Overview

Athenex, Inc., together with its subsidiaries (“Athenex,” the “Company,” “we,” “us” or “our”), is a global biopharmaceutical company dedicated to becoming a leader in the discovery, development and commercialization of next generation drugs for the treatment of cancer. Our mission is to improve the lives of cancer patients by creating more effective, safer and tolerable treatments. We are organized around three platforms, an Oncology Innovation Platform, a Commercial Platform and a Global Supply Chain Platform. Our current clinical pipeline in the Oncology Innovation Platform is derived from four different proprietary technologies: (1) Orascovery, based on a P-glycoprotein (“P-gp”) pump inhibitor, (2) Src Kinase inhibition, (3) T-cell Receptor-engineered T-cells (“TCR-T”), and (4) arginine deprivation therapy. We have assembled a strong and experienced leadership team and have established global operations across the pharmaceutical value chain to execute our goal of becoming a global leader in bringing innovative cancer treatments to the market and improving health outcomes.

Significant Developments in the Oncology Innovation Platform

Orascovery Platform

Our Orascovery technology is based on the novel P-gp pump inhibitor molecule, encequidar, formerly known as HM30181A. Oral administration of encequidar in combination with established chemotherapy agents such as paclitaxel, irinotecan, docetaxel, topotecan and eribulin has been shown in our clinical studies to date to improve the absorption of these agents by blocking the P-gp pump in the intestinal wall. Oral paclitaxel and encequidar, formerly known as Oraxol (“Oral Paclitaxel”) is our lead asset in our Orascovery platform. We are also advancing the following clinical candidates for the treatment of solid tumors on this platform: oral irinotecan and encequidar, formerly known as Oratecan (“Oral Irinotecan”); oral docetaxel and encequidar, formerly known as Oradoxel (“Oral Docetaxel”); oral topotecan and encequidar, formerly known as Oratopo (“Oral Topotecan”); and oral eribulin and encequidar, formerly known as Eribulin ORA (“Oral Eribulin”).

Significant developments in our Orascovery platform in 2019 include the following:

We announced topline results in August 2019 for our Phase 3 study of Oral Paclitaxel for the treatment of metastatic breast cancer and presented further data of the Phase 3 study in an oral presentation at the San Antonio Breast Cancer Symposium (“2019 SABCS”) in December 2019. Results demonstrated that the study met its primary endpoint showing statistically significant improvement in overall response rate for Oral Paclitaxel compared to intravenous (“IV”) paclitaxel and neuropathy was less frequent with Oral Paclitaxel compared to IV paclitaxel. In addition, ongoing analysis of secondary endpoints of survival showed a strong trend favoring Oral Paclitaxel, in particular, Oral Paclitaxel showed a statistically significant improvement in overall survival compared to IV paclitaxel in the prespecified modified intention-to-treat population. We intend to establish Oral Paclitaxel as the treatment of choice for patients receiving chemotherapy for metastatic breast cancer and intend to file a New Drug Application (NDA) with the U.S. Food and Drug Administration (FDA) in 2020 to secure regulatory approval of Oral Paclitaxel for metastatic breast cancer, although we can provide no assurance that we will be successful in obtaining the FDA’s approval to commercialize Oral Paclitaxel.

We are also evaluating Oral Paclitaxel in the treatment of angiosarcoma and in combination with other therapies, including anti-VEGF and anti-PD-1 therapies. In May 2019, we announced early and complete response data from a clinical study of Oral Paclitaxel in cutaneous angiosarcoma, and the study is continuing to enroll. Oral Paclitaxel also received Orphan Designations from the European Commission for the treatment of soft tissue sarcoma, in October 2019. We are also studying Oral Paclitaxel with ramucirumab in a Phase 1b study in patients with advanced gastric cancer who failed previous chemotherapy. We presented results from the study at the European Society for Medical Oncology (“ESMO”) Congress 2019 on the first three patient cohorts and are continuing to advance in the expansion phase of the study. Our Phase 1/2 study of Oral Paclitaxel in combination with pembrolizumab, or Keytruda, in patients with advanced solid malignancies is ongoing.

In addition to the progress made with respect to our lead product candidate, we continued to advance our other Orascovery product candidates in 2019. We presented preliminary results with respect to our Phase 1 study of Oral Irinotecan at the American Society of Clinical Oncology annual meeting in May 2019 (“2019 ASCO Annual Meeting”). We are planning Phase 2 studies for both Oral Irinotecan and Oral Docetaxel. A Phase 1 study of Oral Eribulin in patients with solid tumors is ongoing.

Src Kinase Inhibition Platform

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

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tirbanibulin (formerly known as KX2-391 and KX-01) ointment, which we are advancing for the treatment of actinic keratosis (“AK”) as well as psoriasis and skin cancer. Our other clinical candidates and their indications in this platform include tirbanibulin oral for solid and liquid tumors and KX2-361, formerly known as KX-02, for brain cancers, such as glioblastoma multiforme (“GBM”).

Significant developments in our Src Kinase inhibition platform in 2019 include the following:

We completed two Phase 3 studies for tirbanibulin ointment in the treatment of AK and presented topline results from the two Phase 3 studies in a late breaker session at the 2019 annual meeting of the American Academy of Dermatology (“2019 AAD Annual Meeting”). The results showed that both studies achieved their primary endpoint with 44% and 54% of patients in studies KX01-AK-003 and KX01-AK-004, respectively, achieving 100% AK lesion clearance at Day 57 within the face or scalp treatment areas. There was a statistically significant greater clearance rate in favor of tirbanibulin ointment 1% versus vehicle in each study and in each of the predefined patient subgroups. Safety results showed that tirbanibulin ointment was well tolerated. In October 2019, we announced a progress update for tirbanibulin ointment in the treatment of AK from our partner Almirall, S.A. (“Almirall”), with whom we are collaborating for the development and commercialization of tirbanibulin in the U.S. and Europe. We also announced the completion of pre-NDA consultation with the FDA.

We submitted an NDA to the FDA for tirbanibulin ointment as a topical treatment for AK. We are seeking approval of tirbanibulin ointment pursuant to Section 505(b)(1) of the Federal Food, Drug and Cosmetic Act (“FDCA”). We can provide no assurances the FDA will accept the NDA submission for filing, or if accepted, that our NDA will ultimately receive approval.

A study of tirbanibulin ointment 1% in psoriasis once daily for five days in a Phase 1 clinical trial sponsored by our partner, PharmaEssentia Corp. (“PharmaEssentia”), is ongoing.

With respect to KX2-361, our other Src Kinase inhibition platform product candidate, we announced in September 2019 that our partner, Guangzhou Xiangxue Pharmaceutical Co., Ltd. (“Xiangxue”), initiated a Phase 1 study in China of KX2-361 oral treating advanced malignant solid tumors on the strength of encouraging results in preclinical studies.

Other Platforms

The other technologies in our Oncology Innovation Platform are our TCR-T immunotherapy technology under which we are advancing TCR affinity-enhancing specific T-cell (TAEST) therapy with our first drug candidate, TAEST16001, and our arginine deprivation therapy technology under which we are advancing PT01, also known as Pegtomarginase. With respect to these technologies, we announced several developments in 2019.

In March 2019, we announced that our partner, Xiangxue Life Sciences Limited (“XLifeSc”), a wholly-owned subsidiary of Xiangxue, received notice of allowance from the China National Medical Product Administration (“NMPA”) of its Investigational New Drug (“IND”) application to initiate registration related clinical studies in China of TAEST therapy in patients with solid tumors that are HLA-A*02:01 positive and NY-ESO-1 positive. The cancer immunotherapy product, named TAEST 16001, is an autologous cell-based therapy utilizing the TAEST technology to enhance affinity against the HLA-A*02:01 restricted antigen NY-ESO-1. We are currently preparing the US IND for TAEST 16001.

In June 2019, the FDA allowed our IND application for the clinical investigation of PT01 for the treatment of patients with advanced malignancies. The compound targets cancer growth and survival by removing the supply of arginine to cancers that have a disrupted urea cycle. Also in June 2019 we presented preclinical study results of PT01 in a poster session at the 2019 ASCO Annual Meeting. The biologic agent demonstrated high enzymatic activity, predictable pharmacokinetic-pharmacodynamic profiles, and cytotoxicity in vitro. Mouse xenograft models showed good tumor growth inhibition activity at tolerable doses with only transient weight loss during therapy. We are currently planning a Phase 1 clinical study for PT01.

Other Business Developments

Other significant business developments for the Company in 2019 include:

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Overview of Our Business Organization Commercial Platform U.S. Sales & Marketing Chicago, IL Global Partnering Chicago, IL Oncology Innovation Platform Research Labs Buffalo, NY Clinical  Development Buffalo, NY Hong Kong, HK Cranford, NJ Chongqing, China Taipei, Taiwan Buffalo, NY Cranford, NJ Chongqing, China Taipei, Taiwan Regulatory Global Supply Chain Platform cGMP High  Potency API  Facilities Chongqing, China Under Development cGMP  Manufacturing Clarence, NY Formulation Labs Buffalo

Mission and Strategy

We have a comprehensive and experienced leadership team who have come together under one organization to achieve our mission of improving the lives of cancer patients by creating more effective, safer and tolerable treatments. We have the goal of becoming a global leader in bringing innovative cancer treatments to the market and improving health outcomes. To achieve our goal, we have established the following strategic priorities:

Obtain regulatory approval and prepare to commercialize Oral Paclitaxel and tirbanibulin ointment - We intend to file an NDA with the FDA in 2020 to secure regulatory approval of Oral Paclitaxel for metastatic breast cancer, and if approved, to establish it as the chemotherapy of choice for patients with metastatic breast cancer. If approved by the FDA, we plan to commercialize Oral Paclitaxel in the U.S. by leveraging our commercialization capabilities in the U.S., and also plan to evaluate marketing options outside of the U.S., including using our internal resources, partnering with others, or out-licensing the product. We submitted an NDA to the FDA for tirbanibulin ointment for the treatment of AK and we can provide no assurances the FDA will accept the NDA submission for filing, or if accepted, that our NDA will ultimately receive approval. Our strategic partner Almirall will employ its expertise to support the development of tirbanibulin ointment, if approved, in Europe and also to commercialize the product in the U.S. and European countries, including Russia.

Rapidly and concurrently advance our other clinical programs and product candidates - We intend to pursue the fastest feasible pathways to approval of our existing clinical product pipeline. For example, in our Orascovery platform, we plan to continue to advance our studies evaluating Oral Paclitaxel in other indications as well as those of our other Orascovery product candidates. In addition, we continue to make progress with the development of the clinical program for tirbanibulin. We will also evaluate options to enter into partnerships and collaborations where appropriate.

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Enhance and expand our other new technology platforms -  In 2018, Axis Therapeutics Limited, our majority owned subsidiary, commenced the development of TCR-T through an in-license from XLifeSc. We are currently preparing the U.S. IND application for TAEST16001. In 2018, we commenced development of arginine deprivation therapy, based on our pegylated genetically modified human arginase technology which is in-licensed from Avalon Polytom (HK) Limited (“Polytom”). In June 2019, the FDA allowed the IND application for the clinical investigation of PT01 for the treatment of patients with advanced malignancies and we are currently planning a Phase 1 clinical study. In addition to our existing portfolio of clinical candidates, our research and development teams are evaluating additional applications of our novel technology platforms. For example, our novel Cytochrome P450 (“CYP”) and P-gp dual inhibitor technology could expand the breadth of application for our oral enabling platform.

