered and reimbursed under Medicare. Private payors tend to follow CMS to a substantial degree. However, one payor’s determination to provide coverage for a drug product does not assure that other payors will also provide coverage for the drug product. Further, a payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. It is difficult to predict what CMS will decide with respect to reimbursement for novel products such as ours since there is no body of established practices and precedents for these new products. Reimbursement agencies in Europe may be more conservative than CMS. For example, a number of cancer drugs have been approved for reimbursement in the United States and have not been approved for reimbursement in certain European countries.
Outside the United States, international operations are generally subject to extensive governmental price controls and other market regulations, and we believe the increasing emphasis on cost-containment initiatives in Europe, Canada and other countries has and will continue to put pressure on the pricing and usage of therapeutics such as our product candidates. In many countries, particularly the countries of the EU, the prices of medical products are subject to varying price control mechanisms as part of national health systems. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. In general, the prices of products under such systems are substantially lower than in the United States. Other countries allow companies to fix their own prices for products, but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our product candidates. Accordingly, in markets outside the United States, the reimbursement for our product candidates may be reduced compared with the United States and may be insufficient to generate commercially reasonable revenues and profits.
Moreover, increasing efforts by governmental and third-party payors, in the United States and internationally, to cap or reduce healthcare costs may cause such organizations to limit both coverage and level of reimbursement for new products approved and, as a result, they may not cover or provide adequate payment for our product candidates. We expect to experience pricing pressures in connection with the sale of any of our product candidates due to the trend toward managed healthcare, the increasing influence of certain third-party payors, such as health maintenance organizations, and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs and surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products into the healthcare market. Recently there have been instances in which third-party payors have refused to reimburse treatments for patients for whom the treatment is indicated in the FDA-approved product label. Even if we are successful in obtaining FDA approvals to commercialize our products, we cannot guarantee that we will be able to secure reimbursement for all patients for whom treatment with our products is indicated.
In addition to CMS and private payors, professional organizations such as the American Medical Association, or the AMA, can influence decisions about reimbursement for new products by determining standards for care. In addition, many private payors contract with commercial vendors who sell software that provide guidelines that attempt to limit utilization of, and therefore reimbursement for, certain products deemed to provide limited benefit to existing alternatives. Such organizations may set guidelines that limit reimbursement or utilization of our product candidates. Even if favorable coverage and reimbursement status is attained for
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one or more products for which we or our collaborators receive regulatory approval, le ss favorable coverage policies and reimbursement rates may be implemented in the future.
If we are unable in the future to establish U.S. or global sales and marketing capabilities or enter into agreements with third parties to sell and market our product candidates, we may not be successful in commercializing our product candidates if they are approved and we may not be able to generate any revenue.
We currently do not have a marketing or sales team for the marketing, sales and distribution of any of our product candidates that are able to obtain regulatory approval. To commercialize any product candidates after approval, we must build on a territory-by-territory basis marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and we may not be successful in doing so. If our product candidates receive regulatory approval, we may decide to establish an internal sales or marketing team with technical expertise and supporting distribution capabilities to commercialize our product candidates, which will be expensive and time-consuming and will require significant attention of our executive officers to manage. Any failure or delay in the development of our internal sales, marketing and distribution capabilities would adversely impact the commercialization of any of our product candidates that we obtain approval to market.
With respect to the commercialization of all or certain of our product candidates, we may choose to collaborate, either globally or on a territory-by-territory basis, with third parties that have direct sales forces and established distribution systems, either to augment our own sales force and distribution systems or in lieu of our own sales force and distribution systems. If we are unable to enter into such arrangements when needed on acceptable terms, or at all, we may not be able to successfully commercialize any of our product candidates that receive regulatory approval or any such commercialization may experience delays or limitations. If we are not successful in commercializing our product candidates, either on our own or through collaborations with one or more third parties, our future product revenue will suffer and we may incur significant additional losses.
We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we focus on research programs and product candidates that we identify for specific indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to timely capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.
We may not be successful in finding strategic collaborators for continuing development of certain of our product candidates or successfully commercializing or competing in the market for certain indications.
We have in the past, and may in the future, decide to collaborate with non-profit organizations, universities, pharmaceutical and biotechnology companies for the development and potential commercialization of existing and new product candidates. We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing drugs, the existence of uncertainty with respect to our 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 us for our product candidate. The terms of any additional collaborations or other arrangements that we may establish may not be favorable to us.
We may also be restricted under existing collaboration agreements from entering into future agreements on certain terms with potential collaborators. Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.
We may not be able to negotiate additional collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of
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any sales or marketing activiti es, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital , which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue.
The success of our collaboration arrangements will depend heavily on the efforts and activities of our 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. Any such termination or expiration would adversely affect us financially and could harm our business reputation.
Risks Related to Our Financial Position
Comprehensive tax reform bills could increase the tax burden on our orphan drug programs and adversely affect our business and financial condition.
The U.S. government recently enacted comprehensive tax legislation that includes significant changes to the taxation of business entities. These changes include, among others, (i) a permanent reduction to the corporate income tax rate, (ii) a partial limitation on the deductibility of business interest expense, (iii) a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system (along with certain rules designed to prevent erosion of the U.S. income tax base) and (iv) a one-time tax on accumulated offshore earnings held in cash and illiquid assets, with the latter taxed at a lower rate.
Further, the newly enacted comprehensive tax legislation, among other things , reduces the orphan drug tax credit from 50% to 25% of qualifying expenditures. When and if we become profitable, this reduction in tax credits may result in an increased federal income tax burden on our orphan drug programs as it may cause us to pay federal income taxes earlier under the revised tax law than under the prior law and, despite being partially off-set by a reduction in the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, may increase our total federal tax liability attributable to such programs.
Notwithstanding the reduction in the corporate income tax rate, the overall impact of this tax reform is uncertain, and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will conform to the newly enacted federal tax law.
We have a history of operating losses, and we may not achieve or sustain profitability. We anticipate that we will continue to incur losses for the foreseeable future. If we fail to obtain additional funding to conduct our planned research and development effort, we could be forced to delay, reduce or eliminate our product development programs or commercial development efforts.
We are an early-stage biotechnology company with a limited operating history on which to base your investment decision. Biotechnology product development is a highly speculative undertaking and involves a substantial degree of risk. Our operations to date have been limited primarily to organizing and staffing our company, business planning, raising capital, acquiring and developing product and technology rights, manufacturing, and conducting research and development activities for our product candidates. We have never generated any revenue from product sales. We have not obtained regulatory approvals for any of our product candidates, and have funded our operations to date through proceeds from sales of our preferred stock and common stock.
We have incurred net losses in each year since our inception. We incurred a net loss of $90.2 million and $59.7 million for the years ended December 31, 2017 and 2016, respectively, and a net loss of $93.2 million and $65.9 million for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, we had an accumulated deficit of $283.9 million. Substantially all of our operating losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant expenses and operating losses over the next several years and for the foreseeable future as we intend to continue to conduct research and development, clinical testing, regulatory compliance activities, manufacturing activities, and, if any of our product candidates is approved, sales and marketing activities that, together with anticipated general and administrative expenses, will likely result in us incurring significant losses for the foreseeable future. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ deficit and working capital.
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We expect that we will need to raise additional funding before we can expect to become profitable from any potential future sales of our products. This additional financing may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit, or terminate our product development efforts or other operations.
We will require substantial future capital in order to complete planned and future preclinical and clinical development for AT132, AT342, AT982, AT307 and other future product candidates, if any, and potentially commercialize these product candidates. We expect our spending levels to increase in connection with our preclinical studies and clinical trials of our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant expenses related to commercial launch, product sales, medical affairs, marketing, manufacturing and distribution. Furthermore, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate certain of our licensing activities, our research and development programs or other operations.
Our operations have consumed significant amounts of cash since inception. As of September 30, 2018, our cash, cash equivalents, marketable securities and restricted cash were $285.5 million, which includes long-term investments of approximately $1.3 million and restricted cash of approximately $3.6 million
Our future capital requirements will depend on many factors, including:
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the costs associated with the scope, progress and results of discovery, preclinical development, laboratory testing and clinical trials for our product candidates; |
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the costs associated with the development of our internal manufacturing facility and processes; |
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the costs related to the extent to which we enter into partnerships or other arrangements with third parties in order to further develop our product candidates; |
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the costs and fees associated with the discovery, acquisition or in-license of product candidates or technologies; |
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our ability to establish collaborations on favorable terms, if at all; |
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the costs of future commercialization activities, if any, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval; |
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revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval; and |
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the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims. |
Our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of product candidates that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives, which may not be available to us on acceptable terms, or at all.
Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
We are an early-stage biotechnology company formed in November 2012. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, acquiring our technology, identifying potential product candidates, undertaking research and preclinical studies of our product candidates, manufacturing, and establishing licensing arrangements. We have not yet demonstrated the ability to complete clinical trials of our product candidates, obtain marketing approvals, manufacture a commercial scale product or conduct sales and marketing activities necessary for successful commercialization. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history.
In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition from a company with a licensing and research focus to a company that is also capable of supporting clinical development and commercial activities. We may not be successful in such a transition.
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Our ability to utilize our net operating loss carryforwards may be subject to limitation.
We have incurred substantial losses during our history and do not expect to become profitable in the near future and we may never achieve profitability. As of December 31, 2017, we had federal net operating loss carryforwards of $77.3 million, which begin to expire in 2033. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards, or NOLs, and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
Risks Related to Intellectual Property
If we are unable to obtain and maintain patent protection for our products and technology, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize products and technology similar or identical to ours, and our ability to successfully commercialize our products and technology may be adversely affected.
Our commercial success depends in part on our ability to obtain and maintain proprietary or intellectual property protection in the United States and other countries for our current product candidates and future products, as well as our core technologies, including our manufacturing know-how. We strive to protect and enhance the proprietary technology, inventions and improvements that are commercially important to the development of our business by seeking, maintaining and defending our intellectual property, whether developed internally or licensed from third parties. We also rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop, strengthen and maintain our proprietary position in the field of gene therapy. Additionally, we intend to rely on regulatory protection afforded through rare drug designations, data exclusivity and market exclusivity as well as patent term extensions, where available.
Our in-licensed patents and patent applications are directed to the compositions of matter and methods of use related to various aspects of our product candidates as well as certain aspects of our manufacturing capabilities. The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation.
The degree of patent protection we require to successfully compete in the marketplace may be unavailable or severely limited in some cases and may not adequately protect our rights or permit us to gain or keep any competitive advantage. We cannot provide any assurances that any of our licensed patents have, or that any of our pending licensed patent applications that mature into issued patents will include, claims with a scope sufficient to protect our current and future product candidates or otherwise provide any competitive advantage. The FSM and Genethon patent families were filed only in the United States, and therefore these patent families will not provide patent protection outside the United States. While other patent families include foreign counterparts, the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Furthermore, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally twenty years after it is filed. Various extensions may be available; however, the life of a patent, and the protection it affords, is limited. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. If any of our product candidates are approved by the FDA as a biological product under a BLA in the United States, we believe the product would qualify for a 12-year period of exclusivity. For example, if our AT132 product was approved by the FDA as a biological product under a BLA in 2020, we believe it would qualify for a 12-year period of exclusivity, which would expire in 2032, or two years before the Genethon patent family will expire in the United States absent patent term adjustment or patent term extension. Moreover, our exclusive licenses are subject to retained rights, which may adversely impact our competitive position. As a result, our licensed patent portfolio may not provide us with adequate and continuing patent protection sufficient to exclude others from commercializing products similar to our product candidates, including biosimilar versions of such products. In addition, the patent portfolio licensed to us is, or may be, licensed to third parties, such as outside our field, and such third parties may have certain enforcement rights. Thus, patents licensed to us could be put at risk of being invalidated or interpreted narrowly in litigation filed by or against another licensee or in administrative proceedings brought by or against another licensee in response to such litigation or for other reasons.
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Other parties have developed technologies that may be related or competitive to our own and such parties may have filed or may file patent applications, or may have received or may receive patents, claiming inventions that may overlap or conflict with those claimed in our own patent applications or issued patents. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and in other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot know with certainty whether the inventors of our licensed patents and applications were the first to make t he inventions claimed in those patents or pending patent applications, or that they were the first to file for patent protection of such inventions. Further, we cannot assure you that all of the potentially relevant prior art relating to our licensed paten ts and patent applications has been found. If such prior art exists, it can invalidate a patent or prevent a patent from issuing from a pending patent application. As a result, the issuance, scope, validity and commercial value of our patent rights cannot be predicted with any certainty.
In addition, the patent prosecution process is expensive and time-consuming, and we or our licensors may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we or our licensors will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. We cannot provide any assurances that we will be able to pursue or obtain additional patent protection based on our research and development efforts, or that any such patents or other intellectual property we generate will provide any competitive advantage. Patent prosecution is a lengthy process and the scope of the claims initially submitted for examination may be significantly narrowed by the time they issue, if at all. Moreover, we do not have the right to control the preparation, filing and prosecution of patent applications, or to control the maintenance of the patents, covering technology that we license from third parties. Therefore, these patents and applications may not be filed, prosecuted or maintained in a manner consistent with the best interests of our business.
Even if we acquire patent protection that we expect should enable us to maintain competitive advantage, third parties, including competitors, may challenge the validity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. In litigation, a competitor could claim that our patents, if issued, are not valid for a number of reasons. If a court agrees, we would lose our rights to those challenged patents.
The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability and our licensed patents may be challenged in courts or patent offices in the United States and abroad. For example, we may be subject to a third-party submission of prior art to the U.S. Patent and Trademark Office, or USPTO, challenging the validity of one or more claims of our licensed patents. Such submissions may also be made prior to a patent’s issuance, precluding the granting of a patent based on one of our pending licensed patent applications. We may become involved in opposition, derivation, reexamination, inter partes review, post-grant review, interference, or similar proceedings in the United States or abroad, challenging the patent rights of others from whom we have obtained licenses to such rights. Furthermore, our licensed patents may be challenged in district court. Competitors may claim that they invented the inventions claimed in such issued patents or patent applications prior to the inventors of our licensed patents, or may have filed patent applications before the inventors of our licensed patents did. A competitor may also claim that we are infringing its patents and that we therefore cannot practice our technology as claimed under our licensed patents, if issued. As a result, one or more claims of our licensed patents may be narrowed or invalidated.
Even if they are unchallenged, our licensed patents and pending patent applications, if issued, may not provide us with any meaningful protection or prevent competitors from designing around our patent claims to circumvent our licensed patents by developing similar or alternative technologies or therapeutics in a non-infringing manner. For example, even if we have a valid and enforceable patent, we may not be able to exclude others from practicing our invention if the other party can show that they used the invention in commerce before our filing date or the other party benefits from a compulsory license. Moreover, a third party may develop a competitive product that provides benefits similar to one or more of our product candidates but that uses a vector or an expression construct that falls outside the scope of our patent protection or license rights. If the patent protection provided by the patents and patent applications we hold or pursue with respect to our product candidates is not sufficiently broad to impede such competition, our ability to successfully commercialize our product candidates could be negatively affected, which would harm our business. Although currently all of our patents and patent applications are in-licensed, similar risks would apply to any patents or patent applications that we may own or in-license in the future.
Our strategy of obtaining rights to key technologies through in-licenses may not be successful.
We seek to expand our product candidate pipeline in part by in-licensing the rights to key technologies, including those related to gene delivery. The future growth of our business will depend in part on our ability to in-license or otherwise acquire the rights to additional product candidates and technologies. We cannot assure you that we will be able to in-license or acquire the rights to any product candidates or technologies from third parties on acceptable terms or at all.
The in-licensing and acquisition of these technologies is a highly competitive area, and a number of more established companies are also pursuing strategies to license or acquire product candidates or technologies that we may consider attractive. These established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and
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commercialization capabilities. In addition, companies that perceive us to be a competitor may be unwilling to license rights to us. Furthermore, we may be unable to identify suitable product candidates or techno logies within our area of focus. If we are unable to successfully obtain rights to suitable product candidates or technologies, our business, financial condition and prospects could suffer.
If we breach our license agreements, it could have a material adverse effect on our commercialization efforts for our product candidates.
If we breach any of the agreements under which we license the use, development and commercialization rights to our product candidates or technology from third parties, we could lose license rights that are important to our business. We currently hold licenses or other rights for certain intellectual property, such as from REGENXBIO relating to various AAV vectors, from Genethon related to XLMTM, from the University of Pennsylvania relating to Crigler-Najjar, and from ICSM relating to various nucleic acid sequences associated with single mutation arrhythmias related to CASQ2-CPVT.
Under our existing license agreements, we are subject to various obligations, including diligence obligations such as development and commercialization obligations, as well as potential royalty payments and other obligations. If we fail to comply with any of these obligations or otherwise breach our license agreements, our licensors may have the right to terminate the applicable license in whole or in part. Generally, the loss of any one of our current licenses, or any other license we may acquire in the future, could harm our business, prospects, financial condition and results of operations.
Licensing of intellectual property is of critical importance to our business and involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding intellectual property subject to a license agreement, including:
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the scope of rights granted under the license agreement and other interpretation-related issues; |
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whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement; |
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our right to sublicense patent and other intellectual property rights to third parties under collaborative development relationships; |
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our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our product candidates, and what activities satisfy those diligence obligations; |
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the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners; and |
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whether and the extent to which inventors are able to contest the assignment of their rights to our licensors. |
If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates. In addition, if disputes arise as to ownership of licensed intellectual property, our ability to pursue or enforce the licensed patent rights may be jeopardized. If we or our licensors fail to adequately protect this intellectual property, our ability to commercialize our products could suffer.
All of our current product candidates are licensed from or based upon licenses from third parties. If any of these license or sublicense agreements are terminated or interpreted to narrow our rights, our ability to advance our current product candidates or develop new product candidates based on these technologies will be materially adversely affected.
We now depend, and will continue to depend, on licenses and sublicenses from third parties and potentially on other strategic relationships with third parties for the research, development, manufacturing and commercialization of our current product candidates. If any of our licenses or relationships or any in-licenses on which our licenses are based are terminated or breached, we may:
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lose our rights to develop and market our current product candidates; |
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lose patent or trade secret protection for our current product candidates; |
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experience significant delays in the development or commercialization of our current product candidates; |
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not be able to obtain any other licenses on acceptable terms, if at all; or |
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incur liability for damages. |
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Additionally, even if not terminated o r breached, our intellectual property licenses or sublicenses may be subject to disagreements over contract interpretation which could narrow the scope of our rights to the relevant intellectual property or technology or increase our financial or other obl igations.
If we experience any of the foregoing, it could have a materially adverse effect on our business and could force us to cease operations which could cause you to lose all of your investment.
We are required to pay certain royalties under our license agreements with third-party licensors, and we must meet certain milestones to maintain our license rights.
Under our license agreements with REGENXBIO, the University of Pennsylvania, and ICSM, we will be required to pay royalties based on our net revenues from sales of our products utilizing the technologies and products. These royalty payments could adversely affect the overall profitability for us of any products that we may seek to commercialize. In order to maintain our license rights under these license agreements, we will need to meet certain specified milestones, subject to certain cure provisions, in the development of our product candidates and in the raising of funding. In addition, these agreements contain development obligations and we may not be successful in meeting all of the obligations in the future on a timely basis or at all. We may need to outsource and rely on third parties for many aspects of the clinical development, sales and marketing of our products covered under our license agreements. Delay or failure by any such third parties could adversely affect the continuation of our license agreements with third-party licensors.
Third parties may initiate legal proceedings alleging claims of intellectual property infringement, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.
Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates and future products and use our proprietary technologies without infringing the proprietary rights and intellectual property of third parties. The biotechnology and pharmaceutical industries are characterized by extensive and frequent litigation regarding patents and other intellectual property rights. We may in the future become party to, or threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our product candidates, future products and technology, including interference or inter partes review proceedings before the USPTO. Our competitors or other third parties may assert infringement or misappropriation claims against us, alleging that our therapeutics, manufacturing methods, formulations or administration methods are covered by their patents. For example, we do not know which processes we will use for commercial manufacture of our future products, or which technologies owned or controlled by third parties may prove important or essential to those processes. Given the vast number of patents in our field of technology, we cannot be certain or guarantee that we do not infringe existing patents or that we will not infringe patents that may be granted in the future. Many companies have filed, and continue to file, patent applications related to gene therapy and orphan diseases. Some of these patent applications have already been allowed or issued and others may issue in the future. Since this area is competitive and of strong interest to pharmaceutical and biotechnology companies, there will likely be additional patent applications filed and additional patents granted in the future, as well as additional research and development programs expected in the future. Furthermore, because patent applications can take many years to issue, may be confidential for 18 months or more after filing and can be revised before issuance, there may be applications now pending which may later result in issued patents that may be infringed by the manufacture, use, sale or importation of our product candidates or future products. If a patent holder believes the manufacture, use, sale or importation of one of our product candidates or future products infringes its patent, the patent holder may sue us even if we have licensed other patent protection for our technology. Moreover, we may face patent infringement claims from non-practicing entities that have no relevant product revenue and against whom our licensed patent portfolio may therefore have no deterrent effect.
It is also possible that we have failed to identify relevant third-party patents or applications. For example, applications filed before November 29, 2000 and certain applications filed after that date that will not be filed outside the United States remain confidential until patents issue. Moreover, it is difficult for industry participants, including us, to identify all third-party patent rights that may be relevant to our product candidates and technologies because patent searching is imperfect due to differences in terminology among patents, incomplete databases and the difficulty in assessing the meaning of patent claims. We may fail to identify relevant patents or patent applications or may identify pending patent applications of potential interest but incorrectly predict the likelihood that such patent applications may issue with claims of relevance to our technology. In addition, we may be unaware of one or more issued patents that would be infringed by the manufacture, sale, importation or use of a current or future product candidate, or we may incorrectly conclude that a third-party patent is invalid, unenforceable or not infringed by our activities. Additionally, pending patent applications that have been published can, subject to certain limitations, be later amended in a manner that could cover our technologies, our future products or the manufacture or use of our future products.