Leverage our global research and development operations to continue development of an oncology-focused product pipeline - We have research and development operations in the U.S., U.K., China, Taiwan and Latin America that are focused on advancing our existing product pipeline and on developing additional novel clinical drug product candidates in order to replenish our development pipeline as other candidates mature. We have developed a core competency in oral absorption technology and apply that skill to develop new methods of drug discovery and to identify new pipeline candidates, such as our Oral Eribulin IND program. In addition, we may leverage our research and development capabilities to partner with others for the development of new pipeline candidates. We believe that we can create substantial long-term value by pursuing a robust, ongoing research and development program.

Continue to build an integrated business model that leverages our proprietary commercial platform, supply chain and cGMP manufacturing capabilities - We built our U.S. commercial operation in preparation for future FDA approvals of our proprietary product candidates. We believe that our experienced product commercialization team can build an infrastructure that leverages both our global facilities and collaborative relationships to achieve global distribution of any products approved by the FDA and regulatory authorities in other jurisdictions, as applicable, in a timely and cost-effective manner. Our strategic partner Almirall will employ its expertise to support the development in Europe and also to commercialize tirbanibulin in the U.S. and European countries, including Russia. In addition, we intend to utilize current Good Manufacturing Practices (“cGMP”) manufacturing facilities from our public/private partnerships in both the China and U.S. markets as a mechanism to build-out our supply chain around the world.

Selectively pursue strategic M&A, licensing or partnership opportunities to complement our existing operations - We continue to pursue strategic acquisitions, licensing and partnership opportunities. We will continue to target opportunities that will complement our existing portfolio and operations to create value for stockholders and support our business strategy and mission.

Operating Segments

We have organized our business model into three platforms: (1) our Oncology Innovation Platform, dedicated to the research and development of our proprietary drugs; (2) our Commercial Platform, focused on the sales and marketing of our specialty drugs and the market development of our proprietary drugs; and (3) our Global Supply Chain Platform, dedicated to providing a stable and efficient supply of APIs for our clinical and commercial efforts. Our global operations across the three segments as of December 31, 2019 are shown below:

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* Includes Guatemala City, Guatemala and Buenos Aires, Argentina

Our Oncology Innovation Platform

Within our Oncology Innovation Platform, we have four different technologies: (1) Orascovery, based on a P-glycoprotein (P-gp) pump inhibitor, (2) Src Kinase inhibition, (3) TCR-T immunotherapy, and (4) arginine deprivation therapy. The following table summarizes the clinical development status of our current pipeline of product candidates in our Oncology Innovation Platform as of December 31, 2019:

May 2019  Program Drug Candidate Indication Pre-clinical Phase 1 Phase 2 Phase 3 Orascovery  (P-gp inhibitor [ encequidar ] +  chemoRx agents )  Oral paclitaxel + encequidar Metastatic breast cancer Angiosarcoma Oral paclitaxel + encequidar w/  pembrolizumab Solid tumors Oral paclitaxel + encequidar w/  ramucirumab Gastric cancer Oral irinotecan + encequidar Solid tumors Oral docetaxel + encequidar Solid tumors  Oral topotecan + encequidar Solid tumors Oral  eribulin + encequidar Solid tumors  Dual Inhibition ATNX - 04 (CYP / P - gp) Multiple tumors Src Kinase Inhibition Tirbanibulin ointment Actinic keratosis Psoriasis Skin Cancers Tirbanibulin  oral Liquid tumors Ovarian cancer KX2 - 361 Glioblastoma TCR - T Immunotherapy TAEST16001 Multiple tumors Arginine Deprivation Therapy PT01 ( Pegtomarginase) Multiple tumors

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In addition to our existing portfolio of clinical candidates, our research and development teams are evaluating additional applications of our novel technology platforms. For example, our novel CYP and P-gp dual inhibitor technology could expand the breadth of application for our oral enabling platform.

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

Our Orascovery Platform

Our Orascovery platform technology is based on the novel oral P-gp pump inhibitor molecule, encequidar. The P-gp pump is a plasma membrane efflux protein on the cells which forms a localized drug transport system. In the intestine it limits the oral absorption of a large number of drugs, including widely used P-gp substrate cancer chemotherapeutic drugs such as paclitaxel, irinotecan, docetaxel and eribulin, thus restricting their current dosing to IV administration. We are developing a series of orally administered chemotherapeutic agents using our proprietary P-gp pump inhibitor delivery system. For our lead Orascovery product candidate, Oral Paclitaxel, sequential co-administration of encequidar and oral paclitaxel is designed to facilitate oral absorption of paclitaxel and achieve therapeutic blood levels. Studies conducted to date have indicated that oral administration of paclitaxel in combination with encequidar has lower peak concentrations of paclitaxel in the blood which we believe will result in lower rates of peripheral neuropathy. In addition, oral administration eliminates infusion-related reactions related to IV administration of paclitaxel, which could improve patient tolerability and allow for longer dosing durations to improve efficacy. The technology is designed to enable the oral administration of many cancer agents, which currently are only given by IV due to poor oral absorption. Oral administration of certain cytotoxic chemotherapies can potentially overcome several key challenges in IV administration of those drugs. In addition to Oral Paclitaxel, we are advancing Oral Irinotecan, Oral Docetaxel, Oral Topotecan and Oral Eribulin as other clinical candidates on this platform.

Chemotherapeutic agents such as paclitaxel, irinotecan, docetaxel and eribulin are clinically proven and widely used. However, these agents have historically been limited to IV administration, which can result in adverse events which are due, in part, to high peak blood concentration levels of the chemotherapeutic drugs. In addition, for some agents, there are infusion-related reactions caused, in part, by solubilizing dilution agents used to facilitate IV administration. A cancer patient’s inability to tolerate IV chemotherapies may limit the long-term efficacy of IV anti-cancer therapies. We believe our pipeline products, which leverages our proprietary delivery system will expand the use of these chemotherapeutic agents. We believe that our Orascovery platform overcomes the current challenges of chemotherapeutic agents by allowing more frequent dosing over longer periods of time, which we believe will lead to better tolerability and allow for higher total dosage and longer time exposure to the chemotherapeutic agent.

We have historically observed that a novel technology applied to a traditional chemotherapy agent may achieve pricing premiums if data demonstrates superior efficacy and tolerability as compared to current standards of care. We believe our pipeline products will be able to capture a large untapped market and achieve significantly larger market potential than the revenue generated by existing formulations, due to (1) increasing adoption of oral therapy due to patient preference, (2) the potential for improved response rates through greater exposure (based on our predictive model), (3) the potential for improved tolerability (based on our predictive model) and (4) the possibility to expand the market through combination therapies with immuno-oncology therapy and oral targeted treatments.

Encequidar—Our Novel P-gp Pump Inhibitor

The novel P-gp inhibition molecule, encequidar (formerly known as HM30181A), belongs to a new class of P-gp inhibitor that has high potency, specificity and local action at the intestine cells, and forms the cornerstone of our Orascovery platform. Encequidar is designed to enable the administration of oral dosing formats of paclitaxel, irinotecan, docetaxel, topotecan and eribulin, each of which is currently under clinical development. The feature that distinguishes encequidar from other small molecule P-gp inhibitors is that this novel compound is specific to P-gp, does not interfere significantly with the activity of other related transporters and does not significantly inhibit cytochrome 3A4, an enzyme that is important in the metabolism of commonly used drugs. Encequidar is minimally absorbed following oral administration. This localizes P-gp inhibitory activity in the gastrointestinal tract, limiting the potential for interaction at additional systemic sites where P-gp is expressed. Based on the results of our encequidar clinical development programs to date, inhibition of gastrointestinal P-gp has been shown to improve the absorption of chemotherapy agents to achieve systemic exposure profiles which enhance the efficacy and may reduce toxicity of these established chemotherapeutic agents. Based on its pharmacological profile and low systemic absorption, encequidar is not expected to cause drug-to-drug interactions other than enhancement of oral absorption of medications which are P-gp substrates.

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Mechanism of Action - P-gp Inhibition

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

Preclinical Development

In preclinical studies, encequidar demonstrated poor absorption from the gastrointestinal tract following oral administration in rats and dogs. The safety and tolerability of encequidar has been characterized in a panel of safety and toxicology studies. Single dose oral toxicology, repeat dose oral toxicology in multiple species for several durations, a standard battery of genotoxicity assays, and a full developmental and reproductive toxicity assessment have been performed.

Multiple preclinical studies have evaluated the in vivo pharmacologic effect of encequidar, generally in the context of a co-administered P-gp substrate such as paclitaxel. In each case, co-administration of encequidar significantly enhanced systemic exposure of the co-administered substrate. In murine models of human cancer, oral co-administration of encequidar with paclitaxel or docetaxel conferred anti-tumor activity comparable to the IV dosing route.

Clinical Development

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

Our Orascovery Product Candidates

Oral Paclitaxel and Encequidar

Overview

IV paclitaxel is used widely for the treatment of breast, ovarian and lung cancer. Due to its poor solubility, paclitaxel is usually dissolved in ethanol and polyethoxylated castor oil, which is a major cause of IV hypersensitivity reactions. As a result, premedication

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with high dose steroids and antihistamines is required to minimize these adverse reactions. Additional common toxicities associated with IV administration of paclitaxel include neuropathy, neutropenia and alopecia. These side effects limit dose intensification and often require reduction in dosing.

As a single agent or in combination, IV paclitaxel is administered at a variety of doses and regimens that are approved for therapeutic use for various paclitaxel indications, including 175 and 135 mg/m² administered as both three and twenty-four hour infusions, respectively, once every three weeks. Over the past number of years, there has been great interest in dose dense therapy with paclitaxel, switching from the conventional every three-week regimen to administering the drug once weekly. Dose dense treatment with paclitaxel has various advantages that can lead to an increase in the overall exposure, as measured by area under the concentration-time curve (AUC), over a treatment cycle, while balancing the adverse event profile normally observed, such as neutropenia. This concept is consistent with the hypothesis of maintaining sufficient drug concentrations above a threshold target value for an extended duration.

Oral Paclitaxel is our lead drug candidate in our Orascovery Platform and is initially being developed for the treatment of patients with metastatic breast cancer. We are preparing for NDA submission in 2020, having conducted a pivotal, randomized Phase 3 study of Oral Paclitaxel monotherapy versus IV paclitaxel monotherapy which met its primary endpoint of confirmed response rate in patients receiving Oral Paclitaxel. We are also evaluating Oral Paclitaxel (1) as a monotherapy treatment for patients with cutaneous angiosarcoma, (2) in combination with ramucirumab for patients with advanced gastric cancers, and (3) in combination with pembrolizumab for advanced solid malignancies including urothelial, gastric or gastroesophageal or non-small cell lung cancer. We are working to develop Oral Paclitaxel for additional indications and are exploring potential combinations with immuno-oncology agents.