Third parties may assert infringement claims against us based on existing intellectual property rights and intellectual property rights that may be granted in the future. If we were to challenge the validity of an issued U.S. patent in court, such as an issued U.S. patent of potential relevance to some of our product candidates or future products or manufacture or methods of use, we would need to overcome a statutory presumption of validity that attaches to every U.S. patent. This means that in order to prevail, we would have to
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present clear and convincing evidence as to the invalidity of the patent’s claims. There is no assurance that a court would find in our favor on questions of infringement or validity.
Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome is uncertain. If we are found, or believe there is a risk we may be found, to infringe a third party’s intellectual property rights, we could be required or may choose to obtain a license from such third party to continue developing and marketing our products and technology. However, we may not be able to obtain any such license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. Without such a license, we could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our future products or force us to cease some of our business operations, which could materially harm our business. Alternatively, we may need to redesign our infringing products, which may be impossible or require substantial time and monetary expenditure. If we lose a foreign patent lawsuit, alleging our infringement of a competitor’s patents, we could be prevented from marketing our therapeutics in one or more foreign countries and/or be required to pay monetary damages for infringement or royalties in order to continue marketing. Claims that we have misappropriated the confidential information, trade secrets or other intellectual property of third parties could have a similar negative impact on our business. Any of these outcomes would have a materially adverse effect on our business.
Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court, or redesign our future products or processes. Patent litigation is costly and time-consuming, and some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. We may not have sufficient resources to bring these actions to a successful conclusion. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could delay our research and development efforts and limit our ability to continue our operations.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position may be harmed.
In addition to the protection afforded by patents, we rely upon unpatented trade secret protection, unpatented know-how and continuing technological innovation to develop and maintain our competitive position. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our contractors, collaborators, scientific advisors, employees and consultants and invention assignment agreements with our consultants and employees. We may not be able to prevent the unauthorized disclosure or use of our technical know-how or other trade secrets by the parties to these agreements, however, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures is difficult and we do not know whether the steps we have taken to protect our proprietary technologies will be effective. If any of the contractors, collaborators, scientific advisors, employees and consultants who are parties to these agreements breaches or violates the terms of any of these agreements, we may not have adequate remedies for any such breach or violation. As a result, we could lose our trade secrets. Enforcing a claim that a third party illegally obtained and is using our trade secrets, like patent litigation, is expensive and time consuming and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing or unwilling to protect trade secrets.
Our trade secrets could otherwise become known or be independently discovered by our competitors. Competitors could purchase our product candidates and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If our trade secrets are not adequately protected or sufficient to provide an advantage over our competitors, our competitive position could be adversely affected, as could our business. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating our trade secrets.
Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In addition, periodic maintenance fees on issued patents often must be paid to the USPTO and foreign patent agencies over the lifetime of the patent. While an unintentional lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in
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which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in pa rtial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribe d time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we or our licensors fail to maintain the patents and patent applications covering our product candidates, we may not be able to stop a competitor from marke ting drugs that are the same as or similar to our product candidates, which would have a material adverse effect on our business.
Some intellectual property that we have in-licensed may have been discovered through government funded programs and thus may be subject to federal regulations such as “march-in” rights, certain reporting requirements and a preference for U.S.-based companies. Compliance with such regulations may limit our exclusive rights, and limit our ability to contract with non-U.S. manufacturers.
Many of the intellectual property rights we have licensed are generated through the use of U.S. government funding and are therefore subject to certain federal regulations. As a result, the U.S. government may have certain rights to intellectual property embodied in our current or future product candidates pursuant to the Bayh-Dole Act of 1980, or Bayh-Dole Act. These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). The U.S. government also has the right to take title to these inventions if we, or the applicable licensor, fail to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us or the applicable licensor to expend substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturers may limit our ability to contract with non-U.S. product manufacturers for products covered by such intellectual property. To the extent any of our current or future intellectual property is generated through the use of U.S. government funding, the provisions of the Bayh-Dole Act may similarly apply.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. The requirements for patentability may differ in certain countries, particularly in developing countries. Moreover, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in foreign intellectual property laws. 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. Further, licensing partners may not prosecute patents in certain jurisdictions in which we may obtain commercial rights, thereby precluding the possibility of later obtaining patent protection in these countries. For example, the FSM and Genethon patent families were only filed in the United States, and therefore these patent families will not provide patent protection outside the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and may also export infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
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We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time consuming and uns uccessful.
Competitors may infringe our patents, trademarks, copyrights or other intellectual property. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming and divert the time and attention of our management and scientific personnel. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents, in addition to counterclaims asserting that our patents are invalid or unenforceable, or both. In any patent infringement proceeding, there is a risk that a court will decide that a patent of ours is invalid or unenforceable, in whole or in part, and that we do not have the right to stop the other party from using the invention at issue. There is also a risk that, even if the validity of such patents is upheld, the court will construe the patent’s claims narrowly or decide that we do not have the right to stop the other party from using the invention at issue on the grounds that our patent claims do not cover the invention. An adverse outcome in a litigation or proceeding involving our patents could limit our ability to assert our patents against those parties or other competitors, and may curtail or preclude our ability to exclude third parties from making and selling similar or competitive products. Any of these occurrences could adversely affect our competitive business position, business prospects and financial condition. Similarly, if we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this case, we could ultimately be forced to cease use of such trademarks.
Even if we establish infringement, the court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may or may not be an adequate remedy. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during 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 shares of our common stock. Moreover, there can be no assurance that we will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded. Even if we ultimately prevail in such claims, the monetary cost of such litigation and the diversion of the attention of our management and scientific personnel could outweigh any benefit we receive as a result of the proceedings.
Changes to the patent law in the United States and other jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our product candidates.
As is the case with other biotechnology companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biotechnology industry involve both technological and legal complexity and is therefore costly, time consuming and inherently uncertain. Recent patent reform legislation in the United States and other countries, including the Leahy-Smith America Invents Act, or Leahy-Smith Act, signed into law in September 2011, could increase those uncertainties and costs. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art and provide more efficient and cost-effective avenues for competitors to challenge the validity of patents. In addition, the Leahy-Smith Act has transformed the U.S. patent system into a “first to file” system. The first-to-file provisions, however, only became effective in March 2013. Accordingly, it is not yet clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could make it more difficult to obtain patent protection for our inventions and increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could harm our business, results of operations and financial condition.
The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. For example, in Association for Molecular Pathology v. Myriad Genetics, Inc., the Supreme Court ruled that a “naturally occurring DNA segment is a product of nature and not patent eligible merely because it has been isolated,” and invalidated Myriad Genetics’s patents on the BRCA1 and BRCA2 genes. Certain claims of our licensed patents relate to isolated AAV vectors, capsid proteins, or nucleic acids. To the extent that such claims are deemed to be directed to natural products, or to lack an inventive concept above and beyond an isolated natural product, a court may decide the claims are invalid under Myriad. Additionally, there have been recent proposals for additional changes to the patent laws of the United States and other countries that, if adopted, could impact our ability to obtain patent protection for our proprietary technology or our ability to enforce our proprietary technology. Depending on future actions by the U.S. Congress, the U.S. courts, the USPTO and the relevant law-making bodies in other countries, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.
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We may be subjec t to claims asserting that our employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property.
Many of our employees, consultants or advisors, and the employees, consultants or advisors of our licensors, are currently, or were previously, employed at or affiliated with universities, hospitals or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants and advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that these individuals or we have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Moreover, some of our and our licensors’ employees, consultants or advisors are or have been affiliated with multiple institutions. There is no guarantee that such institutions will not challenge our or our licensors’ intellectual property ownership rights. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property.
Risks Related to Employee Matters, Managing Growth and Other Risks Related to Our Business
We will need to grow the size of our organization, and we may experience difficulties in managing this growth.
As our development, manufacturing and commercialization plans and strategies develop, and as we fully transition our operations as a public company, we expect to need and are actively recruiting additional managerial, operational, sales, marketing, financial and other personnel. Future growth would impose significant added responsibilities on members of management, including:
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identifying, recruiting, and integrating new employees; |
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retaining existing employees |
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managing our internal development efforts effectively, including the clinical, FDA and international regulatory review process for our product candidates, while complying with our contractual obligations to contractors and other third parties; and |
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improving our operational, financial and management controls, reporting systems and procedures. |
Our future financial performance and our ability to develop, manufacture and commercialize our product candidates will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert financial and other resources, and a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time, to managing these growth activities.
We currently rely, and for the foreseeable future will continue to rely, in substantial part on certain independent organizations, advisors and consultants to provide certain services, including substantially all aspects of regulatory approval, clinical management and manufacturing. We cannot assure you that the services of independent organizations, advisors and consultants will continue to be available to us on a timely basis when needed, or that we can find qualified replacements. In addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval of our product candidates or otherwise advance our business. We cannot assure you that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all.
If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further develop and commercialize our product candidates and, accordingly, may not achieve our research, development and commercialization goals.
Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.
We are highly dependent on the research and development, clinical and business development expertise of Matthew Patterson, our Chief Executive Officer, Dr. Suyash Prasad, our Chief Medical Officer, Dr. John Gray, our Chief Scientific Officer, Natalie Holles, our President and Chief Operating Officer, and Thomas Soloway, our Chief Financial Officer, as well as the other principal
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members of our management, scientific and clinical team. Although we have entered into employment letter agreements or employment agreements with our exec utive officers, each of them may terminate their employment with us at any time. We do not maintain “key person” insurance for any of our executives or other employees. In addition, we rely on consultants and advisors, including scientific and clinical adv isors, to assist us in formulating our research and development and manufacturing strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to pursue our growth strategy will be limited.
Recruiting and retaining qualified scientific, clinical, manufacturing and, if needed, sales and marketing personnel will also be critical to our success. The loss of the services of our executive officers or other key employees could impede the achievement of our research, development and commercialization objectives and seriously harm our ability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop, gain regulatory approval of and commercialize drugs. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. Failure to succeed in clinical trials may make it more challenging to recruit and retain qualified scientific personnel.
If we fail to establish and maintain proper and effective internal control over financial reporting, our operating results and our ability to operate our business could be harmed.
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.
As of December 31, 2017, in accordance with the Sarbanes-Oxley Act, our management was required to perform an evaluation of our internal control over financial reporting. However, because we were an emerging growth company as of December 31, 2017, our independent registered public accounting firm was not required to perform an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act. Accordingly, we cannot assure you that we will not in the future identify one or more material weaknesses in our internal control over financial reporting, which may have a negative impact on our ability to timely and accurately produce financial statements or which may negatively impact the confidence level of our stockholders and other market participants with respect to our ability to produce timely and accurate financial statements. We will be required to include an attestation report on internal control over financial reporting issued by our independent registered accounting firm in our Annual Report on Form 10-K for the year ended December 31, 2018, the date on which we will no longer be deemed an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.
To the extent necessary, implementing any future changes to our internal controls may distract our officers and employees, entail substantial costs to modify our existing processes and take significant time to complete. These changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and harm our business. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements on a timely basis may harm our stock price and make it more difficult for us to raise new capital or effectively market and sell our product candidates once they are approved for commercial sale.
We incur increased costs as a result of operating as a public company and our management is required to devote substantial time to compliance initiatives, each of which may increase when we are no longer an emerging growth company.
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company, which we expect will increase after we are no longer an “emerging growth company.” In addition, the Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the Securities and Exchange Commission and The Nasdaq Stock Market LLC, or Nasdaq, have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Furthermore, as of December 31, 2017, we became an “accelerated filer” and are required to file our annual report and quarterly reports more quickly than we previously had been required to file them, which may require us to dedicate additional resources to the timely filing of such reports.
Additionally, as of December 31, 2018, we will no longer be an emerging growth company and will need to comply with additional disclosure and reporting requirements, including accelerated filing deadlines and an attestation report on internal control
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over fin ancial reporting as of December 31, 2018 issued by our independent registered public accounting firm. We will also be required to include additional information regarding executive compensation in our 2019 proxy statement and hold a nonbinding advisory vot e on executive compensation at our 2019 annual meeting of stockholders.
Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly.
Future acquisitions or strategic alliances could disrupt our business and harm our financial condition and operating results.
We may acquire additional businesses or drugs, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing business, including, for example our August 2015 acquisition of Cardiogen. If we acquire businesses with promising markets or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to successfully integrate them with our existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing and marketing any new drugs resulting from a strategic alliance or acquisition that delay or prevent us from realizing their expected benefits or enhancing our business. We cannot assure you that, following any such acquisition, we will achieve the expected synergies to justify the transaction. The risks we face in connection with acquisitions, include:
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diversion of management time and focus from operating our business to addressing acquisition integration challenges; |
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coordination of research and development efforts; |
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retention of key employees from the acquired company; |
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changes in relationships with strategic partners as a result of product acquisitions or strategic positioning resulting from the acquisition; |
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cultural challenges associated with integrating employees from the acquired company into our organization; |
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the need to implement or improve controls, procedures, and policies at a business that prior to the acquisition may have lacked sufficiently effective controls, procedures and policies; |
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liability for activities of the acquired company before the acquisition, including intellectual property infringement claims, violation of laws, commercial disputes, tax liabilities, and other known liabilities; |
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unanticipated write-offs or charges; and |
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litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders or other third parties. |
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions or strategic alliances could cause us to fail to realize the anticipated benefits of these transactions, cause us to incur unanticipated liabilities and harm the business generally. There is also a risk that future acquisitions will result in the incurrence of debt, contingent liabilities, amortization expenses or incremental operating expenses, any of which could harm our financial condition or operating results.
Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. For example, the global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, such as the 2008 global financial crisis, could result in a variety of risks to our business, including, weakened demand for our product candidates and our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.
We or the third parties upon whom we depend may be adversely affected by natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.
Natural disasters, including earthquakes to which the San Francisco Bay Area is prone, could severely disrupt our operations and have a material adverse effect on our business, results of operations, financial condition and prospects. If a natural disaster, fire, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as our manufacturing facilities, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time.
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The disaster recovery and business continuity pl ans we have in place may prove inadequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which could have a material adverse e ffect on our business.
Our internal computer and information systems, or those used by our CROs, third-party collaborators or other contractors, may fail or suffer security breaches, which could result in a material disruption of our development programs.
Despite the implementation of appropriate security measures, our internal computer and information systems and those of our current and any future CROs, collaborators and other contractors or consultants may become vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such material system failure, or accident, and are unaware of any security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other proprietary information or other similar disruptions. For example, the loss of data from completed or future preclinical studies or clinical trials could result in significant delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability, our competitive position could be harmed and the further development and commercialization of our product candidates could be significantly delayed.
We may be unable to adequately protect our information systems from cyberattacks, which could result in the disclosure of confidential information, damage our reputation, and subject us to significant financial and legal exposure.
Cyberattacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. Cyberattacks could include wrongful conduct by hostile foreign governments, industrial espionage, wire fraud and other forms of cyber fraud, the deployment of harmful malware, denial-of-service, social engineering fraud and/or other means to threaten data confidentiality, integrity and availability. A successful cyberattack could cause serious negative consequences for us, including, without limitation, the disruption of operations, the misappropriation of confidential business information, including financial information, trade secrets, financial loss and the disclosure of corporate strategic plans. To date, we have not experienced a material compromise of our data or information systems. However, although we devote resources to protect our information systems, we realize that cyberattacks are a threat, and there can be no assurance that our efforts will prevent information security breaches that would result in business, legal, financial or reputational harm to us, or would have a material adverse effect on our operating results and financial condition.
Our employees, principal investigators, CROs and consultants may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.
We are exposed to the risk of fraud or other misconduct by our employees, principal investigators, consultants and commercial partners. Misconduct by these parties could include intentional failures to comply with the regulations of FDA and non-U.S. regulators, provide accurate information to the FDA and non-U.S. regulators, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, 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 commission, customer incentive programs and other business arrangements. Such misconduct could also involve the improper use of information obtained in the course of clinical studies, which could result in regulatory sanctions and cause serious harm to our reputation. We have adopted a code of conduct applicable to all of our employees, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.
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Product liability lawsuits against us could cause us to incur substantial liabilities and could limit commercialization of any product candidates that we may develop.
We will face an inherent risk of product liability exposure related to the testing of our product candidates in clinical trials and will face an even greater risk if we commercialize any of our product candidates. If we cannot successfully defend ourselves against claims that our product candidates caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
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decreased demand for any product candidates that we may develop; |
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injury to our reputation and significant negative media attention; |
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withdrawal of clinical trial participants; |
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significant time and costs to defend the related litigation; |
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substantial monetary awards to trial participants or patients; |
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loss of revenue; and |
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the inability to commercialize any product candidates that we may develop. |
We currently maintain product liability insurance coverage of up to $10.0 million, which may not be adequate to cover all liabilities that we may incur. We anticipate that we will need to increase our insurance coverage when we begin clinical trials and if we successfully commercialize any product candidate. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.
We are subject to U.S. and certain foreign export and import controls, sanctions, embargoes, anti-corruption laws, and anti-money laundering laws and regulations. Compliance with these legal standards could impair our ability to compete in domestic and international markets. We can face criminal liability and other serious consequences for violations which can harm our business.
We are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations, various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls, the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and other state and national anti-bribery and anti-money laundering laws in the countries in which we conduct activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees, agents, contractors, and other partners from authorizing, promising, offering, or providing, directly or indirectly, improper payments or anything else of value to recipients in the public or private sector. We may engage third parties for clinical trials outside of the United States, to sell our products abroad once we enter a commercialization phase, and/or to obtain necessary permits, licenses, patent registrations, and other regulatory approvals. We have direct or indirect interactions with officials and employees of government agencies or government-affiliated hospitals, universities, and other organizations. We can be held liable for the corrupt or other illegal activities of our employees, agents, contractors, and other partners, even if we do not explicitly authorize or have actual knowledge of such activities. Any violations of the laws and regulations described above may result in substantial civil and criminal fines and penalties, imprisonment, the loss of export or import privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, and other consequences.
Risks Related to Our Common Stock
The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock.
Our stock price is likely to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your common stock at or above the price at which you purchased them. The market price for our common stock may be influenced by many factors, including:
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the success of competitive drugs or technologies; |
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results of preclinical studies or clinical trials of our product candidates or those of our competitors; |
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unanticipated or serious safety concerns related to the use of any of our product candidates; |
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adverse regulatory decisions, including failure to receive regulatory approval for any of our product candidates; |
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regulatory or legal developments in the United States and other countries; |
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the size and growth of our prospective patient populations; |
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developments concerning our collaborators, our external manufacturers or in-house manufacturing capabilities; |
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inability to obtain adequate product supply for any product candidate for preclinical studies, clinical trials or future commercial sale or inability to do so at acceptable prices; |
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developments or disputes concerning patent applications, issued patents or other proprietary rights; |
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the recruitment or departure of key personnel; |
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the level of expenses related to any of our product candidates or clinical development programs; |
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the results of our efforts to discover, develop, acquire or in-license additional product candidates or drugs; |
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actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts; |
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variations in our financial results or those of companies that are perceived to be similar to us; |
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changes in the structure of healthcare payment systems; |
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market conditions in the biotechnology sector; |
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general economic, industry and market conditions; and |
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the other factors described in this “Risk Factors” section. |
If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.
The trading market for our common stock depends in part on the research and reports that industry or financial analysts publish about us or our business. If one or more of the analysts covering our business downgrade their evaluations of our stock or publish inaccurate or unfavorable evaluations of our company or our stock, the price of our stock could decline. If one or more of these analysts ceases to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline.
Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in dilution of the percentage ownership of our stockholders and could cause our stock price to fall.
We expect that significant additional capital may be needed in the future to continue our planned operations, including conducting our planned clinical trials, manufacturing and commercialization efforts, expanded research and development activities and costs associated with operating as a public company. To raise capital, we may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.
Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.
We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will be limited to the appreciation of stock. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in value of the stock. We cannot guarantee you that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, any action asserting a claim arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws or any action asserting a claim that is governed by the internal affairs doctrine, in each case subject to the Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein and
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the claim not being one which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery or for which the Court of Chancery does not have subject matter jurisdiction . Any person purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have consented to this provision of our amended and restated certificate of incorporation. This choice of forum provisio n may limit our stockholders’ ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and our directors, officers, employees an d agents even though an action, if successful, might benefit our stockholders. Stockholders who do bring a claim in the Court of Chancery could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaw are. The Court of Chancery may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments or results may be more favorable to us than to our stockholders. Alternatively, if a court were to find this provision of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could have a material adverse effect on our business, financial condition or results of operations.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:
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establish a classified board of directors so that not all members of our board are elected at one time; |
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permit only the board of directors to establish the number of directors and fill vacancies on the board; |
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provide that directors may only be removed “for cause” and only with the approval of two-thirds of our stockholders; |
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require super-majority voting to amend some provisions in our restated certificate of incorporation and restated bylaws; |
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authorize the issuance of “blank check” preferred stock that our board could use to implement a stockholder rights plan, also known as a “poison pill”; |
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eliminate the ability of our stockholders to call special meetings of stockholders; |
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prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; |
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prohibit cumulative voting; and |
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establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at annual stockholder meetings. |
Moreover, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
Any of these provisions of our charter documents or Delaware law could, under certain circumstances, depress the market price of our common stock.
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ITEM 2. UNREGISTERED SALES OF EQUI TY SECURITIES AND USE OF PROCEEDS
Use of Proceeds
On July 19, 2016, our Registration Statement on Form S-1 (File No. 333-208842) relating to the initial public offering of our common stock was declared effective by the SEC.