Overview of Clinical Findings

As of December 31, 2019, five Phase 1, 2 and 3 clinical studies of Oral Paclitaxel have been completed. Oral Paclitaxel (15 mg of encequidar plus 205 mg/m² of oral paclitaxel) administration has shown to result in overall exposure in the blood approximately equivalent to that achieved with 80 mg/m² of IV paclitaxel. We believe oral dosing of paclitaxel can provide a longer drug exposure over a target drug concentration than IV paclitaxel, which may translate to better clinical response. We also observed in a Phase 3 clinical study of 402 metastatic breast cancer patients that Oral Paclitaxel had statistically significantly higher confirmed tumor response rate with lower incidence and severity of neuropathy compared to IV paclitaxel. See “—Clinical Development by Indication—Metastatic Breast Cancer—Phase 3 Study” for a further discussion of the results of the Phase 3 study. We are continuing to collect data on the secondary endpoints of progression free and overall survival.

We have completed a randomized two-way crossover study comparing the exposure of paclitaxel after administration of IV paclitaxel 80 mg/m² and Oral Paclitaxel 205mg/m² daily over three consecutive days. Intensive PK sampling was conducted over each treatment period. Statistical analysis demonstrated that the exposure to paclitaxel, based on the AUC was similar between the two treatments. For Oral Paclitaxel, the AUC was 5033 ng.hr/mL and Cmax was 397 ng/mL. For IV paclitaxel, the AUC was 5595 ng.hr/mL with a Cmax of 2732 ng/mL. The geometric ratio and 90% confidence intervals for AUC was 89.5% (83.9-95.5) falling within the guidelines for equivalence.  

Clinical Development by Indication

Metastatic Breast Cancer

Phase 2 Study

We conducted a Phase 2 study of Oral Paclitaxel in patients with metastatic breast cancer who failed previous chemotherapies in Taiwan. The study was a multicenter, single-arm, open-label, PK study of Oral Paclitaxel administered orally for 3 consecutive days weekly for up to 16 weeks. We presented encouraging data on the efficacy of Oral Paclitaxel in the treatment of metastatic breast cancer patients obtained from this Phase 2 study at the 2019 ASCO Annual Meeting. Results from 28 patients were reported and 26 of these patients had failed multiple previous chemotherapies.  Study results on tumor response showed that there were 11 (42.3%) partial response, 12 (46.2%) stable disease and 3 (11.5%) progressive disease in 26 evaluable patients. Three patients had treatment-related SAEs (grade ≥3 neutropenia) and all patients recovered completely. PK results showed that the AUC of Oral Paclitaxel at week-1 was reproducible at week-4 (3050 to 3594 ng-hr/mL). The results indicated that weekly Oral Paclitaxel can achieve paclitaxel exposure similar to that of weekly IV paclitaxel (80mg/m²) reported previously and that Oral Paclitaxel appears effective in the treatment of advanced breast cancer patients.

Phase 3 Study

Our Phase 3 study of Oral Paclitaxel in patients with metastatic breast cancer was a randomized, active-controlled clinical trial comparing Oral Paclitaxel monotherapy against IV paclitaxel monotherapy. The trial randomized subjects in a 2:1 ratio to Oral Paclitaxel, and was designed to compare the safety and efficacy of Oral Paclitaxel with IV paclitaxel. The primary endpoint was overall response rate (“ORR”) (confirmed by scans at two consecutive timepoints) as assessed by RECIST v1.1 criteria, a generally

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accepted method for assessing tumor response. Blinded assessments of tumor response were made by independent radiologists. In December 2019, we presented the data from our Phase 3 study of Oral Paclitaxel in patients with metastatic breast cancer at the 2019 SABCS.

A total of 402 metastatic breast cancer patients were enrolled (Oral Paclitaxel =265 vs. IV paclitaxel=137), which represented the intent-to-treat (“ITT”) population. Patient demographics were balanced. The prespecified modified ITT (“mITT”) population comprised 360 patients (Oral Paclitaxel =235 vs. IV paclitaxel=125), which includes patients who received at least 7 doses of Oral Paclitaxel (the majority of one cycle of treatment) or one dose of IV paclitaxel and excludes patients that did not have tumors that could be evaluated by the central radiologist at baseline.  The study was designed with 360 evaluable patients (prespecified mITT population) and was statistically powered to detect a difference of 15% in confirmed ORR at p=0.045 with 80% power at the final analysis.  

In the final analysis of the primary endpoint of the study, Oral Paclitaxel (205 mg/m² per day 3 days/week) showed a statistically significant improvement in ORR at 40.4% compared to IV paclitaxel (175 mg/m² once every 3 weeks) at 25.6%, a difference of 14.8% (p=0.005) favoring Oral Paclitaxel, based on prespecified mITT analysis. Based on ITT analysis, Oral Paclitaxel showed a statistically significant improvement in ORR over IV paclitaxel, with 35.8% ORR, compared to 23.4% for IV paclitaxel, a difference of 12.4% (p=0.011).

The study results showed that approximately one-third of confirmed responders who received Oral Paclitaxel experienced a confirmed tumor response for more than 200 days. Ongoing analysis as of July 25, 2019 showed the median durations of response were 39.0 weeks for the patients who received Oral Paclitaxel, compared to 30.1 weeks for those who received IV paclitaxel.

Secondary endpoints in the study include progression free survival (“PFS”) and overall survival (“OS”). Ongoing analysis as of July 25, 2019 showed a strong trend favoring Oral Paclitaxel. The study results showed a median PFS of 9.3 months for Oral Paclitaxel compared to 8.3 months for IV paclitaxel (p=0.077, hazard ratio=0.760) in the prespecified mITT and ITT populations.  Ongoing analysis as of July 25, 2019 of OS in the prespecified mITT population favored Oral Paclitaxel over IV paclitaxel, by an additional 11 months, with a median survival of 27.9 months compared to 16.9 months, respectively (p=0.035, hazard ratio=0.684). In the ITT population, the median OS was 27.7 months for the Oral Paclitaxel group compared to 16.9 months for the IV paclitaxel group (p=0.114).

In the study, the Oral Paclitaxel group had lower incidence and severity of neuropathy compared to IV paclitaxel: 57% of IV paclitaxel patients experienced neuropathy (all grades) versus 17% of Oral Paclitaxel patients, with grade 2 or above neuropathy observed in 31.1% of IV paclitaxel patients versus 7.6% of Oral Paclitaxel patients.  Grade 3 neuropathy was observed in 8% of IV paclitaxel patients versus 1% of Oral Paclitaxel patients. The results also showed lower incidence of alopecia compared to IV paclitaxel, with 28.8% of the Oral Paclitaxel group experiencing alopecia versus 48.2% of the IV paclitaxel group in treatment-emergent adverse events of interest. For other treatment-emergent adverse events of interest, there was a higher incidence of neutropenia with CTCAE grade ≥ 3 (29.9% vs. 28.1%; with Grade 4 14.8% vs 8.9%) and gastro-intestinal side effects, such as diarrhea with CTCAE grade ≥ 3 (5.3% vs. 1.5%) and vomiting or nausea with CTCAE grade ≥ 3 (6.8% vs. 0.7%), in the Oral Paclitaxel group as compared to the IV paclitaxel group.

Based on the Phase 3 study data, we are preparing an NDA submission to the FDA. In the event we receive regulatory approval from the FDA, we plan to pursue additional oncology indications where we believe taxanes will remain a foundational treatment and to continue exploring combination therapies.

Angiosarcoma

          We are also developing Oral Paclitaxel for the treatment of angiosarcoma. Angiosarcomas are rare, aggressive and heterogeneous tumors accounting for approximately 2% of all soft tissue sarcomas. Only limited treatment options for advanced disease exist with poor outcomes and low 5-year survival rates. In April 2018, FDA granted an Orphan Drug Designation for Oral Paclitaxel for the treatment of angiosarcoma. In addition, in October 2019, we announced the receipt of Orphan Designations from the European Commission for Oral Paclitaxel for the treatment of soft tissue sarcoma.

           In the angiosarcoma xenograft model in preclinical studies, oral dosing of Oral Paclitaxel resulted in dose-dependent tumor growth inhibition and subsequent increased survival. Tumor histology revealed that Oral Paclitaxel greatly reduced the formation of cavernous blood-filled neoplastic vessels characteristic of angiosarcoma.

           We commenced a study of Oral Paclitaxel monotherapy in the treatment of angiosarcoma in December 2018. Preliminary data announced in May 2019 showed promising early clinical responses in the first 7 patients who received at least six weeks treatment, the timepoint for the first response assessment. All 7 patients showed significant and visible reduction of the cutaneous angiosarcoma within one or two weeks of treatment. Three patients had complete responses based on RECIST v1.1 criteria, with two complete responses occurring by six weeks of treatment. The study is ongoing.

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Gastric Cancer

Monotherapy Study

Hanmi conducted a Phase 1/2 gastric cancer study in South Korea. The study was an open-label Phase 2, single-arm clinical trial of Oral Paclitaxel for second line treatment of advanced gastric cancer patients. This trial included dosing Oral Paclitaxel at 150 mg/m² per day, for two consecutive days per week, for 3 weeks out of a 4-week cycle. A total of forty-six subjects enrolled in this study. Oral Paclitaxel was well-tolerated by gastric cancer patients. The results of the Phase 2 portion of this clinical trial showed treatment with Oral Paclitaxel resulted in a median overall survival of 10.7 months, which compared favorably to historical data for ramucirumab, the only FDA approved drug for second line treatment of gastric cancer, which reported 5.2 months of overall survival in a randomized, placebo controlled Phase 3 clinical study.

Study in Combination with Ramucirumab

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

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

Other Indications

We have an ongoing Phase 1/2 clinical study to assess the safety, tolerability and activity of Oral Paclitaxel in combination with an anti-programmed cell death protein 1 (anti-PD1) antibody (pembrolizumab) in patients with advanced solid malignancies. Pembrolizumab is a checkpoint inhibitor approved by the FDA. The study is being conducted in patients with urothelial, gastric or gastroesophageal or non-small cell lung cancer that have previously failed treatment with a checkpoint inhibitor. Dose escalation of paclitaxel administered as a flat dose of 270 mg per day for 3 to 5 days per week for 2 of 3 weeks is ongoing.

Overview of Safety Observations in Oral Paclitaxel Studies

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

As of December 31, 2019, approximately 13% of patients treated in clinical studies with Oral Paclitaxel experienced SAEs that were considered to be related to the study treatment. The most common were neutropenia in approximately 4% of patients and febrile neutropenia in approximately 3% of patients; pneumonia in approximately 2% of patients; and sepsis, septic shock, dehydration and vomiting in approximately 1% of patients; gastroenteritis, anemia, diarrhea, mucositis, gastrointestinal bleeding and nausea each in less than one percent of patients. Serious treatment-related infections other than sepsis, septic shock or pneumonia were reported in approximately 1% of patients. Approximately 1% of patients with serious infections had other concurrent treatment-related SAEs.