There has been no material change in the expected use of the net proceeds from our initial public offering, as described in our final Prospectus filed with the SEC on July 20, 2016 pursuant to Rule 424(b)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
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Exhibit Description |
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Exhibit
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10.1 |
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Net Commercial Lease, dated August 15, 2018, by and between the Registrant and JCN Partners . |
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10.2 |
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10.3 |
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31.1 |
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31.2 |
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32.1* |
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32.2* |
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101.INS |
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XBRL Instance Document. |
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101.SCH |
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XBRL Taxonomy Extension Schema Document. |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB |
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XBRL Taxonomy Extension Labels Linkbase Document. |
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101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document. |
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* |
This certification is deemed not filed for purpose of section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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AUDENTES THERAPEUTICS, INC.
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Date: |
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November 6, 2018 |
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By: |
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/s/ Matthew Patterson |
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Matthew Patterson |
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Chairman and Chief Executive Officer |
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(Principal Executive Officer)
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Date: |
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November 6, 2018 |
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By: |
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/s/ Tom Soloway |
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Tom Soloway |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
61
Exhibit 10.1
NET COMMERCIAL LEASE
This Net Commercial Lease (this “ Lease ”) dated August 15, 2018, for reference purposes only, is by and between JCN PARTNERS, a California limited partnership (“ Lessor ”), and AUDENTES THERAPEUTICS, INC., a Delaware corporation (“ Lessee ”).
IT IS HEREBY AGREED:
Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the premises described in Paragraph 1 below for the term and subject to the covenants, agreements and conditions hereinafter set forth. Lessee covenants, as a material part of the consideration for this Lease, to keep and perform all said covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of such performance. Prior to the executon of the Lease, Lessee and Lessor have entered into those certain NET COMMERCIAL LEASE Agreements, one dated January 7, 2017 for that certain commercial real property commonly known as 550-3 Eccles Avenue, South San Francisco, California (the “ 550-3 Eccles Lease ”), and the second lease agreement, dated January 7, 2017 for that certain commercial real property commonly known as 528 B, Eccles Avenue, South San Francisco, California (the “ 528 B Eccles Lease ”). The 550-3 Eccles Lease and the 528 B Eccles Lease are collectively referred to as the “ Existing Leases ”. This Lease shall be effective upon its mutual execution and delivery; however, if prior to the Commencment Date, as defined below, an Event of Default exists as to the Existing Leases, then this Lease shall terminate and be of no futher force or effect.
1. Definitions. Unless the context otherwise specifies or requires, the following terms shall have the following meanings:
A. Buildin g . The term “ Building ” shall mean the land and other real property and improvements located in 528-534 Eccles Avenue, South San Francisco, California, the surrounding grounds and parking and driveway areas, including the common easement roadway (the “Common Roadway” ) adjacent to the Building, which location is shown on Exhibit C attached hereto and incorporated herein by this reference.
B. Premises. The term “ Premises ” shall mean those sections of the Building outlined by dark diagonal lines on the floor plan attached hereto as Exhibit A , and incorporated herein by this reference, commonly referred to as 534 Eccles Avenue, South San Francisco, CA, consisting of approximately 37,071 rentable square feet and the exclusive use of forty-one (41) parking spaces marked on Exhibit B , attached hereto and incorporated herein by this reference, or as designated from time to time by Lessor. For purposes of Lessee’s responsibilities under this Lease, the Premises also includes the grounds surrounding the Premises particularly the two exterior concrete blocks and the walkway located adjacent to the East and North exterior walls of the Premises. Lessee shall have access to the Premises twenty-four (24) hours per day, seven (7) days per week.
C. Lessee's Percentage Share. The term “ Lessee's Percentage Share, ” except when said term refers to the cost of maintaining the Common Roadway, shall mean thirty-three and ninety-nine hundredths percent (33.99%). Lessor and Lessee acknowledge that Lessee's Percentage Share, except when said term refers to the cost of maintaining the Common Roadway,
has been obtained by dividing the net r ent al area of the Premises, which Lessor and Lessee agree is 3 7 , 071 square feet, by the total net r ent al area of the Building, which Lessor and Lessee agree is 109,056 square feet, and multiplying such quotient by 100. Lessee’s Percentage Share shall not be subject to change, except for physical additions or deletions to the Premises or Building, or caused by condemnation or destruction.
D. Lessee's Percentage Share of Common Roadway. The term “Lessee's Percentage Share” when said term refers to the cost of maintaining the Common Roadway shall mean nineteen and seventy-four one hundredths percent (19.74%). Lessor and Lessee acknowledge that Lessee's Percentage Share, when said term refers to the cost of maintaining the Common Roadway, has been obtained by dividing the net rental area of the Premises, which Lessor and Lessee agree is 37,071 square feet, by the total square footage of the two buildings which use the Common Roadway which Lessor and Lessee agree is 187,770 square feet, and multiplying such quotient by 100.
E. Common Area Maintenance and Repair Costs. The term “ Common Area Maintenance and Repair Costs ” shall include, but not be limited to, all commercially reasonable costs of maintaining and repairing, including the cost of any maintenance or service contract, the Building's water, sewer, ventilating and air-conditioning systems (unless such system only serves the Premises, or any part thereof, in which event Lessee shall maintain said system), common entryways, doors and passage ways, the plumbing and sewer system and sewer lines which extend from the Premises and the Building, the grounds surrounding the Building (including landscaping whether located adjacent to the Building or elsewhere on the parcel on which the Building is located), the parking areas and driveways and the Common Roadway (including but not limited to the resealing, re-striping and re-paving of all such areas and filling in pot holes), fences, the drain and gutter pipes at the roof level, and all other common areas. Such term shall also include the cost of washing the exterior walls or painting or repairing such walls for the purpose of removing any graffiti which may appear thereon and Lessee’s Percentage Share of a management fee of four and one-half percent (4.5%) of the Base Monthly Rent each month during the term of this Lease. Such term shall also include the cost of any needed replacements of such equipment or systems or any other replacements or capital improvements. With regard to items which are capital improvements, Lessor shall determine what replacements shall constitute a capital improvement and any such costs shall be amortized over the useful life of the improvement, which Lessor shall determine in its discretion, together with interest on the unamortized balance at the rate of 10% per annum if Lessor has used its own funds or the interest rate as may have been paid by Lessor on funds borrowed for the purpose of constructing or installing such replacements or improvements. Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, or any extension thereof, on the date on which Rent is due, an amount equal to Lessee’s Percentage Share for the amortization period of the useful life of such improvement.
(1) Common Area Maintenance and Repair Costs shall not include the following:
(a) The cost of installing, operating and maintaining any specialty service, such as daycare, cafeteria, athletic or recreational club;
2
(b) The cost of any work or service performed for any tenant of the Building (other than Lessee) to a materially greater extent or in a materially more favorable manner than that furnished generally to the tenants and other occupants (including Lessee);
(c) The cost of any repairs, alterations, additions, changes, replacements and other items which are made in order to prepare for a new tenant’s occupancy unless any such cost is required because of Alterations undertaken to the Premises by Lessee;
(d) The cost of any repair in accordance with the casualty and condemnation sections of this Lease, except for deductibles under any insurance policy carried by Lessor;
(e) Any costs representing an amount paid to a corporation related to Lessor which is in excess of the amount which would have been paid in the absence of such relationship;
(f) Interest and penalties due to late payment of any amounts owed by Lessor, except such as may be incurred as a result of Lessee’s failure to timely pay Lessee’s Percentage Share of Real Property Taxes, Insurance premiums or Common Area Maintenance and Repair Costs;
(g) Costs related to the existence and maintenance of Lessor as a legal entity, except to the extent attributable to the operation and management of the Premises or Building;
(h) Legal costs, auditing fees, leasing commissions, advertising costs or fees incurred by Lessor with respect to the Premises, the Building or the Common Roadway;
(i) Costs incurred by Lessor to correct any existing violations of any applicable law, rule, governmental regulation, ordinance or restriction of record (“ Applicable Laws ”) with respect to the Premises, the Building or the Common Roadway; or
(j) Any expense or cost reserves of Lessor.
(2) Lessee, at its sole cost and expense shall have the right during business hours upon not less than five (5) business day advance notice to examine and/or audit the books and documents evidencing the Common Area Maintenance and Repair Costs for both the Building and the Common Roadway once every calendar year. Lessee at Lessee’s sole cost may also have the records maintained by Lessor for the Common Area Maintenance and Repair Costs audited by a reputable certified public accountant once every calendar year. If any such audit should disclose that Lessee has been overcharged by Lessor for Lessee’s Percentage Share of Common Area Maintenance and Repair Costs for the Building or Lessee’s Percentage Share for the Common Roadway for any year, Lessee shall be credited for such overpayment, plus interest at the rate of ten percent (10%) per annum. If such audit should disclose that Lessee has been undercharged by Lessor for any year, then Lessee shall pay to Lessor all such undercharged amounts within thirty (30) days with interest thereon at ten percent (10%) per annum. If the amount of any overcharge for the combined total of Lessee’s Percentage Share of Common Area
3
Maintenance and Repair Costs and maintaining the Common Roadway exceeds ten percent (10%) of Lessee’s Percentage Share of Common Area Maintenance Costs and the cost of maintaining the Common Roadway for that year, Lessor shall promptly reimburse Lessee for the reasonable costs of such audit. The provisions of this Paragraph 1E(2) shall survive the expiration or earlier termination of this Lease.
2. Term; Delivery of Possession
A. The term of this Lease shall begin on May 1, 2019 ( “Commencement Date” ), and shall end, unless sooner terminated as hereinafter provided, on May 31, 2027.
B. Lessor shall deliver possesson of the Premises broom clean and free of debris on the Commencement Date and warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems (“ HVAC ”), loading doors, sump pumps, if any, and all other such elements in the Premises, shall be in good operating condition on said date, that the structural elements of the roof, bearing walls and foundation of the Property shall be free of material defects, and that, to the best of Lessor’s actual knowledge, without duty of investigation, the Premises does not contain hazardous levels of any mold or fungi defined as toxic under applicable state or federal law.
Lessor expressly disclaims any representation or warranty, express or implied that the improvements existing in or on the Premises comply with building codes, applicable laws, covenants or restrictions of record, regulations and ordinances, including but not limited to the Americans With Disabilty Act and Title 24 of California Code of Regulations.
C. Lessor shall use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite such efforts, Lessor is unable to deliver possession by such date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee.
D. Lessor represents to Lessee that as of the Commencement Date it is not in default under any deed of trust encumbering the Building, that the Premises are not subject to any pending litigation, and there is no right of first refusal to lease or purchase the Building.
3. Rent and General Provisions Regarding Payments.
A. Lessee shall pay the following rent ( “Base Monthly Rent” ) to Lessor in advance no later than the first day of each month during the term of this Lease, commencing on the Commencement Date, for the rental of the Premises (except as provided in Subparagraph 2C above):
From May 1, 2019, through April 30. 2020 $ 70,435.00 per month
From May 1, 2020, through April 30, 2021 $ 72,548.00 per month
From May 1, 2021, through April 30, 2022 $ 74,724.00 per month
From May 1, 2022, through April 30, 2023 $ 76,966.00 per month
From May 1, 2023, through April 30, 2024 $79,275.00per month
4
From May 1, 2024 through April 30, 2025 $ 81,653 .00 per month
From May 1, 2025 through April 30, 2026 $84,103.00 per month
From May 1, 2026 through April 30, 2027 $86,626.00 per month
B. All payments of Base Monthly Rent and all other sums due to be paid by Lessee to Lessor under this Lease, all of which are sometimes collectively referred to as “ Rent ”, shall be paid to Lessor, without prior demand, prior notice, deduction or offset (except as may be otherwise provided in this Lease), in lawful money of the United States of America at Lessor’s address for notices hereunder (or to such other person or at such other place as Lessor may from time to time designate in writing). Lessee may also pay Rent by automatic clearing house (“ ACH ”) transfer. All Rent, if not received by Lessor at said address or by ACH transfer within five (5) calendar days of the date the payment is due (such five (5) day period to include the due date), shall bear interest, from the due date until so received, at the rate of ten percent (10%) per annum. Lessee shall pay to Lessor the sum of Thirty and no/100 Dollars ($30.00) for each check tendered by Lessee which is not honored for payment by Lessee's bank for whatever reason and the statutory penalties if Lessor elects to pursue said remedy. In addition, Lessee shall pay to Lessor a late charge of five percent (5%) of the total amount of the payment due for each payment of Base Monthly Rent or other sum due pursuant to this Lease if said sum is not received by Lessor within five (5) calendar days of the date the payment is due (such five (5) day period to include the due date). Lessor and Lessee agree that Lessor will incur damages and expenses on account of any such late payment, including but not limited to added staff time to collect the sums due, accounting and legal expenses and interest or other charges, and that the amount of such damages and expenses will be extremely difficult and impractical to ascertain. Accordingly, the parties agree that the five percent (5%) late charge is a reasonable estimate of said expenses and damages.
C. All sums received by Lessor from Lessee shall be applied first to the oldest outstanding monetary obligation owed by Lessee to Lessor and any other designation of the manner in which said payment is to be applied by Lessee shall be void and of no effect.
D. If the term of this Lease commences on a day other than the first day of a calendar month or ends on a day other than the last day of a calendar month, all Rent due for such fractional month or months shall be prorated based on the actual number of days in that month.
E. Lessee shall pay to Lessor Lessee’s Percentage Share of Common Area Maintenance and Repair Costs and Lessee’s Percentage Share of the cost of maintaining and repairing the Common Roadway, computed and billed quarterly in arrears.
4. Use .
A. The Premises may only be used for warehouse and office functions (the “ Permitted Use ”), and for no other purpose without Lessor’s prior written consent, which consent may be withheld in Lessor's sole discretion. Prior to the Commencement Date, and as condition of Lessor’s obligation of delivery of the Premises, Lessee shall submit an application to the appropriate governmental agency and/or department a separate Business License applicable to the Premises stating that the use is “warehousing, distribution, and office” and Lessee shall deliver a copy of such application to Lessor. The inability to obtain such license shall not invalidate this Lease Agreement. Pursuant to Lessee’s current overall space plan for the Premises attached hereto
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as Exhibit D and made a part he r eof, Lessee intends to use approximately 16,071 square feet of the Premises for warehouse use and approximately 21,000 square feet of the Premises for office use. Lessor has made no warranty or representation that the Premises may be used for the use Lessee intends to make of the Premises and further makes no representation or warranty regarding the legality of the improvements made by the prior tenant of the Premises. Lessee understands that following the expiration or early ter mination of this Lease, Lessor may convert the use of the Premises to other industrial uses including wholesale, warehouse and distribution uses regardless of the nature of Lessee’s use of the Premises at the time of such termination in accordance with the City of South San Francisco Resolution No. 84-97 (as amended) adopted by the City Council of the City of South San Francisco on July 9, 1997 (a copy of which is attached hereto and made a part hereof as Exhibit E -1 ,) and further confirme d by Senior Planner Tony Rozzi of the City of South San Francisco Planning Division in his email dated May 17, 2018, a copy of which is attached hereto as Exhibit E -2 .
B. Not more than twelve (12) months or less than nine (9) months prior to the expiration of the initial Term, as such initial Term may be extended by an Extension Period, Lessee, at its sole cost and expense, shall apply for a letter of determination, applicability, or approval, or similar written assurance (each, a “Zoning Verification Letter”) from the appropriate governmental entity. If such Zoning Verification Letter confirms that the Premises may be used for its originally designated use: wholesale, warehouse and distribution purposes, and does not contain unreasonable conditions, in Lessor’s commercially reasonable discretion, to the proposed reconversion of use, then it shall be deemed a “Favorable Letter of Determination”.
C. Lessee agrees to submit such application for a Zoning Verification Letter to Lessor for its review and approval (which shall not be unreasonably withheld) at least fifteen (15) business days prior to the proposed submission to the governmental entity, including without limitation all documents, studies and reports related to such application. If Lessor does not disapprove or amend such application for a Zoning Verification Letter within such fifteen (15) business day period, then such applications shall be deemed approved by Lessor. A proposed application letter seeking the Zoning Verification Letter is attached hereto as Exhibit E-3 and is hereby approved by Lessor. In no event shall the Zoning Verification Letter be subject to Lessor’s prior approval, it being understood that the content and direction of the Zoning Verification Letter shall be written by and subject to the City of South San Francisco Planning Division’s (or the appropriate governmental entity) sole discretion. Lessor acknowledges that if the Zoning Verification Letter does not contain the language in the attached application letter, the Zoning Verification Letter may still be a Favorable Zoning Verification Letter.
D. In the event that a favorable Zoning Verification Letter is not obtained and finalized through the applicable appeal period, or conditions to the proposed reconversion of use are imposed by the governmental entity that are not acceptable to Lessor, in its reasonable commercial discretion, then Lessee shall forfeit to Lessor Three Million and no/100 Dollars ($3,000,000.00) of the Security Deposit. In the event that a Favorable Letter of Determination is obtained and finalized, Lessor shall return the Three Million Dollars ($3,000,000.00) portion of the Security Deposit within thirty (30) days of receipt of such letter.
E. In the event that Lessee, without the prior written consent of Lessor, which consent may be withheld in Lessor’s sole and absolute discretion, or upon such conditions as Lessor shall
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deem appropriate in its sole and absolute discretion, changes the use from warehouse and office to labs or manufacturing, or to any degree includes lab and/or manufacturing operations in the Premises, Lessee shall execute and deliver to Lessor an “Agreement for Restoration of Premise s ” in a form similar to that certain Agreement for Restoration of Premises, dated December 10, 2015 , by and between Lessor and Solstice Neuroscience, LLC, US Wo r ldMeds, LLC, and Lessee, and Lessee shall deliver to Lessor a letter of credit, in the amount of Five Hundred Thousand and no/100 Dollars ($500,000.00) in association with such Agreement for Restoration of Premises.
F. In addition, immediately upon such change in use pursuant to the immediately preceding paragraph of this Paragraph 4, Base Monthly Rent shall increase by fifty percent (50%) of the then current Base Monthly Rent, and the Base Monthly Rent applicable during any Extension Period (defined below) shall similarly increase.
G. The parties acknowledge that a change in use and the loss of the current recognized use of the Property under the applicable zoning and use codes and regulations of the City of South San Francisco shall cause substantial damage and loss to Lessor, and Lessee and Lessor agree that Lessor’s actual damages would be impracticable or extremely difficult to fix. The parties therefore agree that in the event that the current zoned “use” designation is changed by the City of South San Francisco from warehousing, distribution and office to lab and/or manufacturing due to Lessee’s actions and/or use of the Premises for lab and/or manufacturing purposes (“Lessee’s Caused Change in Use”), Lessee shall pay to Lessor the sum of Three Million and no/100 Dollars ($3,000,000.00) if such event occurs during the initial term of the Lease, Four Million and no/100 Dollars ($4,000,000.00), if such event occurs during the first Extension Period, and Five Million and no/100 Dollars ($5,000,000.00) if such event occurs during the second Extension Period. Such payment shall occur by Lessor’s partial application of the Security Deposit in the amount of Three Million and no/100 Dollars ($3,000,000.00) and if such partial application is insufficient due to such event occurring in the first or second Extension Period, Lessee shall pay to Lessor the difference within thirty (30) days following written demand therefor.
H. Lessor acknowledges and agrees that if, at any time during the Term, including any Extension Periods, a Lessee Caused Change in Use shall occur and a Favorable Letter of Determination is not obtained, the maximum amount Lessee would pay or forfeit to Lessor pursuant to the terms of this Section 4 shall not exceed (i) Three Million and 00/100 Dollars ($3,000,000.00) during the initial Term of the Lease, (ii) Four Million and 00/100 Dollars ($4,000,000.00) during the first Extension Period, and (iii) Five Million and 00/100 Dollars ($5,000,000.00) during the second Extension Period.
________________________
Lessee’s Initials Lessor’s Initials
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5. |
Security Deposit and Reporting Requirements. |
A. Upon the mutual execution and delivery of this Lease Agreement, Lessee shall deposit with Lessor the sum of Three Million Two Hundred Fifty Nine Thousand Eight Hundred Seventy Eight and no/100 Dollars ($3,259,878.00) (the “ Security Deposit ”). The
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Security Deposit shall be held by Lessor as security for the faithful performance by Lessee of all of the provisions of this Lease to be performed or observed by Lessee. No portion of the Security Deposit may be used by Lessee for any monetary obligation owed by Lessee during the term of this Lease and any extension thereof, particularly the Rent due for the last month of the term of this Lease or any extension thereof. If Lessee fails to pay Rent or other charges hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of the Security Deposit for the payment of said obligation or of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby.
B. If Lessor so uses or applies all or any portion of the Security Deposi t during the term of this Lease or any extension thereof, Lessee shall within fifteen (15) business days after demand therefor deposit cash with Lessor in an amount sufficient to restore the Security Deposit to the full amount thereof. Lessee's failure to do so shall be deemed a failure to pay Rent and shall constitute a material breach of this Lease. Lessor shall not be required to keep the Security Deposit separate from its general accounts; however on a quarterly basis Lessor shall provide information to Lessee regarding the account(s) in which the Security Deposit is held. No part of the Security Deposit shall be considered to be held in trust, or bear interest.
C. If Lessee performs all of Lessee's obligations hereunder, the Security Deposit, or so much thereof as has not theretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder) no later than sixty (60) days after the expiration of the term hereof and after Lessee has vacated the Premises and they are returned to Lessor in the condition in which they are obliged to be returned to Lessor.
D. If Lessee ceases being a publicly traded company or if its financial statements are not readily available to Lessor, on the internet , Lessee will provide Lessor with one mid-fiscal year interim complete financial statement and one audited annual financial statement, within ten (10) days of their preparation, each year throughout the term of the Lease including any option periods, which statements shall be kept confidential by Lessor and Lessor’s consultants.