Oral Irinotecan and Encequidar

Overview

Irinotecan is a potent anticancer drug that is marketed under the trade name Camptosar. Irinotecan is mainly administered to patients with metastatic colorectal cancer (mCRC), but also in glioblastoma, lung, ovarian, cervical, upper gastrointestinal cancer and pancreatic cancer. The active metabolite of Irinotecan, SN38, is a type 1 DNA topoisomerase inhibitor with potent antitumor activity and wide antitumor spectrum. We believe that oral administration of irinotecan will more efficiently generate SN38, resulting in the potential for better clinical response with reduced toxicity. Oral Irinotecan is intended for oral administration for the treatment of irinotecan-responsive cancers.

Key Preclinical and Early Clinical Studies

Hanmi conducted three Oral Irinotecan Phase 1 studies, two as monotherapy, and one in combination with capecitabine, in a total of fifty-four Korean patients with advanced solid tumors. The tumor types in these clinical trials were mostly gastric and

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colorectal cancers. MTD for Oral Irinotecan as monotherapy was defined as 100 mg/m² per 3-week cycle, either given as once daily for five consecutive days for one week (20 mg/day), or two weeks (10 mg/day), of a 3-week cycle. Anti-cancer activity was observed in these studies.

Completed Clinical Studies

In a Phase 1 MTD study (HM-OTE-101), Oral Irinotecan was administered to twenty patients with advanced solid tumors on Days 1 to 5 during a 21-day cycle. Irinotecan daily doses ranged from 5 to 30 mg/m², and encequidar doses were 60 mg. MTD was identified at 20 mg/m² per day for five days of a 3-week cycle. Adverse events were typical of events seen with IV irinotecan. Common adverse events included nausea (90%), diarrhea (65%), and vomiting (55%). Four subjects had dose-limiting toxicity (“DLT”) events (diarrhea, neutropenia, nausea/vomiting and AST elevation). At the MTD, the SN-38 C_max on Days 1 and 5 were 9 and 12 ng/mL. Estimated SN-38 cycle exposure (AUC) was 373 ng*hr/mL. In this study Oral Irinotecan monotherapy in patients with advanced solid tumors resulted in a disease control rate of 44%.

In a Phase 1 MTD study (HM-OTE-102), Oral Irinotecan was given once daily for five consecutive days each week for two weeks during a 21-day cycle to thirteen patients with advanced solid tumors. Irinotecan doses ranged from 5 to 20 mg/m². MTD was identified at 10 mg/m² per day. Adverse events were similar to those observed following IV irinotecan and included diarrhea, nausea, and anorexia. Five subjects had a DLT in Cycle 1. The disease control rate was 50% or above at each of the dose levels tested.

In a Phase 1 MTD study (HM-OTE-103) Oral Irinotecan in combination with capecitabine. Oral Irinotecan was administered to twenty-one patients on Days 1 to 5 during a 21-day cycle. Irinotecan doses ranged from 10 to 20 mg/m² per day, with encequidar (15 mg) in combination with capecitabine at 800-1000 mg/m² for fourteen days. The MTD of Oral Irinotecan, in combination with capecitabine at the 1000 mg/m² dose was identified at 15 mg/m² per day of Oral Irinotecan. In this study of combination of Oral Irinotecan with capecitabine in patients with a variety of solid tumors (mostly GI cancers), 10 out of 18 (56%) patients had either stable disease or a partial response.

Current and Planned Clinical Development

A Phase 1 MTD study is being conducted and is currently ongoing. This study is to determine the MTD of Oral Irinotecan, when given once every three weeks, in subjects with advanced malignancies. We have identified a dosing regimen suitable for Phase 2, and Phase 2 studies are being planned.

Overview of Safety Observations in Oral Irinotecan Studies

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

Oral Docetaxel and Encequidar

Overview

Docetaxel is a potent anticancer drug within the class of antimicrotubule agents that is marketed under the trade name Taxotere. Docetaxel is mainly administered to patients with breast, lung, prostate, gastric and head and neck cancers. Docetaxel has potent activity with a wide antitumor spectrum. As a single-agent therapy, docetaxel is administered by IV infusion over one hour at a dose of 60-100 mg/m² for breast cancer and 75 mg/m² for non-small cell lung cancer given once every three weeks. Docetaxel is also used in combination with doxorubicin and cyclophosphamide (adjuvant treatment of breast cancer), cisplatin (lung), topical fluorouracil (head and neck and gastric) and prednisone (prostate). Docetaxel causes dose-limiting toxicities that are more common at higher doses. One significant dose-limiting toxicity is fluid retention that we believe is associated (at least in part) with the IV formulation that contains polysorbate 80, a nonionic and emulsifier frequently used in food and cosmetics. Hypersensitivity reactions may also be attributable to IV administration of polysorbate 80. We believe that Oral Docetaxel will provide therapeutic exposures of the drug and result in the potential for better clinical response with reduced toxicity.

Preclinical Activity and Evaluation

The potential effectiveness of encequidar to inhibit the P-gp pump’s ability to transport docetaxel out of cells was first observed in vitro by an increase in the potency of docetaxel by 1,788-fold in a uterine sarcoma cell line. In rat oral PK studies, the plasma concentrations of docetaxel versus time showed a significant increase upon co-administration of encequidar with docetaxel. In this experiment, docetaxel was formulated in the currently proposed clinical formulation. Oral Docetaxel was also tested in preclinical human prostate cancer murine model and overall, Oral Docetaxel was more active than docetaxel given orally without a P-gp inhibitor and was similar to the efficacy of IV docetaxel administration. At a dose of 25 mg/kg docetaxel with encequidar a percent of tumor control of 4.8% was achieved which is comparable to the standard 10 mg/kg IV dosing regimen of docetaxel (2.9%). Without P-gp pump inhibition by encequidar, oral administration of docetaxel demonstrated less inhibition of tumor growth, with a percent of control of 50.5%, consistent with reduced absorption of oral docetaxel when dosed without encequidar.

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Current and Planned Clinical Studies

A Phase 1 dose escalation U.S. trial for Oral Docetaxel in patients with various solid tumors with a starting dose of 35 mg/m² given once every three weeks is ongoing. Another Phase 1 study to identify the absolute bioavailability of Oral Docetaxel in prostate cancer patients is ongoing in New Zealand. Based on Phase 1 results so far, we believe that we can achieve similar exposure to IV docetaxel with one or two days of dosing every three weeks. Phase 2 studies are being planned.

In line with our expectations for Oral Paclitaxel, we expect that the overall safety profile of Oral Docetaxel will be similar to that of IV docetaxel, with differences related to the route of administration. As with Oral Paclitaxel, premedication has not been required and hypersensitivity type reactions have not been observed. No treatment-related SAEs have been reported.

Oral Topotecan and Encequidar

Topotecan is a potent anticancer drug under the class of camptothecins that is marketed under the trade name Hycamtin. Topotecan is mainly administered to patients with lung, ovarian and cervical cancer. Clinical activity has been shown in combination with the taxanes, docetaxel and paclitaxel, for the treatment of a variety of tumors, including lung cancer. Topotecan causes dose-limiting toxicities. These side effects mainly include neutropenia, late onset diarrhea and nausea and vomiting.

In rat oral PK studies, the plasma concentrations of topotecan versus time demonstrated a significant increase upon co-administration with encequidar. This effect is evident when topotecan is formulated in saline or the marketed product, Hycamtin. In preclinical murine models with human tumor transplants, including ovarian cancer, oral topotecan in combination with encequidar was more active than oral topotecan alone following administration at a dose of topotecan 1 mg/kg once daily for five days per week.

A Phase 1 clinical trial in advanced malignancies for Oral Topotecan is ongoing.

In line with our expectations for Oral Paclitaxel, we expect that the overall safety profile of Oral Topotecan will be similar to that of IV topotecan, with differences related to the route of administration. As with Oral Paclitaxel, premedication has not been required and hypersensitivity type reactions have not been observed. No treatment-related SAEs have been reported.

Oral Eribulin and Encequidar

Eribulin is an anticancer intravenous drug marketed by Eisai Company under the trade name Halaven. It is used to treat certain patients with breast cancer and liposarcoma. Eribulin is a synthetic derivative of the natural product Halichondrin B. The potent anticancer effects of this agent come primarily from its unique means of targeting microtubule dynamics, a process critical to cell proliferation. 

The nonclinical demonstration of a favorable PK profile, with lowered peak plasma concentration and longer duration of the drug within the desired plasma concentration range, suggests the potential for an efficacy and safety profile for Oral Eribulin, similar to what we have observed with Oral Paclitaxel and other Orascovery products. In addition, we have developed a novel and efficient synthetic route for the synthesis of eribulin API which we believe will support our development of this candidate. In October 2018, the FDA allowed our IND application for Oral Eribulin. A Phase 1 study commenced in 2019 to assess the safety, MTD, DLT and absolute bioavailability of Oral Eribulin (encequidar and oral eribulin) in subjects with solid tumors. As the clinical development program is still in its early stages, we do not yet have meaningful safety, including adverse event, statistics to report.

Our Src Kinase Inhibition Platform

Our Src Kinase inhibition platform technology is based on novel small molecule compounds that have multiple mechanisms of action, including the inhibition of the activity of Src Kinase and the inhibition of tubulin polymerization, which may limit the growth or proliferation of cancerous cells. We believe the combination of these mechanisms of action provides a broader range of anti-cancer activity compared to either mechanism of action alone. Our lead product candidate on our Src Kinase inhibition platform is tirbanibulin ointment, which we are advancing for the treatment of AK as well as psoriasis and skin cancer. Our other clinical candidates and their indications in this platform include tirbanibulin oral for solid and liquid tumors; and KX2-361 for brain cancers, such as GBM.

Tirbanibulin

Mechanism of Action

Tirbanibulin, formerly known as KX2-391 or KX-01, is a novel small molecule that we discovered and developed, which demonstrates at least two mechanisms of action (“MOAs”) relevant to the potential control of cancer and hyper-proliferative disorders: (1) Src tyrosine kinase inhibition (non-ATP competitive) and (2) tubulin polymerization inhibition. Src Kinase, a tyrosine kinase protein involved in regulating cell growth, is strongly implicated in metastasis. Inhibiting Src Kinase may limit the growth or proliferation of cancerous cell types. Src plays a role in regulating multiple aspects of tumor development, growth and metastases, and

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its inhibition limits such tumor activity. Interfering with tubulin polymerization activity is a clinically validated mechanism for treating cancer. For both targets tirbanibulin binds at a novel binding site. Taken together, these two MOAs may provide for a potent means of treating cancer and other hyper-proliferative disorders.

 Tirbanibulin Ointment for Topical Indications

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

We are evaluating topical tirbanibulin ointment in the clinic for AK in the U.S. The most common cause of AK is exposure to ultraviolet radiation from the sun or tanning beds. This exposure can lead to oncogenic changes, such as inactivation of p53, and consequential hyper-proliferation of mutated keratinocytes. If left untreated, 10-15% of AKs can progress to skin cancer. tirbanibulin inhibits the proliferation of keratinocytes and up-regulates p53 so its utility in clinically treating AK is of interest. We commenced two Phase 3 studies of tirbanibulin ointment for the treatment of AK in September 2017, which completed patient enrollment in February 2018. In July 2018, both Phase 3 studies achieved their primary endpoint of 100% clearance AK lesions at Day 57 within the face or scalp treatment areas.