6. Limitations on Use. Lessee's use of the Premises shall be in accordance with the following:
A. Cancellation of insurance; increase in insurance rates. Lessee shall not do, bring, or keep anything in or about the Premises that will cause a cancellation of any insurance covering the Premises and the Building. If the rate of any insurance carried by Lessor is increased as a result of any activity of Lessee at the Premises, or if any lender of Lessor shall require Lessor to carry additional insurance as a result of any activity of Lessee at the Premises, Lessor shall notify Lessee of said event at least fifteen (15) days prior to the date on which such premium is due and Lessee shall pay a sum equal to the total difference between the original premium and the increased premium to Lessor within five (5) days before the date Lessor is obligated to pay said premium on the insurance. If Lessee should so request, Lessor shall deliver to Lessee a statement from Lessor’s insurance carrier or lender stating that the rate increase or requirement of additional insurance was caused primarily by an activity of Lessee on the Premises.
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B. Compliance with Laws . Lessee shall, at Lessee’s sole cost and expense, comply with all Applicable Laws concerning the Premises or Lessee’s use of and activities in the Premises, including without limitation, the obligation at Lessee’s cost to alter, maintain, or restore the Premises, in compliance and conformity with all Applicable L aws relating to the condition, use, or occupancy of the Premises during the term of this Lease or any extension thereof, whether foreseen or unforeseen, regardless of the cost, and regardless of when during the term the work is required, including, without limitation the United States Americans With Disabilities Act, California Title 24 of the California Code of Regulation s , and all laws regulating the production of pharmaceuticals or drugs and regulations issued by the Food and Drug Administration of the United States Government or any other state, federal or local governmental agency with jurisdiction with respect thereto.
C. Limits on Hazardous Materials. Lessee shall not store, or permit the storage, or use, or permit the use, of Hazardous Materials in such a manner which would result in contamination, in violation of any Environmental Laws (as defined below), of the Building, the Premises, or the surrounding soil or air, or cause a substantial risk of fire, explosion, or release of hazardous, noxious or corrosive fumes in or about the Premises or the Building or the Common Roadway or within fifty (50) feet thereof, or conduct, or permit to be conducted, any hazardous activities which would involve contamination of the Building, Premises or surrounding soil or air in violation of any law or regulation described in Paragraph 6.C.(1) below, or cause a substantial risk of fire, explosion, flood or noxious, hazardous, or corrosive fumes in or about the Premises or Building or the Common Roadway or within fifty (50) feet thereof or endanger the good health of any occupant or invitee to the Building or Premises or user of the Common Roadway. In addition to, and not by way of limitation of, Lessee’s obligations set forth in this Lease, Lessee shall at all times comply with all local, state and national laws regarding the manufacture, transportation, storage, use and disposal of all Hazardous Materials.
(1) As used in this Lease, the term “Hazardous Materials” shall include the following: any substance or material defined as “hazardous” or “toxic” by the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C. Section 9601 et seq.), as amended from time to time; the Hazardous Materials Transportation Act (42 U.S.C. Section 1801 et seq.), as amended from time to time; the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), as amended from time to time; the Hazardous Waste Control Law, California Health & Safety Code Section 25100 et seq., as amended from time to time; the Safe Drinking Water and Toxic Enforcement Act of 1986, as amended from time to time; any rules and regulations promulgated under the foregoing statutes; rules and regulations of the Environmental Protection Agency, the California Water Quality Control Board, the Department of Labor, the California Department of Industrial Relations, the Department of Transportation, the Department of Agriculture, the Consumer Product Safety Commission, the Department of Health and Human Services, the Food and Drug Administration any other governmental agency now or hereafter authorized to regulate or protect the environment or human health or safety; and any other federal, state, or local law, statute, ordinance, or regulation now in effect or later enacted to protect the environment or human health or safety (collectively, “Environmental Laws” ).
(2) Lessee shall keep adequate records to demonstrate that all Hazardous Materials are being properly handled, used, stored, transported and disposed of in
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accordance with all applicable laws and regulations and shall make said records available to Lessor promptly after receiving a request therefor from Lessor. No more than once per year, Lessor shall have the right to appoint a consultant, at Lessee's expense, whose fee shall not exceed $5,000.00, upon no less than thirty (30) days’ written notice to Lessee, to conduct an investigation to determine whether Hazardous Materials are located in or about the Premises or whether Hazardous Materials have been released in such a manner as would violate applicable laws and regulations, and determine the corrective measures, if any, required to remove such Hazardous Materials. Lessee, at its expense, shall comply with all recomm endations of such consultant. If and to the extent Lessee is not in violation of applicable laws. Lessor and Lessor’s consultant shall use good faith efforts not to unreasonably disturb Lessee’s use and enjoyment of the Premises during any such investigation.
(3) Without limiting the applicability of any other indemnity provision of this Lease, Lessee shall indemnify, defend and hold Lessor harmless from all costs, expenses and liabilities, including reasonable attorneys’ fees as incurred by Lessor, arising from any violation by Lessee of the provisions of this Paragraph 6.C .
(4) Without limiting the foregoing, in the event Hazardous Materials brought onto the Premises by, or with the knowledge of, Lessee result in contamination of the Building, the Premises or any air, water or soil in or about the Bullding or the Premises in violation of any law or regulation described in Paragraph 6.C.(1) (except for Hazardous Materials that pre-existed before June 30, 2015), Lessee shall, at its sole cost, promptly take all actions necessary to return the Premises and/or the Building to the condition existing prior to the contamination and into compliance with Environmental Laws. Any remedial action or disposal shall be undertaken in accordance with all Environmental Laws.
(5) Lessee shall promptly notify Lessor in writing of any discovery by Lessee, its agents or employees, of the release of any Hazardous Material onto the Premises or the Building and transmit to Lessor copies of all non-routine reports from any governmental agency having jurisdiction over any activity of Lessee in the Premises regarding any violations or suspected violations of any laws or regulations governing Lessee’s use of and activities within the Premises. Lessee shall furthermore promptly notify in writing Lessor of any non-routine inquiry, test, investigation or enforcement proceeding by or against Lesse e or the Premises concerning a Hazardous Material (each, a “Proceeding” ). Lessee shall transmit to Lessor copies of any reports from any governmental agency having jurisdiction in connection with any such Proceeding. Lessee agrees that Lessor, as owner of the Building, shall have the right to take such actions as Lessor reasonably believes are necessary to protect its interest in the Building with respect to any such Proceeding. Lessee acknowledges that Lessor, as the owner of the Building, at its election shall have the sole right, at Lessee’s expense, to negotiate, defend, approve and appeal any action taken or order issued in connection with any Proceeding, or with regard to Hazardous Materials by an applicable governmental authority.
(6) In no event shall Lessee’s oligations under this Paragraph 6.C apply to or with respect to any Hazardous Materials that were present or existed in the Building, the Premises or the Common Roadway on or prior to June 30, 2015, including, without limitation, any of Lessee’s obligations under Paragraph 6.C.(3) and Paragraph 6.C.(4) above.
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D. Waste; Nuisance. Lessee shall not use the Premises in any manner that will constitute waste or nuisance (including, without limitation, the use of loudspeakers or sound or light apparatus that can be heard or seen outside the Premises, or the emission of noxious odors from the Premises) or interference with use or access of other tenants in the Building or of owners or occupants of adjacent properties. In the event any use of the Premises by Lessee attracts the attention of the public and the public enters or attempts to enter the Premises, the Building or the grounds surrounding the Building in a manner that would, if done by Lessee or any of Lessee's invitees, violate the provisions of P aragraph 6. E below, Lessee shall take all reasonable steps to abate such activities which shall be deemed to be a nuisance and Lessor shall allow Lessee a reasonable time to address such issues and take corrective measures.
E. Compliance with Rules Issued by Lessor. Lessee shall use the driveway(s) and Common Roadway so as not to impede any ingress or egress by other vehicles, and shall park all vehicles only in areas designated for such vehicles. Lessee shall also comply with all reasonable rules which have been or which may hereinafter be promulgated by Lessor regarding the use of the Common Roadway, driveways and parking areas, which rules will apply equally to all who have rights to use the Common Roadway. Lessee hereby consents to Lessor towing any such vehicles which do not comply with this subparagraph or the above described rules. Lessee shall also refrain from storing any property on the grounds surrounding the Premises or on driveways or parking areas or allowing the use of any such grounds except as means for ingress and egress from the Premises or the Building.
F. No Retail Sales. Lessee shall not conduct any retail sales of any goods or products from the Premises.
7. Personal Property Taxes. Lessee shall pay before delinquency all taxes, assessments, license fees and other charges that are levied and assessed against Lessee's personal property installed or located in or on the Premises, and that become payable during the term. Within thirty (30) days after written request by Lessor, Lessee shall furnish Lessor with satisfactory evidence of these payments.
8. Real Property Taxes Payable by Lessee.
A. Lessee shall pay to Lessor as additional Rent, Lessee’s Percentage Share of all Real Property Taxes. As used herein, the term “ Real Property Taxes ” shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than: (i) any penalties or interest on taxes except to the extent caused by Lessee’s failure to pay any part thereof; (ii) documentary transfer taxes imposed on the sale or exchange of the Building; and (iii) franchise, inheritance, death, gift, income or estate taxes) imposed upon the Building by any authority having the direct or indirect power to tax, including any city, county, state, or federal government, any school, agricultural, sanitary, fire, street, drainage, or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Building or any portion thereof, Lessor's right to Rent or other income therefrom , and/or Lessor's business of leasing the Premises or Building. The term “ Real Property Taxes ” shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect during the term of this Lease, including but not limited to a change in the
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ownership of the Building or the improvements therein, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the parties to this Lease .
B. Lessee’s liability hereunder to pay any tax shall be prorated on a daily basis to account for any fractional portion of a tax period included in the term of this Lease or any extension thereof at its commencement and expiration.
C. Lessor shall notify Lessee, at least twenty-five (25) days before any taxes must be paid before incurring a penalty, of Lessee’s Percentage Share of the Real Property Taxes and whether Lessor has elected to pay said taxes in the permitted installments or in one lump sum prior to the date on which the first installment is due. Lessee shall pay Lessee’s Percentage Share of said taxes as shown in Lessor's notice at least ten (10) days prior to the date said taxes must be paid before incurring a penalty. If Lessee is given at least twenty-five (25) days’ notice prior to the date on which said taxes must be paid before incurring a penalty and Lessee fails to pay the sums required within ten (10) days of the date of the written notice, Lessee shall pay to Lessor, as additional Rent, all interest and penalties assessed by the taxing authority if Lessor has failed to make the timely payment of said taxes, in addition to the late charge provided for in Paragraph 3 .
D. Lessee shall also reimburse Lessor for all of any increases in Real Property Taxes caused by an increase in the valuation of the Building due to the construction by Lessee of improvements to the Premises and measured by the value of such increased valuation.
9. Repairs.
A. Lessee's Responsibilities.
(1) On the Commencement Date, Lessee shall accept the Premises in their “as is” condition and in the condition in which Lessor is obligated to deliver them. Lessee shall, at all times during the term hereof, and at Lessee’s sole cost and expense, keep the Premises and every part thereof in good condition and repair, ordinary wear and tear, damage by fire, earthquake, or act of God excepted, Lessee hereby waives all rights to make repairs at the expense of Lessor or in lieu thereof to vacate the Premises as provided by California Civil Code Section 1942 or any other law, statute or ordinance now or hereafter in effect. Said obligation on the part of Lessee includes, but is not limited to, maintaining, repairing and/or replacing internal columns, windows, fixtures, ballasts, lamps and light bulbs, roll-up doors, and the plumbing, electrical, and heating, ventilating and air-conditioning systems serving exclusively the Premises (whether or not the damaged portion of the Premises or the means of repairing the same are reasonably or readily accessible to Lessee and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises).
(2) Unless otherwise directed by Lessor in accordance with the terms of Paragraph 10 , Lessee shall, at the end of the term of this Lease or any extension thereof, surrender to Lessor the Premises and all alterations, additions and improvements thereto in good condition which condition includes, without limitation, replacement of burnt-out lamps and ballasts, all roll up doors and dock levelers serviced and in good repair, the concrete floor in smooth condition and all interior walls in good condition and repair. Notwithstanding the
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foregoing, Lessee may remove Lessee’s trade fixtures upon termination of the Lease, so long as Lessee repairs any damage caused by the installation, maintenance and removal from the Premises. Lessor has no obligation and has made no promise to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof. No representations respecting the condition of the Premises or the Building have been made by Lessor to Lessee, except as specifically herein set forth.
(3) Commencing on the Commencement Date, Lessee shall pay to Lessor Lessee's Percentage Share of Common Area Maintenance and Repair Costs as additional Rent hereunder within fifteen (15) days of receiving a written notification from Lessor of Lessee’s Percentage Share of said costs delivered to Lessee in accordance with Paragraph 3.E above.
B. Lessor's Responsibilities.
(1) Lessor shall at Lessor's expense (which shall not be included in Common Area Maintenance and Repair Costs unless expressly permitted pursuant to Paragraph 1.E above) maintain the roof (including the roof membrane), the foundation, the structural portions of the Building excluding internal support columns, and the exterior walls of the Building. Lessor’s financial responsibility for the roof is for the structure and membrane alone and does not include the costs of the maintenance of the drain pipes from the roof or other structures appurtenant thereto. Lessor’s financial responsibility for the exterior walls does not include maintenance, repair or replacement of the interior portion of the exterior walls, the interior partition walls, studs, sheet rock, or any windows, window frames, or plate glass or doors or any damage directly caused by the act or omission of Lessee or the costs of repairing any vandalism to the exterior walls or roof - all of which remain the responsibility of Lessee. Except in cases of an emergency posing a danger to persons or property or which materially interfere with the conduct of Lessee’s business, Lessor shall have no obligation to make repairs under this subparagraph until twenty (20) days after receipt of written notice of the need for such repairs from Lessee. If the repairs cannot be completed within twenty (20) days after receipt of such notice, Lessor shall not be in default hereunder if Lessor commences the repairs within the twenty (20) days and continues thereafter to complete the repairs or if said repairs cannot be completed timely due to factors beyond the reasonable control of Lessor.
(2) Lessor, subject to reimbursement as provided elsewhere herein, shall maintain and repair all common areas (including lobbies and passage ways), grounds (including landscaping, parking areas, the Common Roadway, driveways and fences), drain pipes from the roof or other structures appurtenant thereto, any utility systems or services or portions thereof which serve the Building as well as the Premises and any damage caused by vandalism to the roof or exterior walls. If Lessee damages the internal columns in the Premises and fails within thirty (30) days after written notice from Lessor to commence the repair or replacement of said columns, Lessor at Lessor's option may enter the Premises and cause said repairs to be made. Lessee shall reimburse Lessor for the full cost of said repairs within thirty (30) days of being given written notice by Lessor of the amount of the cost of said repairs.
(3) If Lessor (or its employees, agents or contractors) undertakes work to the Building and that work directly causes damage to utility lines serving the Premises resulting in a termination of such utilities serving the Premises which causes Lessee to cease its operations
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in the Premises, if said interruption lasts longer than two (2) business days, Lessee shall be entitled to a rebate of Base Monthly Rent for each additional business day it does not have utility services and it cannot operate its business in the Premises.
10. Alterations.
A. Except for the installation of unattached, movable trade fixtures which may be installed without drilling, cutting or otherwise defacing the Premises (“Movable Fixtures” ) and except for Cosmetic Alterations (as hereinafter defined), Lessee shall not make any alterations, additions or improvements to the Premises (collectively, “Alterations” ) without Lessor’s prior written consent, not to be unreasonably withheld, conditioned or delayed. As used herein, “Cosmetic Alterations” shall mean an alteration, addition or improvement that: (i) is limited to the interior of the Premises; (ii) does not affect the exterior (including the appearance) of the Building; (iii) is non-structural or does not affect the structural integrity of the Building; (iv) does not affect the usage or the proper functioning of the mechanical, electrical, sanitary, HVAC or other service systems of the Building; and (v) does not exceed One Hundred Thousand and no/100 Dollars ($100 ,000.00) in each instance. Lessee shall provide Lessor written notice of all Cosmetic Alterations to the space fifteen (15) business days prior to undertaking any such Cosmetic Alterations.
(1) Alterations . If Lessee desires to construct and install Alterations (“ Alterations ”) to the Premises during the Lease term, Lessee shall submit a space plan therefor ( “Alterations Space Plan” ) that includes a scope of work prepared by Lessee’s architect for Lessor’s approval in accordance with the terms of this Paragraph 10.A(1) and in accordance with the Approval Standards (defined below). Lessor shall approve or disapprove of the Alterations Space Plan by delivering written notice to Lessee within fifteen (15) business days of its receipt of the Alterations Space Plan, and if Lessor shall fail to approve or disapprove of the Alterations Space Plan within such fifteen (15) business day period, Lessor shall be deemed to have approved of the Alterations Space Plan. If Lessor approves of the Alterations Space Plan (or is deemed to have approved of the Alterations Space Plan), Lessee shall prepare final construction drawings (the “ Alterations Construction Drawings ”) for the Alterations (if deemed necessary by Lessee and Lessor). Lessor shall have the right to object to the Alterations Construction Drawings based upon the following two (2) criteria only: (i) the scope of the Alterations has materially changed from the scope of the Alterations depicted in the Alterations Space Plan or (ii) the Alterations fail to satisfy the Approval Standards. The Alterations Construction Drawings shall be delivered to Lessor for its approval based upon the above-mentioned criteria only, which shall not be unreasonably withheld, conditioned or delayed. Lessor shall deliver its approval or disapproval to Lessee in writing within ten (10) business days following its receipt of the Alterations Construction Drawings, and if Lessor shall fail to approve or disapprove of the Alterations Construction Drawings within such ten (10) business day period, Lessor shall be deemed to have approved of the Alterations Construction Drawings. In the event Lessor shall disapprove of the Alterations Construction Drawings, Lessor shall provide Lessee with Lessor's written objections thereto in reasonable detail and Lessee shall promptly revise the Alterations Construction Drawings to address Lessor's objections. The foregoing procedure shall be repeated until Lessor approves of (or is deemed to have approved of) the Alterations Construction Drawings. Upon completion of the Alterations, Lessee shall deliver to Lessor one set of the as-built drawings for the Alterations in both hard copy and electronic format.
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(3) Approval Standards . Lessor shall not be deemed to have acted unreasonably if it withholds its approval of the Alterations depicted in any construction drawings in the Alterations Space Plan submitted to it pursuant to Paragraph 10.A(1) above because, in Lessor’s reasonable opinion, such Alterations (i) would materially and adversely affect Building systems, the structure of the Building, the exterior of the Building or the safety of the Building or its occupants, (ii) would substantially increase the cost of operating the Building, (iii) would result in a change of the use of the Premises from the use approved in Paragraph 4 , (iv) would violate any A pplicable L aws, (v) contain or use Hazardous Materials in violation of any A pplicable L aws, rules, regulations or ordinances, or (vi) would materially and adversely affect another tenant’s premises in the Building (the “ Approval Standards ”) .
B.
Any Cosmetic Alterations or other
Alterations
shall remain on
and be surrendered
by Lessee
with the Premises
on
expiration or
termination of
the term or any extension thereof, except that Lessor may elect, upon written notice to Lessee delivered
at least six (6) months prior to the expiration of the then-current term
,
to require that
Lessee
remove
any Cosmetic
Alterations
and/or other Alterations that Lessee has made to the Premises. If Lessor so elects, Lessee at its sole cost shall restore the Premises to the condition existing before such installation of such Cosmetic Alteration and/or other Alteration before the last day of the term. If Lessee fails to remove any of its Cosmetic Alterations and/or other Alterations designated by Lessor and to so restore the Premises and Lessor incurs costs to restore the Premises or to remove such Cosmetic Alterations and/or other Alterations made by Lessee, Lessee shall reimburse Lessor for all reasonable costs incurred by Lessor
and shall also pay Lessor the current amount of Base Monthly Rent prorated for each day after the expiration of the term that Lessor must occupy the Premises for the purpose of removing Lessee’s Cosmetic Alterations or other Alterations or making repairs
.
.
C. If Lessee makes any Alterations to the Premises as provided in this Paragraph 10 , the Alterations shall not be commenced until five (5) business days after Lessor has received written notice from Lessee stating the date the installation of the Alterations is to commence so that Lessor may post and record appropriate notice(s) of non-responsibility.
D. Lessee's right to make Alterations, and the consent of Lessor given as required by this Paragraph 10 , shall be deemed conditioned upon Lessee complying in the making of such Alterations with all requirements of state and local laws and ordinances governing the manner in which such Alterations are made. Lessee shall complete any such work according to applicable building codes and other applicable governmental regulations in a worker-like and expeditious manner. Upon completion of any Alterations which require the issuance of a building permit, Lessee shall: (i) cause a Notice of Completion to be recorded in the office of the Recorder of San Mateo County in accordance with Section 8182 of the Civil Code of the State of California or any successor statute; (ii) deliver to Lessor a reproducible copy of the “as built” drawings of the Alterations; and (iii) deliver to Lessor evidence of payment, contractors' affidavits and full and final waivers of all liens for labor, services or materials.
E. Lessee shall pay all costs for any and all Alterations done by it or caused to be done by it on the Premises as permitted by this Lease. Lessor shall have no obligation or responsibility to make any alterations to the Premises except as specifically provided in this Lease. Lessee shall keep the Premises free and clear of all mechanics liens resulting from any Alterations done by or for Lessee. Lessee shall have the right to contest the correctness or the validity of any
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such lien if, on written demand by Lessor, Lessee procures and records a lien release bond issued by a corporation authorized to issue surety bonds in California (in no event later than thirty (30) days from the recordation of the lien) in an amount equal to one and one-half times the amount of the claim of lien. The bond shall meet the requirements of California Civil Code Section 3143 and shall provide for the payment of any sum that the claimant may recover on the claim (together with costs of suit, if it recovers in the action).