An additional indication for psoriasis is being evaluated in a Phase 1 clinical trial led by our out-licensing partner PharmaEssentia Corp. Since AK can lead to skin cancers, we are now investigating the initiation of a study in that basal cell carcinoma. These applications provide additional potential therapeutic utilities for tirbanibulin ointment and could represent significant potential market expansions beyond AK.

Actinic Keratosis

Phase 1 and 2 Studies

A Phase 1 study of tirbanibulin ointment 1% for treatment of AK was conducted by us in the U.S. In the study, 50% (four of eight subjects) had complete response (100% clearance) with tirbanibulin ointment 1% being applied for five consecutive days on a 25 cm² area of the forearm. The results indicated very good local and systemic tolerability, with a complete response achieved without severe adverse skin reactions in some patients.

We completed a Phase 2a clinical study in the U.S. of tirbanibulin ointment 1% for treatment of AK on the face and scalp. The primary objective was to evaluate the complete response rate, which was defined as 100% clearance of such patient’s AK at Day 57 after treatment. Additionally, we sought to further investigate the findings from the Phase 1 proof of concept study indicating that tirbanibulin ointment has a favorable side effect profile. Data from 168 patients in the Phase 2 study shows that the tirbanibulin dosing regimen used in this study is well-tolerated, with mostly mild and transient local skin reactions (LSRs). The five-day treatment cohort achieved a higher overall 100% clearance of AK lesions at Day 57 (i.e. eight weeks after the initiation of treatment) than the three-day treatment cohort (43% vs. 32%). In the five-day treatment cohort, 23 of 44 subjects (52%) with AK on face and thirteen of forty (33%) on scalp attained 100% clearance at Day 57. LSRs were mild and mostly erythema, flaking or scaling, crusting and swelling with the majority of the LSRs scores of < 2 and resolved rapidly. Only one subject scored 4 in erythema and flaking or scaling, which both resolved rapidly without concomitant medications. Erosions or ulcers and vesicles or pustules were observed in only 15% and 5% of subjects, respectively. No subjects scored ≥ 3 in erosions or ulcers or vesicles or pustules. Treatment related adverse effects were few and predominately mild transient application site pruritus, tenderness and pain. There were no treatment related SAEs or discontinuations. Plasma levels of tirbanibulin were low to undetectable.

Phase 3 Studies

We completed two Phase 3 studies of tirbanibulin ointment for treatment of AK on the face and scalp. These two double-blind, randomized, vehicle-controlled, parallel group, multi-center studies (KX01-AK-003 and KX01-AK-004) were designed to support the registration of tirbanibulin ointment as field therapy for AK of the face or scalp.  The studies enrolled a total of 702 patients across 62 sites in the U.S. Tirbanibulin ointment 1% or vehicle (randomized 1:1) was self-administered to 25 cm² of the face or scalp encompassing 4-8 typical AK lesions, once daily for 5 consecutive days. In July 2018, both Phase 3 studies achieved their primary endpoint of 100% clearance of AK lesions at Day 57 within the face or scalp treatment areas, with each study achieving statistical significance (p<0.0001). In March 2019, we presented topline results from the two Phase 3 studies of tirbanibulin ointment in the treatment of AK in a late breaker session at the 2019 AAD Annual Meeting. Results showed that 44% and 54% of patients in studies KX01-AK-003 and KX01-AK-004, respectively, achieved 100% AK lesion clearance at Day 57 (see Table 1). Compliance rate in these two studies was greater than 99%. There was a statistically significantly higher 100% clearance rate in favor of the tirbanibulin ointment versus the vehicle for each study and in each of the predefined patient subgroups. Safety results showed that tirbanibulin ointment was well tolerated. Treatment-related adverse events occurred in 11-20% of patients receiving tirbanibulin ointment in the two Phase 3 studies. These events were generally transient mild to moderate application site symptoms, such as pruritus or pain. In the KX01-AK-003 study, the most common (occurring in >2% subjects in either group) adverse events in the vehicle and tirbanibulin ointment groups up to the Day 57 efficacy and tolerability endpoint were application site pruritus (5% and 7% subjects, respectively) and application site pain (3% and 6% subjects, respectively). In the KX01-AK-004 study, the most common

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(occurring in >2% subjects in either group) adverse events in the vehicle and tirbanibulin ointment groups were application site pruritus (8% and 11% subjects, respectively) and application site pain (3% and 13% subjects, respectively). There were no SAEs or early discontinuations that were considered related to the study drug. Local skin reactions were mostly mild to moderate and transient erythema, flaking/scaling and crusting. A 12-month recurrence follow-up period was subsequently completed. Only patients showing complete clearance at the primary evaluation endpoint on day 57 were followed quarterly in this period until recurrence was observed in the treatment area. Recurrence rates were defined as proportion of patients in whom at least one treated or new AK lesion was identified in the treated area throughout one year follow up. The recurrence rates at 12 months were 74% and 72% in the pivotal trials KX01-AK-003 and KX01-AK-004, respectively. As of July 22, 2019, there were no SAEs that were considered to be related to the study treatment.

Table 1: Study Results of Tirbanibulin Ointment 1% in the Field Treatment of AK, as presented at the 2019 AAD Annual Meeting in March 2019

Note:

a = p-value calculated based on Cochran-Mantel-Haenszel (CMH)

We believe that this product, if approved by regulatory authorities, could have a major impact in the medical treatment of AK. We submitted an NDA to the FDA for tirbanibulin ointment as a topical treatment for AK. We are seeking approval of tirbanibulin ointment pursuant to Section 505(b)(1) of the FDCA. The FDA may not accept the NDA submission for filing, or if accepted, our NDA may not receive approval. We cannot accurately predict when or if the NDA will be accepted for filing by the FDA. On March 2, 2020, our partner Almirall announced that the European Medicines Agency (EMA) accepted the filing of a European marketing authorization for tirbanibulin ointment for the treatment of AK.

Psoriasis

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

We licensed the rights to tirbanibulin to PharmaEssentia for psoriasis and non-malignant skin conditions (excluding AK) in Mainland China, Taiwan, Hong Kong, Macau, Singapore and Malaysia, as well as the rights for AK in Taiwan. PharmaEssentia is sponsoring this Phase I clinical trial in psoriasis. For additional information, please see “Business—License and Collaboration Agreements—PharmaEssentia License Agreements.”

Tirbanibulin Oral

We are also developing tirbanibulin in an oral formulation. Tirbanibulin oral has been evaluated in several early dose finding studies against both solid and liquid tumors. Initial clinical results indicate activity against both solid and liquid tumors in patients in clinical studies. We are planning further probe studies to focus our evaluation in certain of those indications where activity was observed.

A Phase 1 clinical trial in solid tumor patients identified the MTD for continuous twice daily oral dosing at 40 mg/dose, with a favorable PK profile, and indications of activity. In this trial, 44 patients were enrolled in nine dose cohorts. The drug was well-tolerated and the DLTs were mainly elevated levels of AST and ALT, which were readily reversible. Eleven patients had stable disease for at least four months, including patients with ovarian, carcinoid, papillary thyroid, prostate, pancreas and head and neck

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cancer. An ovarian cancer patient, who failed 9 prior therapies, had stable disease for 16 months and a tirbanibulin oral induced a large decrease in the ovarian cancer CA-125 biomarker, which correlates well with clinical response.

A subsequent Phase 2a clinical study in men with bone-metastatic castration-resistant prostate cancer using the twice daily 40 mg/dose was conducted. Thirty-one patients were dosed with tirbanibulin oral at 40 mg/dose twice daily until disease progression or unacceptable toxicity. The primary endpoint was 24-week progression-free survival. The designated clinical endpoints were not met with tirbanibulin oral at this dose.

A Phase 1b clinical study in elderly acute myeloid leukemia (AML) patients was conducted using once daily dosing. The doses tested were 40, 80, 120, 140 and 160 mg of tirbanibulin. Twenty-four patients were recruited with a median age of 76 years (range 63 to 86 years). Most had been previously treated for their disease, generally with decitabine or azacitidine. The MTD is estimated to be 105 mg of tirbanibulin oral daily.

We are planning further studies to focus our upcoming evaluation efforts in targeted indications. Hanmi, who we partnered with on tirbanibulin oral up until August 2018, completed a Phase 1b clinical trial in South Korea, combining escalating continuous once daily doses of tirbanibulin with a standard IV paclitaxel treatment of 80 mg/m². The study enrolled 23 subjects who received doses of tirbanibulin ranging from 20 through 80 mg/day. The five most frequently reported treatment-related adverse events were neutrophil count decreased (83%), myalgia (61%), decreased appetite (57%), anemia (53%) and peripheral sensory neuropathy (48%).  Six subjects experienced serious adverse events: febrile neutropenia (n=3), and pneumonia, sepsis, fever, and neutrophil count decreased (n=1 each).  There were no CR or PR in this heavily treated Phase 1 population, but 12 subjects had a best response of stable disease.  Dose expansion in part 2 of the study was not conducted.

In our tirbanibulin oral clinical studies to date, the SAEs observed that were deemed to be possibly, likely or definitely related to tirbanibulin oral include allergic reaction, bacteremia, rash, syncope, tremor, dermatitis, neutropenic fever, hyponatremia, hypersensitivity, failure to thrive, lower extremity edema, mucositis, neutropenia, pancytopenia, thrombocytopenia, seizure and motor vehicle accident, embolic stroke, pneumonitis, fever, acute kidney injury, increased bilirubin and albumin levels, decreased blood platelet count, abdominal pain, arm pain, pyrexia, rigors, tachypenea, oxygen desaturation, pneumonia, anemia, elevated ALT and AST, dehydration and leukopenia. As the clinical development program is still in its early stages, we do not yet have meaningful safety, including adverse event, statistics to report.

KX2-361

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

Studies of KX2-361 in preclinical syngeneic mouse GBM models resulted in the complete eradication, without recurrence, of the tumors in an average of approximately 30% of treated mice. KX2-361 produced long-term survival mice, as compared to temozolomide, which extended survival but did not result in any long-term survivors.

In vitro studies in mice have found that the KX2-361 levels in the mouse brain meet or exceed the levels in the plasma at the same time points after oral dosing, indicating that KX2-361 readily crosses the BBB. We believe that this ability to cross the BBB provides a rationale for investigating brain cancers and metastases in the brain as potential therapeutic applications, which are traditionally considered to be an unmet medical need.

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

We out-licensed the development and marketing of KX2-361 in Greater China to our partner, Xiangxue. The NMPA allowed the start of a Phase 1 trial of KX2-361 in China, which commenced at the end of 2019 for the treatment of advanced malignant solid tumors. The Phase 1 clinical study in China is a single-center, open-label dose escalation trial that will enroll approximately 36-72 patients with advanced malignant solid tumors who have no standard treatment or standard treatment failed. We anticipate this partnered clinical program in China will accelerate the development timeline of this candidate.

Our Other Technology Platforms

TCR-T Immunotherapy

TCR-T immunotherapy technology harnesses and enhances the patient’s own immune cells to target and eliminate cancer. It is a cell-based therapy that takes advantage of unique attributes of TCR mediated target recognition and provides a potent and selective TCR-T directed response against cancer cells. Central to this platform is the ability to first identify endogenous TCRs with specificity for a defined tumor antigen and to then enhance the affinity of the TCR to optimize tumor recognition and killing. These high affinity TCRs can be incorporated into a patient’s own T cells, converting the cells into a potent anti-cancer therapy. Using this technology, we believe the platform has generated engineered T-cells with higher binding affinity, specificity for intended target cells, expression level of the TCR and persistence in patients’ circulation during therapy. Preliminary studies have shown positive clinical signals.

Arginine Deprivation Therapy

PT01, the arginine deprivation therapy product, is based on our pegylated genetically engineered human arginase. It targets cancer growth and survival by interrupting the supply of arginine to cancers with disrupted urea cycles such as melanoma, hepatocellular carcinoma and prostate cancer. Our proprietary arginase biologic product is well suited to deplete arginine from the tumors, while healthy cells, capable of producing their own arginine, are largely unaffected.

Other Research Programs

Proprietary Dual (CYP/P-gp) Inhibitor

We are developing a proprietary class of “dual” absorption enhancers that are intended to inhibit both the P-gp transporter and the CYP enzymes within the gastrointestinal tract. There are many barriers that limit the oral absorption of drugs in humans. The P-gp transporter is a major barrier to absorption of active chemotherapy drugs. However, certain other drugs with P-gp liabilities may also have liabilities for other barriers such as metabolizing enzymes, such as the cytochrome P450, or CYP, class of enzymes. This intestinal CYP mediated metabolism can be a contributing factor in limiting oral absorption of certain drugs. This class of dual absorption enhancers has shown potential to significantly improve the oral bioavailability of certain other drugs in laboratory tests and may expand the application of our oral absorption platform to drugs where the CYP barrier to oral absorption is also important. These dual absorption enhancers may lead to better performing next-generation oral medicines in our pipeline of clinical products.

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

Research and Development

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

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

Commercialization

For Oral Paclitaxel, our strategy is to develop and, if we receive approval from the FDA, commercialize Oral Paclitaxel in the U.S. by leveraging our Commercial Platform and sales and marketing capabilities established in the U.S. In terms of commercialization planning efforts, we are further developing strategies around marketing, market access, sales, medical affairs, and policy and patient advocacy. We launched our “Athenex Oncology” brand at the 2019 ASCO Annual Meeting with the goal of raising our profile and showcasing the potential of our Orascovery technology and development pipeline.  We continued these initiatives at the 2019 SABCS in December 2019, in which our abstract for the Phase 3 study of Oral Paclitaxel was not only accepted for oral presentation but also selected for the press program.

In 2020, provided we have a regulatory path to approval, we plan to focus on:

We also plan to evaluate marketing options outside of the U.S., including using our internal resources, partnering with others, or out-licensing the product.

For tirbanibulin ointment in the treatment of AK, in December 2017, we entered into a license agreement with Almirall, pursuant to which we granted to Almirall an exclusive, sublicensable license of certain of our intellectual property for the development and commercialization of topical products containing tirbanibulin for the treatment of AK in the U.S. and substantially all European countries. We believe this partnership validates the potential of this candidate and that this partnership is an important step in the development and commercialization of tirbanibulin. For additional information, please see “Business—License and Collaboration Agreements—Almirall License Agreement.” We may also partner with third parties or consider using our internal resources to reach other geographic markets.

Our Commercial Platform

We believe the value creation potential is higher for biopharmaceutical companies able to commercialize their proprietary products as compared to companies who have a partner to commercialize. The infrastructure investment and build-out of a commercial team prior to regulatory approval is typically costly and requires years of investment. In 2016, we launched a commercial platform in the U.S. to begin building out this infrastructure in advance of our launch of proprietary products.

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Our Commercial Platform includes our Specialty Pharmaceuticals business and our manufacture and marketing of products subject to Section 503B of the FDCA. Our Specialty Pharmaceuticals business markets specialty pharmaceuticals, including multi-source oncology and other pharmaceutical products which are therapeutically related to our proprietary portfolio. Our 503B product offerings, which include sterile to sterile products and products from sterilized bulk API, support our offerings in the U.S. oncology market.

Using our resources to commercialize products in oncology may create more value for investors than marketing product rights pre-commercialization. We believe commercialization risks can be offset by establishing oncology manufacturing operations (API, Manufacturing, etc.) and commercial operations (Multi-source Oncology, Pharmacy, Hospitals, etc.).

Specialty Pharmaceuticals

Our Specialty Pharmaceuticals business develops and sources products through licensing agreements with various partners, whom we collectively refer to as our Global Partner network. Our team has unique commercial expertise in multisource oncology and injectable products and has developed a number of Global Partners that develop and manufacture multisource products for the U.S. market. This Global Partner network supplies the products we market in the Specialty Pharmaceutical business. We primarily market the products to the acute hospital and oncology clinics in the U.S. oncology market. As of December 31, 2019, Athenex Pharmaceutical Division (“APD”) markets twenty-nine products with fifty-five SKUs. In addition, Athenex Pharma Solutions (“APS”) markets five products with thirteen SKUs as of December 31, 2019.

The U.S. Oncology market is highly complex with gatekeepers, influencers and prescribers influencing sales of oncology products. Gatekeepers include hospitals (including pharmacies and therapeutics committees), buying groups, oncology managed care organizations, specialty distributors and pharmacists. Influencers in the oncology market include key opinion leader (KOL) physicians, regional cancer centers (as defined by the National Cancer Institute) and the U.S. government. Prescribers include oncologists and dermatologists. Launching a commercial operation in preparation for a proprietary drug approval is risky, difficult and expensive. Any commercial oncology organization must be able to market to these gatekeepers, influencers and prescribers in the oncology market at launch. Through our Commercial Platform, which has established a comprehensive sales and marketing organization, we are able to target and build relationships with gatekeepers, influencers and prescribers in the U.S. Oncology market, enabling us to manage the risks and capture post commercial oncology economics.

Agreements with key Suppliers and Marketing Partners

Gland Term Sheets

From August 2016 to May 2017, we entered into four binding term sheets with Gland Pharma Ltd (“Gland”) to market twenty-seven of Gland’s products. Gland has obtained FDA approval for twenty-two of such products and has filed an abbreviated new drug application, or ANDA, in the U.S. for the remaining five products. For each of the licensed products, we will pay a license fee to Gland. Additionally, during the terms of the term sheets we have a profit-sharing arrangement pursuant to which we will pay to Gland between 0% and 60% of the net profits from sales of each of the licensed products, depending on the product. The initial term of each of the Gland term sheets is five years from the launch of each product licensed pursuant to the term sheet, subject to automatic renewal for additional two-year terms, unless terminated by either party upon provision to the other party at least 90 days’ notice in advance of a renewal date.

Amphastar Agreement

In February 2017, we entered into a definitive agreement with Amphastar Pharmaceuticals, Inc. (“Amphastar”) to acquire fourteen ANDAs and inventory for certain APIs. The agreement requires payments of up to $6.4 million, which has been paid in full as of December 31, 2018. In addition to the payments described above, we have agreed to pay Amphastar a royalty fee equal to 2% of our net sales relating to the fourteen ANDAs and API inventory transferred to us by Amphastar for a period of ten years from the execution of the agreement. We have competed the site transfer for two products, Prochlorperazine and Diltiazem, and are actively selling them.

MAIA Agreement

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

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In December 2019, the agreement with MAIA was amended to grant us the license to a branded product which MAIA holds the approved NDA. In connection with this amendment, we agreed to an upfront milestone payment and 56% of the net profits from sales of the licensed product. Additionally, we agreed to increase MAIA’s share of the net profits to 70% for both products until certain financial metrics are achieved and shall revert to the initial rates after those metrics are satisfied.

Customers and Product Distribution

We distribute our products primarily through pharmaceutical wholesalers and, to a lesser extent, specialty distributors that focus on particular therapeutic product categories, for use by a wide variety of end-users, including hospitals, integrated delivery networks and alternative site facilities. For the year ended December 31, 2019, the products we sold through our three largest wholesalers, AmerisourceBergen Corp. (“Amerisource”), Cardinal Health Inc. (“Cardinal Health”) and McKesson Corp. (“McKesson”), accounted for approximately 16%, 14% and 15%, respectively, of our total revenue.

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

Global Supply Chain Platform

We believe it is important to minimize potential disruptions associated with a high potency oncology pharmaceutical supply chain. Therefore, we have begun the process of internalizing key components of the supply chain that we believe are integral to minimizing these risks and retaining value for stockholders. For example, the World Health Organization (WHO) lists paclitaxel as an essential medicine. Paclitaxel is derived from the bark of the Pacific yew tree and harvestable trees for the starting biomass are globally limited in supply. While current supply of the starting biomass for paclitaxel may be sufficient to meet global paclitaxel API demand, we believe future shortages are possible if we are successful in the commercialization of one of our lead drug candidates, Oral Paclitaxel. We believe this increased demand could lead to shortages of paclitaxel API potentially leading to market and supply disruptions.

Our research group evaluated the purity and potency of some of the largest global suppliers of paclitaxel API. In 2015, we acquired one of these suppliers, Polymed Therapeutics Inc. (“Polymed”) and Chongqing Taihao Pharmaceutical Co. Ltd., or Taihao. Taihao is a cGMP manufacturer of high potency oncology API based in Chongqing, China and Polymed is the U.S. marketing entity for Taihao’s API in North America and Europe. Historical production and sales of API by this subsidiary were to third parties. We anticipate a greater share of Taihao’s manufacturing capacity will be used for our internal needs in the future, and, therefore, sales to third parties may decrease. Historically, Polymed sold certain of these API products internationally to mostly large multi-national pharmaceutical companies. However, we have experienced a suspension of commercial operations at our plant in Chongqing, China. We suspended production in May 2019 based on concerns raised by the DEMC related to the location of our plant. Although we currently are producing API for our ongoing clinical studies, we can make no assurances that such production will be able to provide sufficient quantities for all future clinical studies and that alternative suppliers will be available if needed to produce API for our clinical trials.

In 2014, we sought to obtain better control over our manufacturing of high potency oncology drugs used in global clinical studies, and, in the third quarter of 2014 acquired APS (formely known as QuaDPharma, LLC), one of our suppliers based in Clarence, New York. The number of our clinical studies has grown since the close of the acquisition. We are standardizing and leveraging the acquired cGMP systems and operating procedures in anticipation of developing multi-cGMP large scale manufacturing plants in both the U.S. and China.

Strategic Public-Private Partnerships

New York State Partnership

In May 2015, we entered into an agreement with Fort Schuyler Management Corporation (FSMC) a not-for-profit corporation affiliated with the State of New York, for a medical technology research, development, innovation and commercialization alliance. Under the agreement, FSMC agreed to pay up to $25.0 million for the construction of our North American headquarters and formulation lab and equipment in Buffalo, New York. We moved into the North American Headquarters in October 2015 and are sub-leasing the space from FSMC for a 10-year term, with an option to extend the term for an additional 10 years. Under the agreement,

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we are obligated to spend $100.0 million in the Buffalo area over the initial 10-year term of the lease and an additional $100.0 million during the second 10-year term if we elect to extend the lease. We also committed to hiring 250 permanent employees in the Buffalo area within the first 5 years of completion of the project. As of December 31, 2019, we had hired 171 permanent employees in the Buffalo area. In the event we are unable to hire enough employees in the Buffalo area or meet our other obligations under this agreement, FSMC may terminate the agreement and we may have to renegotiate our lease or relocate our North American headquarters.