F. If at any time a mechanic’s or materialman’s lien is recorded against the Building and Lessee fails to procure and record a lien release bond issued by a corporation authorized to issue surety bonds in California in an amount equal to one and one-half times the amount of the claim of lien which bond meets the requirements set forth in Paragraph 10.E above, Lessee may not make any further non-cosmetic Alterations to the Premises, or purchase any additional equipment which purchase would expose the Building to a lien resulting from the purchase and installation of equipment in an amount in excess of Fifty Thousand and no/100 Dollars ($50,000.00) in any twelve (12) month period without first obtaining the prior approval of Lessor. Lessor may, as a condition for giving its approval, require that Lessee meet the conditions set forth in Paragraph 10.E above (i.e., obtaining a completion bond).
11. Utilities and Services. Lessee shall make all arrangements for and pay for all utilities and services furnished to or used by it at or about the Premises, including, without limitation, gas, electricity, water, telephone service, meter fees, and trash collection, and for all connection charges. The foregoing includes the requirement that Lessee install a water meter or sub-meter to monitor all of Lessee’s use of water in the Premises. Lessor shall not be responsible for or have any liability whatsoever to Lessee arising in any way from any interruption of any utility or service furnished to the Premises regardless of duration and regardless of whether the interruption in any way affects Lessee’s ability to conduct its business within the Premises, unless the interruption was directly caused by some work directly undertaken by Lessor (or its employees, agents or contractors) at the Premises or at the Building, in which event the remedy stated in Paragraph 9.B.(3) above shall apply.
12. Exculpation of Lessor. Except to the extent caused by the gross negligence or willful misconduct of Lessor, its employees, agents or contractors, Lessor shall not be liable to Lessee for any damage to Lessee or Lessee’s property from any cause. Lessee waives all claims against Lessor for damage to person or property arising in any manner and for any reason, except that Lessor shall be liable to Lessee for damage to Lessee resulting from the willful neglect or gross negligence of Lessor or its employees, agents or contractors.
13. Indemnity. Lessee shall be liable to Lessor for damage resulting from the negligence or misconduct of Lessee or its employees agents or contractors. Lessee shall indemnify, defend and hold Lessor, its agents, assigns, employees and contractors, harmless from all damages arising out of any damage to any person or property occurring in or about the Premises during the term of this Lease of any extension thereof and from all claims arising from Lessee’s use and occupancy of the Premises. Lessor shall indemnify, defend and hold Lessee, its agents, assigns, employees and contractors, harmless from and against any and all damages arising from any damage to any person or property occuring in or about the common areas of the Building or the Common Roadway during the term of this Lease and any extension thereof arising from the gross negligence or willful misconduct of Lessor or its employees, agents or contractors.
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A. Lessee’s Liability Insurance. Throughout the term of this Lease and any extension thereof, Lessee shall, at its sole expense, maintain primary commercial public liability insurance, including coverage for bodily injury, property damage, emotional distress, wrongful death and personal injury, with a combined single combined liability limit of not less than Five Million and no/100 Dollars ($5,000,000.00), insuring Lessor and Lessee against all liability of Lessee and its employees, agents and authorized representatives arising out of and in connection with Lessee's use or occupancy of the Premises. Lessor and, at Lessor’s request its lender, shall be named as an additional insured under all policies used to meet this requirement. Lessee shall deliver to Lessor on or before the Commencement Date and annually thereafter Certificates of Insurance evidencing that all insurance required to be mained by Lessee under this Lease has been obtained and is in full force and effect.
B. Lessee’s Personal Property, Fire and Plate Glass Insurance . Lessee, at its sole expense, shall maintain on all its personal property, Lessee's improvements, and alterations, in, on, or about the Premises, a policy of standard fire insurance, providing “all risk” or “special form” coverage (including coverage for vandalism and malicious mischief), to the extent of at least one hundred percent (100%) of their full replacement value. The proceeds from any such policy shall be used by Lessee for the replacement of its personal property and for the restoration of its ímprovements or alterations. Lessor shall be named as an additional insured on all insurance maintained pursuant to this Subparagraph on Lessee’s leasehold improvements and any alterations made to the Premises.
C. Fire, Multi-Peril Insurance on Premises. Lessor shall maintain on the Building with a combination of primary and excess liability coverage a Commercial Package Policy, including but not limited to standard fire, multi-peril, income replacement and rental loss, and excess liability insurance, to the extent of at least full replacement value of the Building and commercial general Liability coverage in an amount of not less than $5,000,000. Lessor may also obtain earthquake insurance for damage to the Building and Lessee shall be required to pay Lessee's Percentage Share of any such premium. The insurance policy or policies shall be issued in the name of Lessor, and Lessor's lender, if required.
D. Payment of Premiums. Lessee shall pay to Lessor Lessee's Percentage Share of all premiums paid by Lessor for maintaining the insurance described in Paragraph 14.C above. Reimbursement shall be made by Lessee within fifteen (15) days after Lessor notifies Lessee in writing of Lessee's Percentage Share of such costs, which notice shall include a copy of the invoice for the premium. Lessee's obligation to pay the insurance premium costs shall be prorated for any partial year at the commencement and expiration of the term.
E. Waiver of Subrogation. The parties release each other, and their respective authorized representatives, from any claims for damage to the Premises and to the fixtures, personal property, Lessee’s improvements, and alterations of either Lessor or Lessee in or on the Premises that are caused by or result from risks insured against under any insurance policies carried by the parties at the time of such damage. Each party shall cause each insurance policy obtained by it to provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with any damage covered by any policy. Neither
17
party shall be liable to the other for any damage caused by fire or any of the risks insured against under any insurance policy required by this Lease.
F. General Terms of Lessee's insurance. All insurance obtained by Lessee pursuant to this Lease shall be primary and non-contributory with respect to any other insurance that may be available to Lessor. All public liability insurance and property damage insurance required to be carried by Lessee shall insure performance by Lessee of the indemnity provisions of Paragraph 13 of this Lease. Lessor (and Lessor's lenders, if required by any such lender holding a security interest in the Building at any time during the term of this Lease or any extension thereof) shall be named as additional insureds under such policy or policies, and every policy shall contain cross-liability endorsements.
G. Other Insurance Matters. All the insurance required of Lessee under this Lease shall:
(1) Be issued by insurance companies authorized to do business in the State of California, with a Best’s rating of not less than A- VII; and
(2) Be issued as a primary policy.
In addition, Lessee will endeavor to obtain from its carrier an endorsement in which the carrier agrees to provide thirty (30) days’ written notice [ten (10) days notice if cancellation due to non-payment of premium] to Lessor and Lessor's lender if required by Lessor, before cancellation or change in the coverage, scope, or amount of any policy. If Lessee’s carrier refuses to provide such endorsement, Lessee shall provide to Lessor notice of any cancellation of the insurance required by this Paragraph 14 to be carried by Lessee to Lessor within ten (10) business days of its receipt of such notice of cancellation or its failure to pay any premium for any such required insurance.
15. Destruction.
A. If, during the term of this Lease or any extension thereof, the Premises are totally or partially destroyed from a risk covered by the insurance described in Paragraph14.C . above, rendering the Premises totally or partially inaccessible or unusable, Lessor shall restore the Premises, but not Lessee’s Alterations or any tenant improvements present in the Premises on the Commencement Date. The restoration work will commence as soon as reasonably practical after the destruction given the time constraints arising from the need for Lessor to collect proceeds for the reconstruction from its insurance carrier, obtain engineering studies and acceptable building plans and apply for and obtain permits.
(1) Such destruction shall not terminate this Lease provided, however, that: (a) the work, if there is a total destruction must be completed within one (1) year from the date of the event causing the destruction; or (b) if a partial destruction, the work must be completed within nine (9) months from the date of the event causing the destruction. If Lessor cannot complete the rebuilding within the foregoing time limits or if laws in effect at the time of destruction do not permit such restoration, either party may terminate this Lease immediately by giving notice to the other party. If a partial destruction occurs during the last twelve (12) months of the term of this Lease and the work cannot be completed within sixty (60) days from the date
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of the event causing the destruction, Lessee may terminate this Lease immediately by giving notice to Lessor. If Lessor intends to rebuild the Premises, Lessor shall give written notice of such fact to Lessee within forty-five (45) days of the event of destruction, including in said notice an estimate of when the rebuilding will be completed. If Lessee does not object in writing to the time estimates given by Lessor within fifteen (15) business days of the notice from Lessor, this Lease may not be terminated if, in fact, the work is substantially completed within thirty (30 ) days of the estimated date of completion and Lessor delivers possession of the damaged portion of the Premises or the Premises, as applicable, to Lessee.
(2) If the cost of the restoration exceeds the amount of proceeds anticipated to be received from the insurance required under Paragraph 14 by an amount greater than an amount equal to twenty percent (20%) of the cost of restoration (excluding from such calculations any deductible (which shall be paid by Lessor)), Lessor may elect to terminate this Lease by giving notice to Lessee within fifteen (15) days after determining that the restoration cost will exceed the insurance proceeds by such amount. In the case of destruction to the Premises only, if Lessor elects to terminate this Lease, Lessee, within fifteen (15) days after receiving Lessor's notice to terminate, may elect to pay to Lessor in cash, at the time Lessee notifies Lessor of its election, the difference between the amount of insurance proceeds and the cost of restoration, in which case Lessor shall restore the Premises. Lessor shall give Lessee satisfactory evidence that all sums contributed by Lessee as provided in this subparagraph have been expended by Lessor in paying the cost of restoration and the Base Monthly Rent thereafter shall be reduced by amounts so paid by Lessee. If Lessor elects to terminate this Lease and Lessee does not elect to contribute toward the cost of restoration as provided in this subparagraph, this Lease shall terminate.
B. If, during the term, the Premises are totally or partially destroyed from a risk not covered by the insurance described in Paragraph 14 , rendering the Premises totally or partially inaccessible or unusable, Lessor shall have the option of restoring the Premises or terminating this Lease. In the case of uninsured destruction to the Premises only, if Lessor elects to terminate this Lease, which election shall be made by Lessor within forty-five (45) days following the date of destruction, Lessee, within thirty (30) days after receiving Lessor’s written notice to terminate, may elect to pay to Lessor in cash or immediately available funds, at the time Lessee notifies Lessor of its election, the difference between an amount equal to ten percent (10%) of the then replacement cost of the Premises and the actual cost of restoration, in which case Lessor shall restore the Premíses upon receipt of the required funds from Lessee. Lessor shall give Lessee satisfactory evidence that all sums contributed by Lessee as provided in this subparagraph have been expended by Lessor in paying the cost of restoration.
If Lessor elects to terminate this Lease and Lessee does not elect to contribute toward the cost of restoration as provided in this subparagraph, this Lease shall terminate.
C. If Lessor is required or elects to restore the Premises as provided in this Paragraph 15 , Lessor shall not be required to restore Alterations made by Lessee or Lessee’s predecessor in interest, Lessee’s trade fixtures and equipment whether installed or not within the Premises, and Lessee's personal property, such excluded items being the sole responsibility of Lessee to restore.
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D. In case of destruction and Lessor elects or is required to restore the Premises, there shall be an abatement of Base Monthly Rent , Common Area Maintenance and Repair Costs and other Rent on the unusable portion of the Premises from the date of destruction to the date on which there is substantial completion of the work.
E. Notwithstanding anything to the contrary in this Paragraph, Lessee may elect to terminate the Lease if either: (1) there is a total destruction and the work cannot be completed within one (1) year from the date of the event causing the destruction; (2) if there is a partial destruction and the work cannot be completed within nine (9) months from the date of the event causing the destruction; or (3) if there is a partial destruction during the last twelve (12) months of the term and the work cannot be completed within sixty (60) days from the date of the event causing the destruction.
F. Lessee waives the provisions of Civil Code Section 1932(2) and Civil Code Section 1933(4) with respect to any destruction of the Premises.
16. Condemnation - Definitions.
A. Definitions.
(1) “Condemnation” means: (a) the exercise of any governmental power, whether by legal proceedings or otherwíse, by a Condemnor (as defíned below) ; and (b) a voluntary sale or transfer by Lessor to any Condemnor, either under threat of Condemnation or while legal proceedings for Condemnation are pending.
(2) “Date of Taking” means the date the Condemnor has the right to possession of the property being condemned.
(3) “Award” means all compensation, sums, or anything of value awarded, paid, or received on a total or partial condemnation.
(4) “Condemnor” means any public or quasi-public authority, or private corporation or individual, having the power of condemnation.
B. If, during the term or during the period of time between the execution of this Lease and the date the term commences, there is any taking of all or any part of the Premises or any interest in this Lease by Condemnation the rights and obligations of the parties shall be determined pursuant to this Paragraph 16 .
If the Premises are totally taken by condemnation, this Lease shall terminate on the Date of taking. If any portion of the Premises is taken by Condemnation this Lease shall remain in effect, except that Lessee can elect to terminate this Lease if the remaining portion of the Premises, the Building or other improvements or the parking areas on the land on which the Building is located is rendered unsuitable for Lessee’s continued use of the Premises, as determined by Lessee in its sole discretion. If Lessee elects to terminate this Lease, Lessee must exercise its right to terminate pursuant to this Paragraph 16.B . by giving notice to Lessor within thirty (30) days after the nature and the extent of taking have been finally determined which determination shall have been made by written notice to Lessee. If Lessee elects to terminate this Lease as provided in this
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Paragraph, Lessee shall notify Le ssor of the termination, which d ate shall not be earlier than thirty (30) days nor later than ninety (90) days after Lessee has notified Lessor of its election to terminate; except that this Lease shall terminate on the D ate of Taking if the D ate of T aking falls on a date before the date of termination as designated by Lessee. If Lessee does not terminate this Lease within the thirty (30) day to ninety (90) day period, this Lease shall continue in full force and effect except that Base Monthly Rent and the Common Area Maintenance and Repair Costs shall be reduced per Paragraph 16.C below .
C. If any portion of the Premises is taken by condemnation and this Lease remains in full force and effect, on the Date of Taking the Base Monthly Rent and the Common Area Maintenance and Repair Costs shall be reduced by an amount that is in the same ratio to Base Monthly Rent and the Common Area Maintenance and Repair Costs as the value of the area of portion of the Premises taken bears to the total value of the Premises immediately before the Date of Taking.
D. Each party waives the provisions of Code of Civil Procedure Section 1265.130 allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Premises.
E. If there is a partial taking of the Premises and this Lease remains in full force and effect, Lessor at its cost shall accomplish all necessary restoration. Base Monthly Rent and the Common Area Maintenance and Repair Costs shall be abated or reduced during the period from the Date of Taking until the completion of restoration, but all other obligations of Lessee under this Lease shall remain in full force and effect. The abatement or reduction of Base Monthly Rent and the Common Area Maintenance and Repair Costs shall be based on the extent to which the restoration interferes with Lessee’s use of the Premises.
F. The award shall belong to and be paid to Lessor, except that Lessee shall receive from the award a sum attributable to: (i) Lessee’s relocation expenses; (ii) loss of business goodwill; (iii) Lessee’s equipment and trade fixtures; and (iv) Lessee's improvements or alterations made to the Premises by Lessee in accordance with this Lease, which Lessee’s improvements or alterations Lessee has the right to remove from the Premises pursuant to the provisions of this Lease but elects not to remove; or, if Lessee elects to remove any such Lessee’s improvements or alterations, a sum for reasonable removal and relocation costs not to exceed the market value of such improvements or alterations.
G. The taking of the Premises or any part of the Premises by military or other public authority shall constitute a taking of the Premises by condemnation only when the use and occupancy by the taking authority continues for longer than one hundred eighty (180) consecutive days. During the one hundred eighty (180) day period all the provisions of this Lease shall remain in full force and effect, except that Base Monthly Rent and the Common Area Maintenance and Repair Costs shall be abated or reduced during such period of taking based on the extent to which the taking interferes with Lessee’s use of the Premises, and Lessor shall be entitled to whatever award may be paid for the use and occupation of the Premises for the period involved.
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17. Assignment and Subletting.
A. Definitions. The occurrence of any of the following, whether voluntarily or involuntarily, because of death, divorce or disability, or by operation of law or otherwise, shall constitute a “Transfer” of this Lease: (i) any direct or indirect sale, assignment, conveyance, alienation, sublease, hypothecation, encumbrance, mortgaging or other transfer of Lessee's interest in this Lease or in the Premises, or any part thereof or interest therein, including but not limited to any parking spaces assigned to Lessee; (ii) if Lessee is a Legal Entity (as defined below), the direct or indirect sale, assignment, conveyance, alienation, encumbrance, mortgaging or other Transfer of any of the Ownership Interests (as defined below) in such Legal Entity, (iii) if Lessee is a Legal Entity, some or all of whose Ownership Interests are owned by another Legal Entity, the occurrence of any of the events described in the preceding phrase (ii) with respect to such constituent Legal Entity, or (iv) if any other person or entity (except Lessee’s authorized representatives, agents, contractors, employees, invitees or guests) occupies or uses all or any part of the Premises. Notwithstanding the foregoing, no Transfer shall be deemed to have occurred solely by reason of the Ownership Interests of Lessee being traded on any public securities exchange.
(1) As used herein, the term “Legal Entity” means any corporation, partnership, limited liability company, trust, association or other legal entity, and the term “Ownership Interest” means any share of stock, general or limited partnership interest, membership interest, beneficial interest or other ownership interest therein, as the case may be. A “Transfer” includes a transfer of any interest in this Lease held by an subtenant, assignee, transferee or other person claiming an interest in Lessee’s interest in this Lease. The provisions of this Paragraph 17 apply fully to any Transfer by any subtenant, assignee or other holder of any interest in Lessee's interest in this Lease.
B. An assignment or subletting by Lessee of all or any portion of this Lease or the Premises to (i) any present or future parent or subsidiary of Lessee, or (ii) any person or entity which controls, is controlled by or under the common control with Lessee, or (iii) any entity which purchases all or substantially all of the stock or assets of Lessee, or (iv) any entity into or with which Lessee is merged, reorganized or consolidated (all such persons or entities described in clauses (i), (ii), (iii) and (iv) being sometimes herein referred to as " Affiliates ") shall not be subject to obtaining Lessor's prior consent, Paragraph 17.C below shall not be applicable, and such assignments or subleases or any transaction described in clauses (iii) or (iv) shall not be deemed a Transfer, provided in all instances that:
(a) any such Affiliate was not formed as a subterfuge to avoid the obligations of Lessee;
(b) Lessee gives Lessor prior notice of any such assignment or sublease to an Affiliate, except solely for those assignments or subleases in connection with which any Applicable Law precludes Lessee's delivery to Lessor of prior notice of said assignment or sublease then, in all such instances, Lessee shall deliver to Lessor subsequent notice of said assignment or sublease within ten (10) days following the first (1st) day on which Lessee is permitted by law to deliver notice of such assignment or sublease to Lessor;
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(c) the successor of Lessee shall possess a net worth prior to the completion of the contemplated transfer of this Lease equal to or greater than the net worth of Lessee on the Commencement Date. The term "net worth" shall mean a tangible net worth (not including goodwill as an asset) computed in accordance with generally accepted accounting principles (excluding goodwill as an asset) ;
(d) any such assignment or sublease shall be subject to all of the applicable terms and provisions of this Lease, and such assignee or sublessee (i.e. any such Affiliate), other than in the case of an Affiliate resulting from a merger , reorganization or consolidation, shall assume, in a written document reasonably satisfactory to Lessor and delivered to Lessor upon or prior to the effective date of such assignment or sublease, all the obligations of Lessee under this Lease;
(e) the successor of Lessee shall use the Premises for the use approved in Paragraph 4 above; and
(f) the successor of Lessee shall not allow a use that has a greater danger of releasing any Hazardous Materials in or about the Premises or the Building than that done by Lessee.
Lessor agrees to execute a commercially reasonable non-disclosure agreement if required in connection with a Transfer.
C. Lessee shall not engage in or permit any Transfer of this Lease absent full compliance with all of the terms and provisions of this Paragraph 17 . Any Transfer of this Lease occurring without full compliance with all of the terms and conditions of this Paragraph 17 shall be voidable at the option of the Lessor, and shall constitute a material and incurable default on the part of Lessee under this Lease
D. Prior to engaging in or permitting any Transfer other than to an Affiliate, Lessee shall give notice of any intended Transfer to Lessor and shall provide Lessor with the following information in writing: (i) the name, address and ownership of the proposed transferee, (ii) the current balance sheet, statement of cash flows, report of any litigation in which the proposed Transferee is a party or is a judgment debtor, aged schedule of accounts receivable and payable, profit and loss statements, statement that all taxes payable by the proposed transferee are current, and all notes, if any, to all financial and profit and loss statements for the proposed transferee or any other person to be liable for the Lessee's obligations under this Lease covering the prior three (3) years (or for such shorter period as the proposed transferee or other person may have been in existence), all certified as true and correct by the proposed transferee, other person or an authorized officer thereof, (iii) a full description of the terms and conditions of the proposed Transfer, including copies of any and all documents and instruments, any purchase and sale agreements, sublease agreements, assignment agreements and all other writings concerning the proposed Transfer, (iv) a description of the proposed use of the Premises by the proposed transferee, including any required or desired alterations or improvements to the Premises that may be undertaken by such transferee in order to facilitate its proposed use, and (v) any other information, documentation or evidence that may be reasonably requested by Lessor. Lessor agrees that it shall hold all such information in confidence if requested to do so by Lessee and
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shall execute any reasonable confidentiality agreement presented on behalf of and for the benefit of any proposed transferee.
E. In connection with any proposed or requested consent to Transfer, other than to an Affiliate, Lessee shall pay to Lessor a transfer fee of $1,000.00 (payment of which shall accompany Lessee's request for Transfer), plus all of Lessor's reasonable attorneys fees expended in connection with the proposed Transfer not to exceed $5,000.00.
F.
For Transfers
to non-Affiliates
, within ten (10) business days after the submission of all required information described in
Paragraph 17
.D
above, Lessor shall give notice to Lessee of its election under
Paragraph 17.G
.
G. Upon receiving a request for Transfer of this Lease (except in the case of a Transfer to an Affiliate) that must be approved by Lessor, and compliance by Lessee with all the requirements of this Paragraph 17 , Lessor shall have the right to do any of the following:
(1) Lessor may consent to the proposed Transfer, subject to any reasonable conditions on such Transfer, which reasonable conditions may include without limitation: (a) that the proposed transferee assume in writing all of Lessee's obligations under the Lease first arising or accruing after the date of Transfer (without, however, releasing Lessee therefrom); (b) in the case of a proposed sublease, that the subtenant agree that Lessor shall have the right to enforce any and all of the terms of the sublease directly against such subtenant, and if this Lease is terminated prior to the expiration of the sublease, that at the election of Lessor, the sublease shall not terminate and the subtenant will attorn to the Lessor; (c) that one-half (1/2) of all sums or other consideration received by Lessee from the Transferee for the right to use and occupy the Premises in excess of the Rent paid to Lessor be paid as additional Rent by Lessee to Lessor at the same time that Lessee pays Base Monthly Rent to Lessor; (d) that any existing Events of Defaults under this Lease be cured prior to the effective date of the Transfer; and (e) that the Transferee provide additional security deposits or other collateral or guarantees reasonably acceptable to Lessor.
(2) Lessor may deny its consent to the proposed Transfer, except with respect to a Transfer to an Affiliate, on any reasonable ground. Such grounds shall include, without limitation, any one or more of the following, and shall be conclusively deemed to be reasonable as to Lessee: (a) that the proposed transferee's financial condition is insufficient to support all of the financial and other obligations of Lessee with respect to the Lease; (b) that the use to which the Premises will be put by the proposed transferee is inconsistent with the terms of the Lease or otherwise will materially and adversely affect any interest of Lessor; (c) that the nature of the proposed transferee's proposed or likely use of the Premises would involve any increased risk of the use, release or mishandling of Hazardous Materials; or (d) that Lessor has not received assurances acceptable to Lessor in its sole discretion that all past due amounts owing from Lessee to Lessor (if any) will be paid and all other Events of Default on the part of Lessee (if any) will be cured prior to the effective date of the proposed Transfer.
H. Lessee acknowledges and agrees that each of the rights of Lessor set forth in Paragraph 17 in the event of a proposed Transfer is a reasonable restriction on Transfer for purposes of California Civil Code Section 1951.4.
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I. Any consent to any proposed Transfer, whether conditional or unconditional, shall not be deemed to be a consent to any other or further Transfer of this Lease, or any other Transfer of this Lease on the same or other conditions (if any). No Transfer of this Lease shall in any way diminish, impair or release any of the liabilities and obligations of Lessee, any guarantor or any other person liable for all or any portion of the Lessee's obliga tions under this Lease.
18. Lessee ’ s Default. The occurrence of any one of the following events (each an “Event of Default” ) shall constitute a material breach of this Lease by Lessee:
A. Lessee’s failure to pay Base Monthly Rent when due.
B. If Lessee shall fail to pay any other sum (all of which sums shall be deemed to be additional Rent hereunder) to Lessor.
C. Lessee’s failure to perform any other provisions of this Lease if the failure to perform is not cured within thirty (30) days’ after written notice has been given to Lessee. If the default cannot reasonably be cured within such thirty (30) day period, Lessee shall not be in default of this Lease if Lessee commences to cure the default within the thirty (30) day period and diligently and in good faith continues to cure the default thereafter.
D. If this Lease or any estate of Lessee hereunder shall be levied upon under any attachment or execution and such attachment or execution is not vacated within fifteen (15) days.
If within thirty (30) days after the commencement of any proceeding against Lessee seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding shall not have been dismissed, or if, within thirty (30) days after the appointment of a receiver or liquidator of Lessee or of any material part of its properties such appointment shall not have been vacated.
E. An event of Default under the Exising Leases or this Lease shall be deemed to be an event of Default under all such leases.
19. Lessor’s Remedies. If an Event of Default shall occur, Lessor shall have the following remedies. These remedies are not exclusive; they are cumulative in addition to any remedies now or later allowed by law.
A. Lessor may continue this Lease in full force and effect, and this Lease will continue in effect as long as Lessor does not terminate Lessee’s right to possession, and Lessor shall have the right to collect Rent when due. During an Event of Default, Lessor may enter the Premises and relet them, or any part of them, to third parties for Lessee’s account. Lessee shall be liable immediately to Lessor for all costs Lessor incurs in reletting the Premises, including, without limitation, broker’s commissions, expenses of remodeling the Premises required by the reletting, and like costs. Reletting can be for a period shorter or longer than the remaining term of this Lease or any extension thereof, except that Lessee shall only be responsible for brokers commission up until the remaining term of this Lease has expired. Lessee shall pay to Lessor the Rent due under this Lease on the dates the Rent is due, less the Rent Lessor received from any reletting. No act
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by Lessor allowed under this subparagraph shall terminate this Lease unless Lessor notifies Lessee that Lessor elects to terminate this Lease.
B. Lessor may terminate Lessee’s right to possession of the Premises at any time by giving a written termination notice to Lessee, and on the date specified in such notice (which shall be not less than five (5) days after the giving of such notice) Lessee’s right to possession shall terminate and this Lease shall terminate, unless on or before such date all arrears of Rent and all other sums payable by Lessee under this Lease and all costs and expenses incurred by or on behalf of Lessor hereunder shall have been paid by Lessee and all other breaches of this Lease by Lessee at the time existing shall have been fully remedied to the satisfaction of Lessor. No act by Lessor other than giving notice to Lessee shall terminate this Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of a receiver on Lessor’s initiative to protect Lessor’s interest under this Lease shall not constitute a termination of Lessee’s right to possession. On termination, Lessor has the right to recover from Lessee:
(1) The worth, at the time of the award, of the unpaid Rent that had been earned at the time of termination of this Lease;
(2) The worth, at the time of the award, of the amount by which the unpaid Rent that would have been earned after the date of termination of this Lease until the time of award exceeds the amount of the loss of Rent that Lessee proves could have been reasonably avoided;
(3) The worth, at the time of the award, of the amount by which the unpaid Rent for the balance of the term after the time of award exceeds the amount of the loss of Rent that Lessee proves could have been reasonably avoided; and
(4) Any other amount, and court costs, necessary to compensate Lessor for all detriment proximately caused by Lessee’s default. “The worth, at the time of the award” as used in (1) and (2) of this subparagraph is to be computed by allowing interest at the rate of ten percent (10%) per annum. “The worth, at the time of award,” as referred to in (3) of this subparagraph is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%).
C. Lessor, at any time after an Event of Default, may cure said default at Lessee’s cost. If Lessor at any time, by reason of Lessee’s default, pays any sum or does any act that requires the payment of any sum, the sum paid by Lessor shall be due following five (5) business days’ written notice, and if paid at a later date shall bear interest at the rate of ten percent (10%) per annum from the date of such written notice until Lessor is reimbursed by Lessee. The sum, together with interest on it, shall be deemed to be additional Rent.
D. Lessor shall have the following additional remedies:
(1) In the event that a late charge is payable hereunder, whether or not collected, for three (3) installments of Base Monthly Rent or if Lessee fails to pay any other monetary obligation of Lessee under this Lease within the applicable cure or grace period, Lessee shall pay to Lessor, if Lessor shall so request in writing, in addition to any other payments required under this Lease, a monthly advance installment, payable at the same time as the Base Monthly
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Rent , as reasonably estimated by Lessor, for Lessee’s Percentage Share of Real Property Tax and insurance premium expenses which are payable by Lessee under the terms of this Lease. Such fund shall be established to insure payment when due, before delinquency, of Lessee's Percentage Share of Real Property Tax and insurance premiums. All moneys paid to Lessor under this subparagraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a default in the obligations of Lessee under this Lease, then any balance remaining from funds paid to Lessor under the provisions of this subparagraph may, at the option of Lessor, be applied to the payment of any monetary default of Lessee in lieu of being applied to the payment of real property taxes and insurance premiums.
(2) In the event that a late charge is payable hereunder, whether or not collected, for three (3) installments of Base Monthly Rent in any twelve (12) month period, Lessor may demand and Lessee shall pay to Lessor an amount equal to two (2) months of Base Monthly Rent, in the amount of the Base Monthly Rent then due, as an addition to the Security Deposit to be held pursuant to the terms of Paragraph 5 of this Lease.
E. To the extent permitted by law, Lessee hereby waives its rights to demand a trial by jury in any action for unlawful detainer filed by Lessor.
F. Any monetary judgment or award against Lessee under this Lease shall bear interest at the rate of ten percent (10%) per annum regardless of the Court entering or enforcing such judgment or award.
20. Lessor’s Default. Lessor shall be in default of this Lease if it fails or refuses to perform any provision of this Lease that it is obligated to perform if the failure to perform is not cured within thirty (30) days after notice of the default has been given by Lessee to Lessor. If the default cannot reasonably be cured within thirty (30) days, Lessor shall not be in default of this Lease if Lessor commences to cure the default within the thirty (30) day period and diligently and in good faith continues to cure the default; provided, in the event of an emergency, Lessor shall commence the performance of any cure within seven (7) business days following receipt of written notice from Lessee.
21. Limitation of Lessor’s Liability. If Lessor is in default of this Lease, and as a consequence Lessee recovers a money judgment against Lessor, the judgment shall be satisfied only out of the proceeds of sale received on execution of the judgment and levy against the right, title and interest of Lessor in the Building or out of Rent or other income from the Building receivable by Lessor or out of the consideration received by Lessor from the sale or other disposition of all or any part of Lessor’s right, title and interest in the Building. Lessor shall not be personally liable for any deficiency.
22. Lessor’s Entry on Premises. Lessor and its authorized representatives shall have the right to enter the Premises at all reasonable times, after reasonable written notice to Lessee, but in no event less than one (1) business day, except in the case of an emergency when no notice will be required, for any of the following purposes:
A. To determine whether the Premises are in good condition and whether Lessee is complying with its obligations under this Lease.
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B. To do any necessary maintenance, repair, replacement or alteration to the Premises or the Building.
C. To serve, post, or keep posted any notices required or allowed under the provisions of this Lease.
D. To post “for sale” signs and “for rent” or “for lease” signs on the exterior of the Building at any time during the term (except that “for rent” and “for lease” signs may only be posted in the last twelve (12) months of the term unless there has been an Event of Default).
E. To place signs on the exterior of the Building identifying the owner or manager or managing agent of the Building or complex.
F. To show the Premises to prospective brokers, agents, buyers, tenants or persons interested in an exchange, at any time during the term (except that Lessor may not show the Premises to potential tenants or their brokers until the last twelve (12) months of the term unless there has been an Event of Default). Lessor shall not be liable in any manner for any inconvenience, disturbance, loss of business, nuisance, or other damage arising out of Lessor’s entry on the Premises as provided in this Paragraph 22 . Lessee shall not be entitled to an abatement or reduction of Rent if Lessor exercises any rights reserved in this Paragraph 22 , unless occasioned by Lessor’s gross negligence or intentional wrongful conduct or that of Lessor’s employees, agents or contractors. Notwihstanding the foregoing, Lessor shall use good faith efforts to ensure all such entries do not unreasonably disturb Lessee’s use and enjoyment of the Premises.
23. Subordination. This Lease is and shall be subordinate to any encumbrance now of record or recorded after the date of this Lease affecting the Building, other improvements and land of which the Premises are a part. Such subordination is effective without any further act on the part of Lessee. Within ten (10) business days after the Commencement Date, Lessor must obtain and deliver to Lessee a non-disturbance and attornment agreement, executed by Lessor’s lender providing in substance that this Lease shall not be terminated by Lessor’s lender so long as Lessee has not committed an Event of Default which Event of Default has not been cured after the giving of the appropriate notice required by Paragraph 19 hereof and that if any lender instructs Lessee to pay any Rent to said lender said payment will be deemed to be the payment of such rental obligation under this Lease. Lessee shall from time to time on written request from Lessor execute and deliver any commercially reasonable documents or instruments that may be required by a lender to effectuate any subordination of this Lease to any encumbrance now of record or recorded after the date of this Lease on the condition that any such instrument contain a quiet enjoyment clause guaranteeing Lessee’s rights hereunder so long as Lessee does not commit an Event of Default which is not cured after the giving of the appropriate notice required by Paragraph 19 hereof. Lessee’s failure to so execute any such document after ten (10) business days’ written notice to Lessee requesting such execution shall be deemed to be an Event of Default under this Lease.
24. Right to Estoppel Certificates. Within ten (10) business days after written notice from Lessor, Lessee shall execute and deliver to Lessor, a certificate stating that there are no defaults under the Lease, or itemizing any defaults Lessee contends exists, that the Lease is unmodified and in full force and effect, or in full force and effect as modified, and state the
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modifications and any other information reasonably required by a lender or purchaser, including but not limited to the amount of Base Monthly Rent , the date to which Base Monthly Rent has been paid in advance, and the amount of the Security Deposit or any prepaid Rent . Failure to deliver the certificate within the ten (10) bus iness days shall be conclusive as to Lessee that this Lease is in full force and effect and has not been modified except as may be represented by Lessor. If Lessee fails to deliver the certificate within the ten (10) business days, Lessee irrevocably constitutes and appoints Lessor as its special attorney in fact to execute and deliver the certificate to any third party.
25. Notice. Any notice demand, request, consent, approval, or communication that either party desires or is required to give to the other party or any other person shall be in writing and either served personally or by overnight delivery with a recognized delivery service. Any notice demand, request, consent, approval, or communication that either party desires or is required to give to the other party shall be addressed to the other party at the address set forth at the end of this Lease. Either party may change its address by notifying the other party of the change of address.
26. Waiver. The waiver by either party of any breach of any term, covenant, or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant, or condition herein contained, nor shall any custom or practice which may grow up between the parties in the administration of the terms hereof be construed to waive or to lessen the right of either party to insist upon performance by the other in strict accordance with said terms. The subsequent acceptance of Rent hereunder by Lessor shall not be deemed to be a waiver of any preceding breach by Lessee of any term, covenant or condition of this Lease, regardless of Lessor’s knowledge of such preceding breach the time of acceptance of such Rent.
27. Sale of Premises. If Lessor sells or transfers its interest in the Premises, upon the consummation of the sale or transfer, Lessor shall be released from any liability thereafter accruing under this Lease if Lessor’s successor has assumed in writing, for the benefit of Lessee, Lessor’s obligations under this Lease. If any letter of credit or prepaid Rent has been paid by Lessee, Lessor shall transfer the letter of credit or prepaid Rent to Lessor’s successor and on such transfer Lessor shall be discharged from any further liability in reference to the Security Deposit or prepaid Rent, if any.
28. Attorneys’ Fees. If either party commences an action against the other party arising out of or in connection with this Lease, the prevailing party shall be entitled to have and recover from the non-prevailing party reasonable attorneys’ fees and costs of suit. In any proceedings initiated by or against Lessee under the United States Bankruptcy Code, Lessor shall be entitled to recover any and all reasonable attorneys fees and expenses arising from or in connection with proceedings for the assumption, rejection, or assignment of this Lease, stay relief, or other protection of Lessor’s interests, regardless of any default under the Lease.
29. Surrender of Premises. On expiration of the term of this Lease or any extension thereof or upon any earlier termination of this Lease, Lessee shall surrender to Lessor the Premises and all Lessee's Alterations in good condition (except for ordinary wear and tear) unless Lessor has required Lessee to remove its Alterations. The surrender of the Premises will only be deemed
29
to have occurred when Lessee delivers all keys to the Premises to Lessor, or reimburses Lessor a reasonable amount for any lost or stolen keys. Lessee shall remove all of its personal property , equipment and trade fixtures prior to the expiration of the term of this Lease or any extension thereof or upon the earlier termination of this Lease. Lessee shall perform at its expense all restoration and repairs made necessary by the removal of any Alterations and equipment as required by this Lease and any other agreements between Lessor and Lessee.
In the event Lessee fails to remove all of its equipment and personal property following the expiration or earlier termination of this Lease, in addition to any other remedies Lessor may have, Lessor may elect to retain or dispose of said personal property and equipment in any manner Lessor in its sole discretion may decide. Without waiving any other remedy, Lessor shall if it so elects to by written notice to Lessee (and if permitted by Applicable Laws) obtain title to any or all of Lessee’s equipment and personal property and retain or dispose of the same. Lessee waives all claims against Lessor for any damage to Lessee resulting from Lessor’s retention or disposition of any such personal property. Lessee shall also be liable to Lessor for Lessor’s costs for storing, removing, and disposing of any such personal property.
If Lessee fails to surrender the Premises to Lessor on the expiration of the term of this Lease or any extension thereof as required by this Paragraph 29, Lessee shall hold Lessor harmless from all damages resulting from Lessee’s failure to surrender the Premises, including without limitation, lost rental value and any claims made by a new tenant resulting from Lessee’s failure to surrender the Premises .
30. Holding Over. If Lessee, with Lessor’s consent, remains in possession of the Premises after expiration or termination of the term of this Lease, or after the date in any notice given by Lessor to Lessee terminating this Lease, such possession by Lessee shall be deemed to be a month-to-month tenancy terminable on ninety (90) days notice given at any time by either party. All provisions of this Lease except those pertaining to term shall apply to the month-to-month tenancy, and except that Base Monthly Rent shall be equal to one hundred and fifty percent (150%) of the Base Monthly Rent payable immediately prior to the expiration or termination of this Lease. If Lessee holds over without Lessor’s consent, Lessor’s damages shall also include the per diem rental value of the Premises measured by one hundred and fifty percent (150%) of the Base Monthly Rent due in the last month of prior to the expiration or termination of this Lease divided by 30 plus the daily cost of Lessee’s Percentage Share of Common Area Maintenance and Repair Costs, Real Property Taxes and insurance premiums.
31. Option to Extend Term . Lessor hereby grants to Lessee options (the “Options” or “Option” ) to extend the term of this Lease for two (2) five (5) year terms (the “Extension Periods” or “Extension Period” ). The first Extension Period shall commence upon the expiration of the initial term hereof and the second Extension Period shall commence upon the expiration of the first Extension Period. The terms and conditions of the Option are as follows.
A. Exercise of Option . The Options shall be exercised by Lessee giving to Lessor written notice of such exercise at least one hundred eighty (180) days prior to the expiration of the original term of this Lease for the first Extension Period and, for the second Extension Period, at least one hundred eighty (180) days prior to the expiration of the first Extension Period. Lessee shall have no right to exercise the Option for the second Extension Period if Lessee has not
30
exercised the Option for the first Extension Period. If proper notification of the exercise of an option i s not timely given, such option shall automatically expire .
B. Terms and Conditions . All terms and conditions of this Lease shall continue to be binding upon Lessor and Lessee during the Extension Periods except that the Base Monthly Rent during the first Extension Period shall be as follows:
Months 1-12: $ 89,225.00 per month
Months 13-24: $ 91,902.00 per month
Months 25-36: $ 94,659.00 per month
Months 37-48: $ 97,499.00 per month
Months 49-60: $ 100,424.00 per month
Base Monthly Rent for the second Extension Period shall be as follows:
Months 1-12: $ 103,436.00 per month
Months 13-24: $ 106,540.00 per month
Months 25-36: $ 109,735.00 per month
Months 37-48: $ 113,028.00 per month
Months 49-60: $ 116,419.00 per month
C. Option Not Assignable Separate From Lease . The Option herein granted to Lessee may be assigned by Lessee to Affiliates as described in Paragraph 17 above. Except as otherwise provided in this Paragraph 31.C , the Option herein granted to Lessee is not assignable separate and apart from this Lease and may not be exercised by anyone other than the successors or permitted assigns of Lessee.
D. Assumption of Restoration Obligations . Lessee’s exercise of either Option shall be deemed to include Lessee’s assumption of all obligations to restore the Premises pursuant to Paragraph 10 above and to continue to securitize said obligation to the full amount of the cost of both decommissioning any laboratory or manufacturing facility and removal of all Alterations and other improvements, if required by Lessor pursuant to Paragraph 10 , in a manner reasonably acceptable to Lessor. Lessee’s failure to provide such security shall make the Option voidable at Lessor’s option even if Lessee has exercised the Option.
E. Effect of Default on Option .
(1) Lessee shall have no right to exercise the Option, notwithstanding any provision in the grant of option to the contrary during the time that an Event of Default exists or if Lessor in the twelve (12) months prior to the day on which Lessee exercises the Option, Lessor has given to Lessee two (2) or more notices to cure an Event of Default or if during the last twenty-four (24) months of the original term Lessee has incurred a late charge on account of the late payment of Base Monthly Rent on three (3) or more separate occasions.
(2) The period of time within which the Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise such Option because of the provisions of the above paragraph.
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(3) All rights of Lessee under the provisions of the grant of option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease , an Event of Default occurs and Lessee fails to cure the default within the period of time required by Paragraph 18 above .
32. Consent of Parties. Whenever consent or approval of either party is required, that party shall not unreasonably withhold or delay such consent or approval.
33. Time of Essence. Time is of the essence of each provision of this Lease.
34. Successors. This Lease shall be binding on and inure to the benefit of the parties and their successors and assigns.
35. Covenants and Conditions. All provisions, whether covenants or conditions, on the part of the Lessee shall be deemed to be both covenants and conditions.
36. California Law. This Lease shall be construed and interpreted in accordance with the laws of the State of California.