Under the same May 2015 agreement, FSMC also agreed to fund the costs of construction of a new manufacturing facility in Dunkirk, New York that we intend to use for injectable and 503B products and, eventually, our proprietary oncology products for commercial production at this facility. Under the current arrangement, we have selected a general contractor for the project, and we will oversee the development of the facility. Empire State Development (“ESD”), the parent entity of FSMC, is responsible for the costs of construction and all equipment for the facility, up to an aggregate of $200.0 million, plus any additional funds available from the previous $25.0 million grant, and FSMC, not us, will own the facility and equipment. We are entitled to lease the facility and all equipment at a rate of $1.00 per year for an initial 10-year term and for the same rate if we elect to extend the lease for an additional 10-year term. We are responsible for all operating costs and expenses for the facility. In exchange, we have committed to spending $1.52 billion on operational expenses in our first 10-year term in the facility, and an additional $1.5 billion on operational expenses if we elect to extend the lease for a second 10-year term. We also committed to hiring 450 employees at our Dunkirk facility within the first 5 years of operations, including hiring at least 300 new employees within 2.5 years of the Dunkirk facility becoming operational. In September 2017, we entered into a grant disbursement agreement with ESD, whereby the State of New York will grant up to $200.0 million, plus any additional funds available from the previous $25.0 million ESD grant, to us in order to fund the construction of the Dunkirk facility. The funds will be deposited in four installments of up to $50.0 million each into an ESD held account. The first $50.0 million installment was deposited in the third quarter of 2017 and the remaining $50.0 million installments were made in the first, third, and fourth quarter of 2019. Actual disbursement of such funds occurs as we submit appropriate documentation verifying that expenditures on the project have been incurred. In addition, in July 2017, we entered into a 20-year payment in-lieu of tax agreement for the construction of the Dunkirk facility with the County of Chautauqua Industrial Development Agency (“CCIDA”), under which we anticipate incurring sales tax exemption savings of approximately $9.1 million during the development of the facility and property tax savings of approximately $78.0 million over 20 years.

In November 2017, we entered into a project agreement with the CCIDA which sets forth the obligations of the parties in relation to the CCIDA’s grant to us of certain sales and use tax exemptions and real property tax exemptions in consideration for our agreement to complete the Dunkirk facility. The project agreement estimates the cost of the Dunkirk project at around $213.0 million, which exceeds the $200.0 million grant committed to by the State of New York, and we will be responsible for the difference. We are obligated to invest no less than $187.2 million in the facility prior to the completion of the project, which sum includes funds committed by the State of New York. The agreement includes commitments to comply with state and local laws in connection with the project.

In December 2017, we entered into an agreement with M+W, U.S., Inc. (now renamed Exyte U.S., Inc.). The agreement, as amended to date, provides that M+W will be responsible for the design and construction of the Dunkirk facility at a cost estimated between $205.0 million and $213.0 million, of which up to around $208.0 million will be paid by a grant from the State of New York (including approximately $8.0 million in additional funds available from the previous $25.0 million ESD grant), with the remaining amount being paid by us. Payments under the December 2017 agreement will be made to M+W over time based upon completion of certain milestones under the agreement, and ESD must approve any payment from the grant funds.

Under the same September 2017 agreement with ESD, we must complete the construction of the facility in Dunkirk, New York in accordance with the final plans and specifications approved in writing by ESD and must maintain our business operations at the facility for a minimum of ten years after its completion. In 2018, we began constructing the facility and began ordering equipment for the operation and maintenance of the facility. This manufacturing facility, which was originally planned to be 320,000 square feet, has been expanded to approximately 409,000 square feet to meet our needs and within the terms of the September 2017 agreement. The September 2017 agreement may be subject to termination if ESD and FSMC perform their obligations under the agreement, and we do not attain and or maintain certain levels of employment or spending for specified periods of time. In such event and in accordance with the May 2015 agreement, any potential liability of us would be capped at the amount of actual ESD spending on the facility in Dunkirk, New York times the percentage of required spending by us which we have not yet incurred.

China Partnership

In October 2015, we entered into an agreement with CQ, which is wholly owned by the Finance Bureau of Banan district of Chongqing, and is authorized to be responsible for investments, financing, infrastructure construction, operations and management in the Chongqing Maliu Riverside Development Zone. Our agreement with CQ provides for the construction of both a formulation plant and an API plant in China. After entering into the agreement, and pursuant to its terms, we established a China-based subsidiary that is responsible for the operations of both facilities in July 2016 and committed to a registration capital requirement of no less than $30.0 million. CQ is responsible for the construction of both facilities according to the U.S. cGMP standards. The land and buildings will be

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owned by CQ, and we will lease the facilities rent-free, for the first 10-year term, with an option to extend the lease for an additional 10-year term, during which, if we are profitable, we will pay a monthly rent of 5 Chinese Renminbi (“RMB”) per square meter of space occupied. We are responsible for the costs of all equipment and technology for the facilities. The lease term will commence upon our acceptance of the building. Within six months of our acceptance of the building, we are required to finish equipment installation and testing, and within twelve months, we are required to commence production. We have also committed to achieving certain operational, revenue and tax generation milestones within certain time periods once we commence operations. If we are unable to achieve these milestones, CQ will have the opportunity to terminate the agreement and dispose of the plants in its discretion.

In September 2019, we announced the completion of the new API facility construction in Chongqing, China. However, as a result of the Coronavirus outbreak, we expect to commence operations at the 440,000-square-foot facility in the second half of 2020. The construction of the facility is part of our strategy for vertical integration in order to capture value across the supply chain. Once operational, the facility is expected to expand our API production capabilities to further support our global clinical development needs and ensure the supply of API for commercial launches.

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

To date, we have utilized a combination of acquisitions and public-private partnerships to internalize certain key components of our manufacturing and supply chain. We expect to continue to use a combination of collaborations and acquisitions to continue to build out elements of our supply chain where needed as a mechanism to minimize execution risk and retain value for our stockholders.

In May 2019, we suspended operations at our existing API plant in Chongqing, based on the concerns raised by the DEMC related to the location of our plant. As a result of the suspension, we are currently unable to produce commercial batches of API, which has impacted our revenue. We can provide no assurances of when, if at all, commercial production of API will resume at this plant. Although we are still producing API for our ongoing clinical studies, we can make no assurances that such production will be able to provide sufficient quantities for all future clinical studies and that alternative suppliers will be available if needed to produce API for our clinical trials.

License and Collaboration Agreements

In-Licenses

Arginase License Agreement

In June 2018, we entered into a license agreement with Polytom, an entity affiliated with Avalon Global Holdings Limited and a related party of the Company, which we refer to as the Arginase License, pursuant to which Polytom granted us an exclusive, sublicensable right and license to develop and commercialize products containing pegylated and cobalt-replaced arginase for the treatment of cancer in humans, apart from ophthalmic uses and use as eye drops, worldwide. Dr. Johnson Lau, our chief executive officer and chairman, and Dr. Manson Fok, one of our directors, collectively have a controlling interest in, and serve on the board of directors of, Avalon.

We made an upfront payment of cash of $3.0 million and common stock of $2.0 million to Polytom upon effectiveness of the Arginase License in June 2018. In September 2019, we made a cash payment of $1.0 million to Polytom upon meeting the first regulatory milestone under the agreement. We may be required to make additional payments to Polytom worth up to $44.0 million of our common stock or of cash upon the occurrence of additional regulatory milestones. Pursuant to the agreement, we have also agreed to pay royalties based on certain percentage of net sales of any products utilizing the intellectual property that is the subject of the Arginase License. Such royalties will be reduced by 40% when competing generic products have 25% of the market share in the applicable country and will be eliminated entirely when competing generic products have 50% of the market share in the applicable country.

HepaPOC License and Supply Agreement

In June 2018, we entered into a license and supply agreement with Avalon HepaPOC Limited (“HepaPOC”), an entity affiliated with Avalon and a related party of the Company, which we refer to as the HepaPOC License, pursuant to which HepaPOC agreed to exclusively sell to us the meter and consumable strips that can be used to detect galactose concentrations in human blood and granted us an exclusive, sublicensable right and license to use and commercialize the meter and strips for conduct of liver function tests in humans taking our oncology drugs. Dr. Johnson Lau, our chief executive officer and chairman, and Dr. Manson Fok, one of our directors, has a controlling interest in, and serve on the board of directors of, Avalon.

We made an upfront payment of cash of $0.5 million to HepaPOC upon effectiveness of the HepaPOC License Agreement, and we may be required to make payments to HepaPOC worth up to $4.8 million in our common stock or in cash upon the occurrence of

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certain regulatory and sales milestones. Pursuant to the agreement, we have also agreed to pay royalties based on certain percentage of aggregate net sales of any products utilizing the intellectual property that is the subject of the HepaPOC License.

The terms of the HepaPOC License shall extend until the date on which the last of the patent rights licensed under the agreement expires or is invalidated. Notwithstanding the foregoing, the terms of the HepaPOC license shall automatically be extended for consecutive one year periods subject to the same terms and conditions set forth herein (unless agreed otherwise) unless either party gives written notice of its intention not to extend the agreement term: (1) at least ninety days prior to the expiration date of the patent rights licensed under the agreement or (2) as soon as practically possible in the case of an invalidation claim or (3) at least ninety days prior to the then current expiration date of the agreement thereafter. Notwithstanding the foregoing, after the occurrence of (1) or (2) above, the terms of the HepaPOC License shall automatically be extended for consecutive one year periods subject to the same terms and conditions set forth in the agreement unless either HepaPOC or we give written notice of its intention not to extend the agreement terms: (i) at least ninety days prior to the expiration of the patent rights licensed under the agreement or (ii) as soon as practically possible in the case of an invalidation claim and (iii) at least ninety days prior to the then current expiration date of the agreement. Prior to the expiration of the term of the agreement, both parties may terminate the agreement in whole or in part upon mutual written agreement. We may also terminate in whole or in part the agreement in our sole discretion upon not less than six months prior written notice of termination at any time. The agreement also contains customary termination rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party.

TCR-T License Agreement

In June 2018, we entered into a Share Subscription Agreement XLifeSc, a wholly-owned subsidiary of Xiangxue to establish, operate and manage a limited liability company named Axis Therapeutics Limited (Axis) to offer certain goods and services worldwide except in China. Axis is owned 45% by XLifeSc and 55% by us.

In June 2018, Axis entered into a license agreement with XLifeSc, which we refer to as the TCR-T License, pursuant to which XLifeSc granted Axis an exclusive, sublicensable right and license to use XLifeSc’s proprietary TCR-T to develop and commercialize therapeutic products for oncology indications worldwide except in China. Axis is responsible for all development, manufacturing and commercialization, and the related costs and expenses, of any product candidates resulting from the agreement.