37. Entire Agreement. This Lease cannot be amended or modified except by a written agreement.
38. Captions. The captions of this Lease shall have no effect on its interpretation.
39. Number. When required by the context of this Lease, the singular shall include the plural, and vice versa.
40. Joint and Several Obligations. “Party” shall mean Lessor or Lessee; and if more than one person or entity is Lessor or Lessee, the obligations imposed on that party shall be joint and several.
41. Authority. If either party signs as a corporation, partnership, trust, limited liability company or similar entity each of the persons executing this Lease on behalf of such party does hereby covenant and warrant that the company is qualified to do business in the State of California and is in good standing in the State of California, that the company has full right and authority to enter into this Lease, and that the parties signing this Lease and that every person signing on behalf of the company is authorized to do so.
42. Complete Agreement. There are no oral agreements between Lessor and Lessee affecting this Lease, and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, and understandings, if any, between Lessor and Lessee or displayed by Lessor to Lessee, except for those relating to the nature of the materials to be tested and manufactured within the Premises, with respect to the subject matter of this Lease. There are no other representations between Lessor and Lessee other than those contained in this Lease, and all reliance with respect to any representations is solely upon the representations contained in this Lease.
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43. Real Estate Brokers. Lessor and Lessee acknowledge that the only real estate brokers involved in this transaction are Jon Faller, Faller Real Estate, representing Lessee, and Marshall Hydorn, CBRE, representing Lessor (the “Brokers”). Lessor shall be solely responsible for any brokerage due the Brokers, which shall be paid pursuant to a separate written agreement between Lessor and Brokers. Said commission shall be paid one-half (1/2) upon the mutual execution of this Lease, and the remaining one-half (1/2) upon the Lease Commencement Date. Each party agrees that should any claim be made for a brokerage commission or finder’s fee by any broker or finder other than the Brokers, by, though or on account of any acts of said party or its representatives, said party will indemnify and hold the other party free and harmless from and against any and all loss, liability, cost, damage and expense in connection therewith . No commissions shall be due or payable should Lessee exercise any option(s) granted under this Lease.
44. Addresses for Notices. Any notices required to be sent pursuant to this Lease shall be sent to the parties al the following addresses unless changed pursuant to the notification provisions of this Lease.
TO LESSOR: |
JCN Partners, a California limited partnership c/o John C. Nickel Properties 1 Camino Sobrante, Suite 205 Orinda, CA 94563 Attn: John C. Nickel
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With a copy to:
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Joseph G. Tursi SSL Law Firm, llp 515 Market Street, Suite 2700 San Francisco, CA 94105
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TO LESSEE:
With a copy to: |
Audentes Therapeutics, Inc. 600 California Street, Suite 1700 San Francisco, CA 94108 Attn: Natalie Holles
2330 Marinship Way, Suite 211 Sausalito, California 94965 Attn: Jeffrey D. Ebstein, Esq. |
45. Counterparts. This Lease may be signed in multiple counterparts which, when signed by all parties, shall constitute a binding agreement.
46. Access Disclosure . Pursuant to California Civil Code Section 1938, Lessor hereby notifies Lessee that as of the date of this Lease, the Premises have not undergone inspection by a Certified Access Specialist (“ CASp ”) to determine whether the Premises meet all applicable
33
construction-related accessibility standards under California Civ
il Code Section 55.53. Lessor
hereby discloses pursuant to California Civil Code Section 1938 as follows: “A Certified Access Specialist (CASp) can inspect the subject premises and determine whether the subject premises comply with all of the applicable construction-related accessibility standards under state law. Although state law does not require a CASp inspection of the subject premises, the commercial property owner or lessor may not prohibit the Lessee or tenant from obtaining a CASp inspection of the subject premises for the occupancy or potential occupancy of the Lessee or tenant, if requested by the Lessee or tenant. The parties shall mutually agree on the arrangements for the time and manner of the CASp inspection, the payment of the fee for the CASp inspection, and the cost of making any repairs necessary to correct violations of construction-related accessibility standards within the premises.” Lessor and Lessee hereby acknowledge and agree that in the event that Lessee elects to perform a CASp inspection of the Premises hereunder, such CASp inspection shall be performed at Lessee's sole cost and expense
and Lessee shall be solely responsible for the cost of any repairs, upgrades, alterations and/or modifications to the Premises or the Building necessary to correct any such violations of construction-related accessibility standards identified by such CASp inspection as required by Regulation, which repairs, upgrades, alterations and/or modifications may, at Lessor’s option, be performed by Lessor at Lessee’s expense, payable as Additional Rent within ten (10) days following Lessor’s demand
.
47. Quiet Possession . Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee’s part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.
48. Lease Memorandum . The parties agree that they will execute and record a memorandum of lease substantially in the form annexed hereto as Exhibit F .
[SIGNATURE PAGE FOLLOWS]
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IN W1TNESS W HEREOF, the parties have executed this Lease as of the date first set forth above.
Dated:August __, 2018 |
JCN PARTNERS, a California limited partnership
By:JCN Properties, LLC, a California limited liability company, Its General Partner
By:
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Dated:August 15, 2018 |
AUDENTES THERAPEUTICS, INC., a Delaware corporation
By:
/s/ Matthew Patterson
By:
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FLOOR PLAN
A-1
: 6/25/18
PARKING SPACES
B-1
: 6/25/18
COMMON ROADWAY
C-1
: 6/25/18
LESSEE’S CURRENT SPACE PLAN
D-1
: 6/25/18
RESOLUTION NO. 84-97
E-1-1
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E-1-2
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E-1-3
: 6/25/18
CITY OF SOUTH SAN FRANCISCO EMAIL
E-2-1
: 6/25/18
Eccles Lease – Audentes - Proposed Language for Zoning Verification Letter
City of South San Francisco Planning Division
[Address]
Attention: Chief Planner [or Director of Economic and Community Development]
RE: |
534 Eccles Avenue, City of South San Francisco (the “Property”) – Request for Zoning Verification Letter |
Dear _______,
Pursuant to Section 4.B of the lease (the “Lease”) for the premises (the “Premises”) at the Property, between JCN Partners (“Lessor”) and Audentes Therapeutics (“Audentes”), as tenant, dated August _, 2018, Audentes must request a written determination by the City of South San Francisco Planning Division regarding the zoning of the Property (a “Zoning Verification Letter”) not more than twelve (12) months or less than nine (9) months prior to the expiration of the term of the Lease. As such, Audentes hereby requests that a Zoning Verification Letter (or its equivalent) be issued that confirms that the Premises can be reconverted to its originally designated use of Industrial Use (as defined below), including, wholesale, warehouse and distribution under the City’s current zoning ordinance following the termination of the Lease. Below is a background summary that should assist you in issuing the Zoning Verification Letter:
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1. |
The Property is located within an Employment District and zoned as a Business Technology Park (BTP) (SSF Zoning Ordinance §§ 20.110.001, et seq. ). The Property was rezoned as BTP from its previous zoning of “Planned Industrial.” At the time of the rezoning, the Property use was an industrial use, including wholesale, warehouse and distribution uses (individually and collectively, an “Industrial Use”). |
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2. |
Audentes obtained written advice from Senior Planner Tony Rozzi of the South San Francisco Planning Division to determine whether (1) Audentes could use the Premises for life sciences for the term of the Lease (anticipated to be through May 31, 2027, with options), and (2) whether the Premises could be converted back to an Industrial Use upon expiration of the Lease. On May 17, 2018, Mr. Rozzi confirmed that the Premises could convert back to Industrial Use regardless of the nature of Audentes’ use of the Premises during the term of the Lease, pursuant to City of South San Francisco Resolution No. 84-97 (as amended), and adopted on July 9, 1997. A copy of Mr. Rozzi’s email, which includes a copy of Resolution No. 84-97, is enclosed herein. Indeed, Resolution No. 84-97 specifically was adopted to address the concerns of property owners within the BTP zone that previously were zoned as “Planned Industrial,” including the Premises, “to resolve this particular issue.” |
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F-1
:
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3. |
Audentes has used the Premises for office and warehouse uses. The Lease will expire on [ fill in date - not more than 12 months or less than 9 months before expiration of the Lease ]. |
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Consistent with the above, Audentes now seeks a Zoning Verification Letter to confirm that the Premises may be re-used for the Industrial Use, consistent with Senior Planner Rozzi’s May 17, 2018 email and Resolution No. 84-97.
Sincerely,
[Audentes signatory]
F-1
:
EXHIBIT F
MEMORANDUM OF LEASE
RECORDING REQUESTED BY:
AND WHEN RECORDED RETURN TO:
(Space above line for Recorder's use)
______________________________________________________________________________
MEMORANDUM OF LEASE
JCN PARTNERS, a California limited partnership (“ Lessor ”), and AUDENTES THERAPEUTICS, INC., a Delaware corporation (“ Lessee ”), executed that Lease dated as of ____________________, 2018 (the “ Lease ”) for premises commonly known as: 534 Eccles Avenue, South San Francisco, California.
Lessor and Lessee agree as follows:
1. The Commencement Date of the Lease is __________________________.
2. The end of the Initial Lease term and the date on which this Lease will expire is ______________________.
3. Lessee has two (2) five (5)-year options to extend the term of the Lease.
Dated:
F-1
:
F-1
:
A notary public or other officer completing this certificate verifies only the identity of the individual who signed the document to which this certificate is attached, and not the truthfulness, accuracy, or validity of that document. |
State of California )
)
County of ________ )
On ______________________________________ before me, _____________________________, notary public (here insert name and title of the officer), personally appeared _______________________, who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.
I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct.
WITNESS my hand and official seal.
Signature _______________________________ (Seal)
F-1
:
A notary public or other officer completing this certificate verifies only the identity of the individual who signed the document to which this certificate is attached, and not the truthfulness, accuracy, or validity of that document. |
State of California )
)
County of ________ )
On ______________________________________ before me, _____________________________, notary public (here insert name and title of the officer), personally appeared _______________________, who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.
I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct.
WITNESS my hand and official seal.
Signature _______________________________ (Seal)
F-1
:
Exhibit 10.2
FIRST AMENDMENT TO NET COMMERCIAL LEASE
This First Amendment to Net Commercial Lease (this “ Amendment ”) dated September 30, 2018, for reference purposes only, is by and between JCN PARTNERS, a California limited partnership ( “Lessor” ), and AUDENTES THERAPEUTICS, INC., a Delaware corporation ( “Lessee” ), with reference to the following facts:
WHEREAS, Lessor and Lessee entered into that certain Net Commercial Lease (the “Lease” ) dated January 7, 2017, pursuant to which Lessor leases to Lessee certain premises in the Building commonly referred to as 528B Eccles Avenue, South San Francisco, California, consisting of approximately 39,559 square feet (the “Premises” ), as such Premises are more fully described in the Lease;
WHEREAS, Lessor and Lessee desire to modify certain terms of the Lease as set forth herein; and
WHEREAS, capitalized terms used and not otherwise defined herein shall have the meanings given to them in the Lease.
NOW, THEREFORE , in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Lessor and Lessee agree as follows:
1. Square Footage . The Lease contains erroneous references to the square footage of the Premises in Paragraph 1.B. The reference to 39,599 square feet in Paragraph 1.B is changed to 39,559. All other provisions of Paragraph 1.B remain unchanged.
2. Rent . Paragraph 3.A is hereby amended by deleting the reference to “May 1” in the Base Monthly Rent schedule and replacing it with “May 31” in each instance where such reference appears. All other provisions of Paragraph 3.A remain unchanged.
3. Alterations . Paragraph 10.A of the Lease is hereby deleted in its entirety and replaced with the following text:
“A. Alterations . Lessee shall not make any alterations or additions to the Premises ( “Alterations” ) without first obtaining Lessor’s written consent, which shall not be unreasonably withheld, delayed or conditioned.
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shall have the right to object to the Additional Alterations Construction Drawings based upon the following two (2) criteria only: (i) the scope of the Additional Alterations has materially changed from the scope of the Additional Alterations depicted in the Additional Alterations Space Plan or (ii) the Additional Alterations depicted in the Additional Alterations Construction Drawings fail to satisfy the Approval Standards. The Additional Alterations Construction Drawings shall be delivered to Lessor for its approval based up on the above-mentioned criteria only , which shall not be unreasonably withheld, conditioned or delayed. Lessor shall deliver its approval or disapproval to Lessee in writing within ten (10) business days following its receipt of the Additional Al terations Construction Drawings, and if Lessor shall fail to approve or disapprove of the Additional Alterations Construction Drawings within such ten (10) business day period , Lessor shall be deemed to have approved of the Additional Alterations Construction Drawings. In the event Lessor shall disapprove of the Additional Alterations Construction Drawings, Lessor shall provide Lessee with Lessor's written objections thereto in reasonable detail and Lessee shall promptly revise the Additional Alterations Construction Drawings to address Lessor's objections . The foregoing procedure shall be repeated until Lessor approves of (or is deemed to have approved of) the Additional Alterations Construction Drawings. Upon completion of the A dditional Alterations, Lessee shall deliver to Lessor one set of the as-built drawings for the Additional Alterations in both hard copy and electronic format. |
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Neither review nor approval of the Additional Alterations shall constitute a representation or warranty by Lessor that such Additional Alterations Space Plan either (i) are complete or suitable for their intended purpose; or (ii) comply with applicable laws, ordinances codes, regulations, it being expressly agreed by Lessee that Lessor assumes no responsibility or liability whatsoever to Lessee or to any other person or entity for such completeness, suitability or compliance.
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violation of any applicable laws, rules, regulations or ordinances, or (v i ) would materially and adversely affect another tenant’s premises in the Building (collectively, " Approval Standards ") . ” |
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(3) |
Additional Conditions. All consents given by Lessor, whether by virtue of this Paragraph 10 or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee acquiring all applicable permits required by governmental authorities; (ii) furnishing copies of such permits to Lessor prior to the commencement of the referenced work; (iii) the compliance by Lessee with all of the terms and conditions of said permits; and (iv) Lessor’s approval of the proposed contractor. |
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(4) |
Insurance. To the extent Lessee employs any other contractors in the performance of the Additional Alterations, or thereafter from time to time performs work in the Premises, Lessee shall cause such contractors to secure and pay for Worker’s Compensation, Employers Liability Insurance, and Commercial General Lability Insurance in customary forms and amounts reasonably acceptable to Lessor. All policies shall be endorsed to include Lessor and its employees and agents as additional insured. Certificates of such insurance shall be delivered to Lessor prior to Lessee commencing any work in the Premises. |
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Exhibit D attached to the Lease is hereby deleted in its entirety. All other provisions of Paragraph 10 of the Lease remain unchanged.
4. Assignment and Subletting .
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(A) |
Paragraph 17.A is deleted in its entirety and replaced with the following text: |
"A. Definitions. The occurrence of any of the following, whether voluntarily or involuntarily, because of death, divorce or disability, or by operation of law or otherwise, shall constitute a " Transfer " of this Lease: (i) any direct or indirect sale, assignment, conveyance, alienation, sublease, hypothecation, encumbrance, mortgaging or other transfer of Lessee's interest in this Lease or in the Premises, or any part thereof or interest therein, including but not limited to any parking spaces assigned to Lessee; (ii) if Lessee is a Legal Entity (as defined below), the direct or indirect sale, assignment, conveyance, alienation, encumbrance, mortgaging or other Transfer of any of the Ownership Interests (as defined below) in such Legal Entity; (iii) if Lessee is a Legal Entity, some or all of whose Ownership Interests are owned by another Legal Entity, the occurrence of any of the events described in the preceding phrase (ii) with respect to such constituent Legal Entity; or (iv) if any other person or entity (except Lessee's authorized representatives, agents,
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contractors, employees, invitees or guests) occupies or uses all or any part of the Premises."
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(B) |
Paragraph 17.A(2) is deleted in its entirety and replaced with the following text: |
“(2) Any assignment or subletting of the Premises to (a) a present or future parent or subsidiary of Lessee, or (b) any person or entity which controls, is controlled by or under the common control with Lessee, or (c) any entity which purchases all or substantially all of the stock or assets of Lessee, or (d) any entity into or with which Lessee is merged, reorganized or consolidated (all such persons or entities described in clauses (a), (b), (c) and (d) being sometimes herein referred to as " Affiliates ") shall not be subject to obtaining Lessor's prior consent, Paragraph 17.C below shall not be applicable, and such assignments or subleases or any transaction described in clauses (c) or (d) shall not be deemed a Transfer, provided in all instances that:
(i) any such Affiliate was not formed as a subterfuge to avoid the obligations of Lessee;
(ii) Lessee gives Lessor prior notice of any such assignment or sublease to an Affiliate, except solely for those assignments or subleases in connection with which any applicable law precludes Lessee's delivery to Lessor of prior notice of said assignment or sublease then, in all such instances, Lessee shall deliver to Lessor subsequent notice of said assignment or sublease within ten (10) days following the first (1st) day on which Lessee is permitted by law to deliver notice of such assignment or sublease to Lessor;
(iii) the successor of Lessee shall possess a net worth prior to the completion of the contemplated transfer of this Lease equal to or greater than the net worth of Lessee on the Commencement Date. The term "net worth" shall mean a tangible net worth (not including goodwill as an asset) computed in accordance with generally accepted accounting principles (excluding goodwill as an asset);
(iv) any such assignment or sublease shall be subject to all of the applicable terms and provisions of this Lease, and such assignee or sublessee (i.e. any such Affiliate), other than in the case of an Affiliate resulting from a merger , reorganization or consolidation, shall assume, in a written document reasonably satisfactory to Lessor and delivered to Lessor upon or prior to the effective date of such assignment or sublease, all the obligations of Lessee under this Lease;
(v) the successor of Lessee shall use the Premises for the use approved in Paragraph 4 above; and
(vi) the successor of Lessee shall not allow a use that has a greater danger of releasing any Hazardous Materials in or about the Premises or the Building than that done by Lessee.”
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(C) |
The term “ Exempt Transfer ” as used in Paragraph 17 is hereby deleted and replaced with the term “Affiliate.” |
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(D) |
Lessor agrees to execute a commercially reasonable non-disclosure agreement if required in connection with a Transfer to an Affiliate. |
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(E) |
No Transfer shall be deemed to have occurred solely by reason of the Ownership Interests of Lessee being traded on any public securities exchange. |
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(F) |
Paragraph 17.F of the Lease is hereby deleted in its entirety, the subsequent paragraphs 17.G, 17.H and 17.I are hereby re-lettered to become Paragraphs 17.F, 17.G and 17.H respectively and references to such paragraphs throughout the Lease shall be deemed changed to reference the correct paragraph. |
All other provisions of Paragraph 17 remain unchanged.
5. Option to Extend Term . Paragraph 31.C of the Lease is deleted in its entirety and replaced with the following text:
“C. Assignability of Option . The Option herein granted to Lessee may be assigned by Lessee to Affiliates described in Paragraph 17 above. Except as otherwise provided in this Paragraph 31.C , the Option herein granted to Lessee is not assignable separate and apart from this Lease and may not be exercised by anyone other than the successors or permitted assigns of Lessee.”
6. Effect of Amendment . Except as modified herein, the terms and conditions of the Lease shall remain unmodified and continue in full force and effect. In the event of any conflict between the terms and conditions of the Lease and this Amendment, the terms and conditions of this Amendment shall prevail.
7. Authority . This Amendment shall be binding upon and inure to the benefit of the parties hereto, their respective heirs, legal representatives, successors and assigns. Each party hereto and the persons signing below warrant that the person signing below on such party's behalf is authorized to do so and to bind such party to the terms of this Amendment.
//signatures on the following page//
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: 9/13/18
LESSOR:
JCN PARTNERS, a California limited partnership
By:JCN Properties, LLC,
a California limited liability company
By:
/s/ John C. Nickel
|
LESSEE:
AUDENTES THERAPEUTICS, INC, a Delaware corporation
By:
/s/ Natalie Holles
|
6
: 9/13/18
ADDITIONAL ALTERATIONS
SPACE PLAN
Exhibit D, Page 1
: 9/13/18
Exhibit 10.3
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (the “ Agreement ”) is entered into between Audentes Therapeutics, Inc. (the “ Company ”) and Natalie Holles (the “ Executive ”). This Agreement is effective as of September ___, 2018 (the “ Effective Date ”). This Agreement supersedes and replaces in its entirety the Executive Employment Agreements dated February 14, 2018 and July 21, 2015 between Executive and the Company.
In consideration of the promises and the terms and conditions set forth in this Agreement, the parties agree as follows:
1. Position, Duties and Place . As of the Effective Date, Executive will serve as President and Chief Operating Officer of the Company and will report to the Chief Executive Officer. Executive shall perform the duties commonly associated with the position of the President and Chief Operating Officer and that may be assigned to the Executive by the Chief Executive Officer from time to time. Executive will work primarily from the Company’s offices in San Francisco, California. Upon a termination of employment, and to the extent requested in writing by the Company, Executive agrees to resign from all positions Executive may hold with the Company at such time.
2. Exclusive Service . During the Executive’s employment term (the “ Employment Term ”), Executive (i) will be expected to devote his or her full working time and attention to the business of the Company, (ii) will not render services to any other business without the prior approval of the Company and (iii) will not directly or indirectly, engage or participate in any business that is competitive in any manner with the business of the Company. Executive will also be expected to comply with and be bound by the Company’s operating policies, procedures and practices that are from time to time in effect during the Employment Term.
3. At-Will Employment . Executive and the Company understand and acknowledge that Executive’s employment with the Company constitutes “at-will” employment, and the employment relationship may be terminated at any time, with or without Cause (as defined below) and with or without notice. The Company may modify the Executive’s position, duties, goals, reporting relationship, work location, and compensation based on the Executive’s performance and Company needs.
4. Compensation and Benefits .
4.1. Base Salary . During the Employment Term, Executive’s annual base salary will be $455,000, payable in accordance with the Company’s normal payroll practices, less any payroll deductions and withholdings as are required by law. The Compensation Committee (the “ Compensation Committee ”) of the Company’s Board of Directors (the “ Board ”) shall periodically review (at least annually) Executive’s compensation and benefits, provided that any changes thereto shall be determined by the Compensation Committee in its sole and absolute discretion. Executive’s base salary in effect from time to time is referred to herein as the “ Base Salary ”.
4.2. Target Bonus . During the Employment Term, Executive will be eligible to receive an annual cash bonus, with a target amount equal to a percentage of Executive’s Base Salary for each full calendar year as determined by the Compensation Committee from time to time in its sole and absolute discretion (the “ Target Bonus ” and the actual amount awarded, the “Actual Bonus ”), based upon achievement of corporate performance (including financial) and/or personal performance objectives to be established by the Compensation Committee from time to time and subject to the terms of the applicable bonus plan(s). To receive payment of any Actual Bonus, Executive must be employed by the Company on the last day of such fiscal year to which such bonus relates and at the time the bonus is paid. Executive’s Actual Bonus will be paid by the fifteenth (15 th ) day of the third (3 rd ) month following the Company’s taxable year in which it is earned. Executive will be eligible to receive the Actual Bonus in such amount and upon such terms as shall be determined by the Compensation Committee at its sole discretion.
4.3. Employee Benefits . Executive shall be eligible to participate in all employee benefit plans and arrangements, including, but not limited to, medical, dental, vision and long-term disability insurance benefits and arrangements, as are made available by the Company to its senior executives, subject to the terms and conditions thereof, on terms not less favorable than are made available to the Company’s senior executives. The Company
reserves the right to modify benefits, contribution, and reimbursement levels from time to time, as it deems necessary.
4.4. Vacation . Executive will be entitled to paid vacation and holidays pursuant to the terms of the Company’s vacation policy as may exist from time to time.
4.5. Equity Awards . Executive shall be eligible for future equity grants as determined by and pursuant to the terms established by the Compensation Committee.
5.
Expenses
. The Company will, in accordance with applicable Company policies and guidelines, reimburse Executive for all reasonable and necessary expenses incurred by Executive in connection with the performance of services on behalf of the Company, subject to Executive’s presentation of appropriate vouchers or receipts in accordance with such policies and approval procedures as the Company may from time to time establish for employees.
6. Inventions and Proprietary Information . Executive hereby acknowledges and agrees that he or she has executed the Executive Invention Assignment and Confidentiality Agreement, a copy of which is attached hereto as Exhibit A , and that such agreement remains in full force and effect.
7. Employment and Termination . Executive’s employment with the Company will be at-will and may be terminated by Executive or by the Company at any time for any reason as follows: (a) Executive may terminate Executive’s employment upon written notice to the Company for “Good Reason,” as defined below (a “ Constructive Termination ” ); (b) Executive may terminate the Executive’s employment upon written notice to the Company at any time in Executive’s discretion without Good Reason ( “ Voluntary Termination ” ); (c) the Company may terminate Executive’s employment upon written notice to Executive at any time following a determination that there is “Cause,” as defined below, for such termination ( “ Termination for Cause ” ); and (d) the Company may terminate Executive’s employment upon written notice to Executive at any time without Cause for such termination ( “ Termination without Cause ” ).
8. Definitions . As used in this Agreement, the following terms have the following meanings:
8.1. Cause . For purposes of this Agreement, “ Cause ” means (i) Executive’s failure to satisfactorily perform Executive’s duties after there has been delivered to Executive a written demand for performance which describes the specific deficiencies in Executive’s performance and the specific manner in which Executive’s performance must be improved, and which provides thirty (30) business days from the date of notice to remedy such performance deficiencies; (ii) Executive’s conviction of, or plea of nolo contendere to, a felony or a crime involving moral turpitude which the Board believes has had or will have a detrimental effect on the Company’s reputation or business, (iii) Executive engaging in an act of gross negligence or willful misconduct in the performance of his or her employment obligations and duties, (iv) Executive’s committing an act of fraud against, material misconduct or willful misappropriation of property belonging to the Company; (v) Executive engaging in any other misconduct that has had or will have a material adverse effect on the Company’s reputation or business; or (vi) Executive’s breach of any material written Company policy that has been communicated to Executive in advance of Executive’s breach, the Executive Invention Assignment and Confidentiality Agreement or other unauthorized misuse of the Company’s trade secrets or proprietary information.
8.2.
Change in Control
. For purposes of this Agreement “
Change in Control
” means (i) a sale, conveyance, exchange or transfer (excluding any venture-backed or similar investments in the Company) in which any person or entity, other than persons or entities who as of immediately prior to such sale, conveyance, exchange or transfer own securities in the Company, either directly or indirectly, becomes the beneficial owner, directly or indirectly, of securities of the Company representing more than fifty (50%) percent of the total voting power of all its then outstanding voting securities; (ii) a merger or consolidation of the Company in which its voting securities immediately prior to the merger or consolidation do not represent, or are not converted into securities that represent, a majority of the voting power of all voting securities of the surviving entity immediately after the merger or consolidation; or (iii) a sale of substantially all of the assets of the Company or a liquidation or dissolution of the Company.
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8.3. COBRA . For purposes of this Agreement, “ COBRA ” shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.
8.4. Disability . For purposes of this Agreement “ Disability ” shall have that meaning set forth in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the “ Code ”).
8.5. Good Reason . For purposes of this Agreement, “ Good Reason ” means any of the following taken without Executive’s written consent and provided (a) the Company receives, within thirty (30) days following the occurrence of any of the events set forth in clauses (i) through (v) below, written notice from Executive specifying the specific basis for Executive’s belief that Executive is entitled to terminate employment for Good Reason, (b) the Company fails to cure the event constituting Good Reason within thirty (30) days after receipt of such written notice thereof, and (c) Executive terminates employment within the earlier of ten days (10) days following expiration of such cure period or receipt from the Company that such deficiencies will not be cured: (i) a material change, adverse to Executive, in Executive’s position, titles, offices or duties; (ii) following a Change in Control of the Company, the executive is not a Section 16 officer of the Company or its ultimate parent, or if the ultimate parent is not a public company with the executive not reporting to the chief executive officer of the ultimate parent company, if that executive served as a Section 16 officer of the Company prior to the Change in Control, (iii) an assignment of any significant duties to Executive that are inconsistent with Executive’s positions or offices held under this Agreement; (iv) a decrease in Executive’s Base Salary and Target Bonus, combined, by more than 10% (other than in connection with a general decrease in the cash compensation of all other officers); and (v) the relocation of the Executive to a facility or a location more than twenty five (25) miles from Executive’s then current location.
9. Effect of Termination of Employment . For purposes of this Agreement, no payment will be made to Executive upon termination of Executive’s employment unless such termination constitutes a “separation from service” within the meaning of Section 409A of the Code, and Section 1.409A-1(h) of the regulations promulgated thereunder.
9.1. Termination for Cause, Death or Disability or Voluntary Termination . In the event Executive is terminated by the Company pursuant to a Termination for Cause, in the event of Executive’s death or Disability or in the event of the Executive’s Voluntary Termination, Executive will be paid only (i) any earned but unpaid Base Salary and earned but unused vacation or paid time off, and (ii) other unpaid and then vested amounts, including any amount payable to the Executive under the specific terms of any agreements, plans or awards in which Executive participates, unless otherwise specifically provided in this Agreement, and (iii) reimbursement for all reasonable and necessary expenses incurred by Executive in connection with his or her performance of services on behalf of the Company in accordance with applicable Company policies and guidelines, in each case as of the effective date of such termination of employment (the “ Accrued Compensation ”). Executive will be allowed to exercise his or her vested stock options to purchase Company common stock, if any, during the time period set forth in, and in accordance with, the applicable equity plan and governing stock option agreement(s).
9.2. Termination without Cause or Constructive Termination Not in Connection With a Change in Control, Death or Disability . In the event of Executive’s Termination without Cause or Constructive Termination during the Employment Term , in each case not in connection with a Change in Control (as set forth in Section 9.3 below), provided that (except with respect to the Accrued Compensation) Executive delivers to the Company a signed settlement agreement and general release of claims in favor of the Company in a form reasonably specified by the Company (the “ Release ”), and satisfies all conditions to make the Release effective within sixty (60) days following Executive’s termination of employment, then, Executive shall be entitled to:
(a) The Accrued Compensation;
(b) A lump sum cash payment equal to Twelve (12) months of Executive’s then current Base Salary, payable on the first (1 st ) business day after the Sixtieth (60 th ) day following the date of Executive’s termination of employment;
(c) A lump sum payment equal to one hundred percent (100%) of the Target Bonus for the then-current fiscal year and paid when annual bonuses are otherwise paid to active employees, but no later than March 15 th of the year following the year in which Executive’s termination of employment occurs; and
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(d)
Provided Executive timely elects to continue health coverage under COBRA, for Executive and/or Executive’s eligible dependents, the Company shall reimburse Executive for any monthly COBRA premium payments made by Executive to continue such coverage for the
Twelve (12)
month period (“
Benefit Continuation Period
”) measured from the first (1
st
) month following the month in which Executive’s termination of employment occurs, until the earlier of: (1) the last day of the Benefit Continuation Period after the date of Executive’s termination of employment, (2) the date Executive becomes eligible for group health insurance coverage through a new employer, or (3) the date Executive ceases to be eligible for COBRA coverage for any reason, including plan termination. Notwithstanding the foregoing, if Executive is eligible for, and the Company determines, in its sole discretion, that it cannot pay, the COBRA premiums without a substantial risk of violating applicable law (including Section 2716 of the Public Health Service Act), the Company instead shall pay to Executive, on the first day of each calendar month, a fully taxable cash payment equal to the applicable COBRA premiums for that month (including premiums for Executive’s and Executive’s eligible dependents who have elected and remain enrolled in such COBRA coverage), subject to applicable tax withholdings (such amount, the “
Special Cash Payment
”), for the remainder of the period Executive remains eligible for the benefit under the foregoing sentence. Executive may, but is not obligated to, use such Special Cash Payments toward the cost of COBRA premiums. In the event the Company opts for the Special Cash Payments, then on the first (1
st
) business day after the Sixtieth (60
th
) day following the Executive’s termination of employment, the Company will make the first payment to Executive under this Section 9.2(d), in a lump sum, equal to the aggregate Special Cash Payments that the Company would have paid through such date had the Special Cash Payments commenced on the first (1
st
) day of the first (1
st
) month following the Executive’s termination of employment through such first (1
st
) business day after the Sixtieth (60
th
) day following the Executive’s termination of employment, with the balance of the Special Cash Payments paid monthly thereafter.
9.3. Termination without Cause or Constructive Termination In Connection With a Change in Control . In the event of Executive’s Termination without Cause or Constructive Termination during the Employment Term, in each case during the period of time commencing ninety (90) days prior to the execution of a definitive agreement providing for the consummation of a Change in Control and ending on the first anniversary of the consummation of such Change in Control, provided that (except with respect to the Accrued Compensation) Executive delivers to the Company the signed Release, and satisfies all conditions to make the Release effective, within sixty (60) days following Executive’s termination of employment, then (in lieu of any benefits pursuant to Section 9.2, and any additional benefits pursuant to this Section 9.3 shall be payable only following a Change in Control), the Executive shall be entitled to:
(a) The Accrued Compensation;
(b) A lump sum cash payment equal to Twenty-one (21) months of Executive’s the current Base Salary, payable the first (1 st ) business day after the Sixtieth (60 th ) day following the date of Executive’s termination of employment;
(c) A lump sum payment equal to one hundred seventy-five percent (175%) the Target Bonus for the then-current fiscal year and paid when annual bonuses are otherwise paid to active employees, but no later than March 15 th of the year following the year in which Executive’s termination of employment occurs;
(d) The payments set forth above in Section 9.2(d) with a Benefit Continuation Period of Twenty-one (21) months; and
(e) Acceleration as to one hundred percent (100%) the then-unvested portion of any then-outstanding Company equity award granted to Executive. Notwithstanding the foregoing, any equity award subject to performance-based vesting will vest at the target level unless otherwise provided in such grant.
9.4. Miscellaneous . For the avoidance of doubt, the benefits payable pursuant to Section 9.2 or Section 9.3 are not cumulative.
9.5. Parachute Payments . In the event that the severance and other benefits provided for in this Agreement or otherwise payable to Executive (i) constitute “parachute payments” within the meaning of Section 280G of the Code and (ii) but for this Section, would be subject to the excise tax imposed by Section 4999 of the
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Code, then, Executive’s severance and other benefits under this Agreement shall be either (i) delivered in full, or (ii) delivered as to such lesser extent which would result in no portion of such severance and other benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by Executive on an after-tax basis, of the greatest amount of benefits under this Agreement, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code. Unless the Company and Executive otherwise agree in writing, any determination required under this Section shall be made in writing by the Company’s independent public accountants (the “ Accountants ”), whose determination shall be conclusive and binding upon Executive and the Company for all purposes. For purposes of making the calculations required by this Section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and Executive will furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section.
10. Company Policies . Executive shall sign and abide by the Company’s insider trading policy, code of conduct, and any other policies and programs adopted by the Company regulating the behavior of its employees, as such policies and programs may be amended from time to time.
11. Arbitration . Executive and the Company agree to submit to mandatory binding arbitration, in San Francisco County, California, any and all claims arising out of or related to this agreement and Executive’s employment with the Company and the termination thereof, except that each party may, at its or his or her option, seek injunctive relief in court related to the improper use, disclosure or misappropriation of a party’s proprietary, confidential or trade secret information. EXECUTIVE AND THE COMPANY HEREBY WAIVE ANY RIGHTS TO TRIAL BY JURY IN REGARD TO SUCH CLAIMS. This agreement to arbitrate does not restrict Executive’s right to file administrative claims. Executive may bring before any government agency where, as a matter of law, the parties may not restrict the Executive’s ability to file such claims (including, but not limited to, the National Labor Relations Board, the Equal Employment Opportunity Commission and the Department of Labor). However, Executive and the Company agree that, to the fullest extent permitted by law, arbitration shall be the exclusive remedy for the subject matter of such administrative claims. The arbitration shall be conducted through JAMS before a single neutral arbitrator, in accordance with the JAMS employment arbitration rules then in effect. The arbitrator shall issue a written decision that contains the essential findings and conclusions on which the decision is based.
12. Indemnification . Executive will be named as an insured on the director and officer liability insurance policy currently maintained, or as may be maintained by the Company from time to time, and, in addition, Executive will enter into the form of indemnification agreement provided to other similarly situated executive officers and directors of the Company.
13. Section 409A .
(a) To the extent (a) any payments or benefits to which Executive becomes entitled under this Agreement, or under any agreement or plan referenced herein, in connection with Executive’s termination of employment with the Company constitute deferred compensation subject to Section 409A of the Code and (b) Executive is deemed at the time of such termination of employment to be a “specified employee” under Section 409A of the Code, then such payments shall not be made or commence until the earliest of (i) the expiration of the six (6)-month period measured from the date of Executive’s “separation from service” (as such term is at the time defined in Treasury Regulations under Section 409A of the Code) from the Company; or (ii) the date of Executive’s death following such separation from service; provided, however, that such deferral shall only be effected to the extent required to avoid adverse tax treatment to Executive, including (without limitation) the additional twenty percent (20%) tax for which Executive would otherwise be liable under Section 409A(a)(1)(B) of the Code in the absence of such deferral. Upon the expiration of the applicable deferral period, any payments which would have otherwise been made during that period (whether in a single sum or in installments) in the absence of this paragraph shall be paid to Executive or Executive’s beneficiary in one lump sum (without interest).
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(b) It is intended that each installment of the payments provided hereunder constitute separate “payments” for purposes of Treasury Regulation Section 1.409A-2(b)(2)(i).
(c) It is further intended that payments hereunder satisfy, to the greatest extent possible, the exemptions from the application of Section 409A of the Code (and any state law of similar effect) provided under Treasury Regulation Section 1.409A-1(b)(4) (as a “short-term deferral”) and/or Treasury Regulation Section 1.409A-1(b)(9) (iii) (as “involuntary separation pay”).
(d) To the extent that any provision of this Agreement is ambiguous as to its compliance with Section 409A of the Code, the provision will be read in such a manner so that all payments hereunder comply with Section 409A of the Code.
(e) Except as otherwise expressly provided herein, to the extent any expense reimbursement or the provision of any in-kind benefit under this Agreement is determined to be subject to Section 409A of the Code, the amount of any such expenses eligible for reimbursement, or the provision of any in-kind benefit, in one calendar year shall not affect the expenses eligible for reimbursement in any other taxable year (except for any lifetime or other aggregate limitation applicable to medical expenses), in no event shall any expenses be reimbursed after the last day of the calendar year following the calendar year in which the Executive incurred such expenses, and in no event shall any right to reimbursement or the provision of any in-kind benefit be subject to liquidation or exchange for another benefit.
14. Miscellaneous .
14.1.
Absence of Conflicts
.
Executive represents that Executive’s performance of the duties under this Agreement will not breach any other agreement as to which Executive is a party.
14.2. Successors . This Agreement is binding on and may be enforced by the Company and its successors and assigns and is binding on and may be enforced by Executive and Executive’s heirs and legal representatives.
14.3. Severability . If any provision of this Agreement shall be found by any arbitrator or court of competent jurisdiction to be invalid or unenforceable, then the parties hereby waive such provision to the extent of its invalidity or unenforceability, and agree that all other provisions in this Agreement shall continue in full force and effect.
14.4. No Waiver . The failure by either party at any time to require performance or compliance by the other of any of its obligations or agreements shall in no way affect the right to require such performance or compliance at any time thereafter. The waiver by either party of a breach of any provision hereof shall not be taken or held to be a waiver of any preceding or succeeding breach of such provision or as a waiver of the provision itself. No waiver of any kind shall be effective or binding, unless it is in writing and is signed by the party against whom such waiver is sought to be enforced.
14.5. Assignment . This Agreement and all rights hereunder are personal to Executive and may not be transferred or assigned by Executive at any time. The Company may assign its rights, together with its obligations hereunder, to any parent, subsidiary, affiliate or successor, or in connection with any sale, transfer or other disposition of all or substantially all of its business and assets, provided, however, that any such assignee assumes the Company’s obligations hereunder.
14.6. Withholding . All sums payable to Executive hereunder shall be in United States Dollars and shall be reduced by all federal, state, local and other withholding and similar taxes and payments required by applicable law.
14.7. Entire Agreement . This Agreement (and the exhibit(s) hereto) constitutes the entire and only agreement and understanding between the parties relating to Executive’s employment with Company. This
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Agreement supersedes and cancels any and all previous contracts, arrangements or understandings other than the exhibits hereto with respect to Executive’s employment.
14.8. Amendment . The parties understand and agree that this Agreement may not be amended, modified or waived, in whole or in part, except in a writing executed by (i) Executive and (ii) either (A) an authorized executive officer of the Company or (B) an authorized independent member of the Board, in each case, other than Executive.
14.9. Notices . All notices, if any, and all other communications, if any, required or permitted under this Agreement shall be in writing and hand delivered, sent via facsimile, sent by registered first class mail, postage pre-paid, or sent by nationally recognized express courier service. Such notices and other communications shall be effective upon receipt if hand delivered or sent via facsimile, five (5) days after mailing if sent by mail, and one (1) day after dispatch if sent by express courier, to the following addresses, or such other addresses as any party shall notify the other parties:
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If to the Company: |
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Audentes Therapeutics, Inc. |
|
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600 California Street, 17 th Floor |
|
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San Francisco, CA 94108 |
Attention: |
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Chief Executive Officer |
|
|
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If to Executive: |
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Natalie Holles |
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14.10. Binding Nature . This Agreement shall be binding upon, and inure to the benefit of, the successors and personal representatives of the respective parties hereto.
14.11. Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which, taken together, constitute one and the same agreement.
14.12. Survival . The provisions of this Agreement shall survive the termination of Executive’s employment for any reason to the extent necessary to enable the parties to enforce their respective rights under this Agreement.
14.13. Governing Law . This Agreement and the rights and obligations of the parties hereto shall be construed in accordance with the laws of the State of California, without giving effect to the principles of conflict of laws.
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IN WITNESS WHEREOF
, the Company and Executive have executed this Agreement as of the date first above written. This Agreement is contingent upon successful completion of a final reference evaluation and background check to be conducted by the Company.
AUDENTES THERAPEUTICS, INC. |
EXECUTIVE |
|
By: |
|
|
Name: |
Matthew Patterson |
Natalie Holles |
Title: |
President and Chief Executive Officer |
President and Chief Operating Officer |
[S IGNATURE P AGE TO E MPLOYMENT A GREEMENT ]
Executive Invention Assignment and Confidentiality Agreement
Exhibit 31.1
CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Matthew Patterson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Audentes Therapeutics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 6, 2018
/s/ Matthew Patterson |
Matthew Patterson |
Chief Executive Officer |
(Principal Executive Officer ) |
Exhibit 31.2
CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Tom Soloway, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Audentes Therapeutics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 6, 2018
/s/ Tom Soloway |
Tom Soloway |
Chief Financial Officer |
(Principal Financial Officer ) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, Matthew Patterson, Chief Executive Officer of Audentes Therapeutics, Inc. (Company), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
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• |
the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2018 (Report), as filed with the Securities and Exchange Commission, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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• |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein. |
Date: November 6, 2018
/s/ Matthew Patterson |
Matthew Patterson |
Chief Executive Officer |
(Principal Executive Officer ) |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, Tom Soloway, Chief Financial Officer of Audentes Therapeutics, Inc. (Company), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
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• |
the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2018 (Report), as filed with the Securities and Exchange Commission, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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• |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein. |
Date: November 6, 2018
/s/ Tom Soloway |
Tom Soloway |
Chief Financial Officer |
(Principal Financial Officer ) |