In September 2018, we completed the closing process under the Share Subscription Agreement which included an exchange of a 45% ownership interest in Axis to XLifeSc for a license of in-process research and development. Upon effectiveness of the TCR-T License and satisfaction of certain conditions in the license agreement, Axis made an upfront payment of the Company’s common stock of $5.0 million to XLifeSc. In April 2019, Axis made a cash payment of $2.0 million to XLifeSc upon meeting the first regulatory milestone under the agreement. Axis may be required to make additional cash payments to XLifeSc worth up to $108.0 million in aggregate upon the occurrence of certain additional regulatory milestones to be achieved in the U.S., the EU, China and Japan. In addition, XLifeSc is required to pay Axis royalty payments based on certain percentage of aggregate net income generated by sales of any products using the licensed intellectual property in China.

The term of the TCR-T License will remain in effect until the expiration of the patent rights licensed under the agreement. The agreement will terminate automatically if the shareholders agreement between XLifeSc and us is terminated. The TCR-T License also contains customary termination rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party.

Hanmi Licensing Agreements

In December 2011 and June 2013, we entered into two separate in-licensing agreements with Hanmi pursuant to which Hanmi granted us licenses to certain patents and know-how with respect to Hanmi’s Orascovery Program to research, discover and develop compounds that enhance or increase the oral absorption of active pharmaceutical ingredients.

The December 2011 agreement, which we refer to as the 2011 Hanmi Agreement, granted us an exclusive, sublicensable license for development and commercialization activities utilizing Hanmi’s patents and know-how related to the Orascovery Program in a certain territory including North America, South America, the EU, Australia, New Zealand, Russia, Eastern Europe, Taiwan and Hong Kong, and a non-exclusive license to utilize the same intellectual property in manufacturing worldwide for sales inside those territories. The June 2013 agreement, which we refer to as the 2013 Hanmi Agreement, granted us an exclusive, sublicensable license comparable to the 2011 Hanmi Agreement solely for China. The 2011 Hanmi Agreement was amended in November 2012 to add Macau and Singapore to the territory licensed under the agreement; in October 2013 to add Malaysia, Thailand, Vietnam, the Philippines and Indonesia; in March 2015 to add India; in March 2017 to add Japan; and again in September 2018 to all territories in the world apart from the Republic of Korea.

Upon effectiveness of the 2011 Hanmi Agreement we made an upfront payment of $0.25 million to Hanmi, and we will pay Hanmi tiered royalty payments in the teens based on aggregate net sales of any products using the licensed intellectual property in the territory. Such royalties will be reduced if competing generic products gain market share in the applicable country. Depending on when we receive regulatory approval of a product using the intellectual property licensed from Hanmi in the U.S. or Europe, we may

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be obligated to pay Hanmi a regulatory bonus of $24.0 million to be paid (1) upon the occurrence of a liquidity event, if the regulatory approval has already been received, or (2) upon receipt of the regulatory approval, if such approval is received after a liquidity event. We were also required to pay Hanmi an exit bonus, in shares of our common stock at a 20% discount to the initial public offering price, of $6.25 million upon the completion of our initial public offering in June 2017 based on a nominal value of $5.0 million. In connection with the March 2015 amendment to the 2011 Hanmi Agreement, we made an upfront payment of $50,000 to Hanmi. Additionally, in connection with the March 2017 amendment to the 2011 Hanmi Agreement, we issued a $7.0 million convertible bond to Hanmi in lieu of an upfront payment. Hanmi elected to convert the $7.0 million principal amount of the convertible bond into 795,455 shares of our common stock, based on the agreed 20% discount to our initial public offering price, in September 2017. In connection with the September 2018 amendment to the 2011 Hanmi Agreement, we made an upfront payment of $40,000 to Hanmi.

Upon effectiveness of the 2013 Hanmi Agreement we made an upfront payment of $0.1 million to Hanmi, and we will pay Hanmi tiered royalty payments in the teens based on net sales of any products using the licensed intellectual property in China. The royalties shall be reduced if competing generic products gain market share in China. We also granted to Hanmi a one-time right of first negotiation to purchase all of our rights in Oral Paclitaxel or Oral Irinotecan under the agreement during development and prior that, at Hanmi’s discretion, requires us to negotiate in good faith the sale of our rights under such agreement to Hanmi at a purchase price determined by an internationally-recognized investment banking firm with an office in Hong Kong at any time prior to the earlier of (1) our first commercial sale of products using such technology or (2) receipt by Hanmi of written notice from our company of the sublicense of the rights in an applicable product to a third party.

Under each agreement, we are responsible for all clinical studies and development and commercialization activities, and the related expenses, resulting from the agreements. Each of the 2011 Hanmi Agreement and the 2013 Hanmi Agreement expires on the earlier of (1) expiration of the last of Hanmi’s patent rights licensed under the agreement or (2) invalidation of Hanmi’s patent rights which are the subject of the agreement, provided that the term will automatically be extended for consecutive one year periods unless either party gives notice to the other at least 90 days prior to expiration of the patent rights licensed under the agreement or before the then-current annual expiration date of the agreement. The patent rights licensed to us under the 2011 and 2013 Hanmi Agreements have expiry dates ranging from in 2023 to 2033, unless the terms of such licensed patents are extended in accordance with applicable laws and regulations.

Hanmi may also terminate the 2011 Hanmi Agreement if (1) we fail to file an IND application with the FDA for Oral Paclitaxel within six months of the latest of (x) our receipt from Hanmi of all English translations necessary for the filing of an IND application with the FDA, (y) the date we and Hanmi agree that all studies necessary for the filing of an IND application with the FDA have been completed or (z) the date of the final study report for the last of any additional studies that are necessary for the filing of an IND application with the FDA or (2) we fail to commence clinical studies for Oral Paclitaxel within twelve months after the date of approval of an IND application by the FDA.

The 2013 Hanmi Agreement may be terminated by Hanmi if (1) we fail to file an IND application for Oral Paclitaxel with the NMPA within six months after the latest of (w) completion of all Chinese translations necessary for the filing of an IND application with the NMPA, (x) completion of all manufacturing and toxicology studies necessary for the filing of an IND application with the NMPA (y) the date we and Hanmi agree that all studies necessary for the filing of an IND application with the NMPA have been completed or (z) the date of the final study report for the last of any additional studies that are necessary for the filing of an IND application with the NMPA or (2) we fail to commence clinical studies for Oral Paclitaxel within twelve months after the date of approval of an IND application by the NMPA.

Such clinical development milestones in respect of the termination right in both the 2011 Hanmi Agreement, and the 2013 Hanmi Agreement may be extended for twelve months if we reasonably request.

Prior to the expiration of the term of each agreement, we may terminate the agreement in our sole discretion, by providing six months’ notice to Hanmi. Subject to certain conditions. The agreements also contain customary termination rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party or by mutual agreement.

Out-Licenses

ZenRx License Agreement

In April 2013, we entered into a license agreement with ZenRx, which we refer to as the ZenRx License, pursuant to which we granted to ZenRx an exclusive, sublicensable license to use certain of our intellectual property to develop and commercialize Oral Irinotecan and Oral Paclitaxel in Australia and New Zealand, and a non-exclusive license to manufacture a certain compound but only for use in Oral Irinotecan and Oral Paclitaxel. ZenRx is responsible for all development, manufacturing and commercialization, and the related costs and expenses, of any product candidates resulting from the agreement.

We received a $50,000 payment from ZenRx upon effectiveness of the agreement, and we may be entitled to receive up to an aggregate of $1.4 million in additional development, regulatory and sales milestone payments. We will also be eligible to receive

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tiered royalties in the teens on net sales of each product commercialized by ZenRx utilizing the intellectual property that is the subject of the ZenRx License. Such royalties will be reduced by 40% when competing generic products have 30% of the market share in the applicable country and will be eliminated entirely when competing generic products have 60% of the market share in the applicable country.

As an incentive to ZenRx to further development and commercialization of Oral Irinotecan and Oral Paclitaxel in the territory, if ZenRx obtains certain regulatory approvals in the territory prior to regulatory approval of those products in either the U.S. or South Korea, we may be required to make payments to ZenRx, at ZenRx’s option, either up to $0.6 million in cash or $0.35 million in cash plus $0.25 million worth of our common stock.

The term of the ZenRx License expires on the earlier of (1) expiration of the last of our patent rights licensed under the agreement or (2) invalidation of our patent rights which are the subject of the agreement, provided that the term will automatically be extended for consecutive one year periods unless either party gives notice to the other at least 90 days prior to expiration of the patent rights licensed under the agreement or before the then current annual expiration date of the agreement. Prior to the expiration of the term of the agreement, ZenRx may terminate the agreement in its sole discretion, by providing three months’ notice to us. Subject to certain conditions, we may also terminate the agreement if ZenRx fails to comply with certain development timelines set forth in the ZenRx License. The agreement also contains customary termination rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party.

PharmaEssentia License Agreements

In December 2011 and December 2013, we entered into two separate out-licensing agreements with PharmaEssentia, pursuant to which we granted to PharmaEssentia certain licenses to our intellectual property for use in development and commercialization of certain products in specific territories.

The December 2011 agreement, which we refer to as the 2011 PharmaEssentia Agreement, granted an exclusive, sublicensable license to use any pharmaceutical preparation containing tirbanibulin or KX-361 for use in treating psoriasis or other non-malignant skin conditions in a territory that includes China, Taiwan, Macau, Hong Kong, Singapore and Malaysia. In December 2016, we agreed to amend the 2011 PharmaEssentia Agreement such that the field under the license agreement does not include AK for any country in the territory except Taiwan.

We received a $40,000 payment from PharmaEssentia upon effectiveness of the 2011 PharmaEssentia Agreement, and we may be entitled to an aggregate of up to $1.6 million in additional development and regulatory milestone payments, $0.25 million of which may be paid in the form of PharmaEssentia stock. PharmaEssentia has discretion to offer to make such payment in the form of its stock, and we have discretion as to whether to accept such payment in the form of its stock. We will also be eligible to receive tiered royalties ranging from the high single-digits to teens on net sales of each product commercialized by PharmaEssentia utilizing the intellectual property that is the subject of the 2011 PharmaEssentia Agreement. Such royalties will be reduced by 40% when competing generic products have 30% of the market share in the applicable country and will be eliminated entirely when competing generic products have 60% of the market share in the applicable country.

The December 2013 agreement, which we refer to as the 2013 PharmaEssentia Agreement, granted an exclusive, sublicensable license for development and commercialization of Oral Paclitaxel and Oral Irinotecan in Taiwan and Singapore. In December 2016, we agreed to amend the 2013 PharmaEssentia Agreement to also include Vietnam in the territories covered by the license, provided that, if PharmaEssentia has not completed a submission for regulatory approval in Vietnam by 2021, the rights under the license in Vietnam will be returned to us. In November 2018, we agreed to amend the 2013 PharmaEssentia Agreement to also include a license for development and commercialization of Oral Docetaxel in Singapore, Taiwan and Vietnam. We received $2.0 million from PharmaEssentia upon effectiveness of the amended agreement.

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We received a $50,000 payment from PharmaEssentia upon effectiveness of the 2013 PharmaEssentia Agreement and a $0.5 million payment upon the initiation of a 505b2 strategy registration study in the first quarter of 2017, and we may be entitled to an aggregate of up to $1.5 million in additional development, regulatory and sales milestone payments. We may be obligated to pay PharmaEssentia an aggregate of $1.0 million in incentives if PharmaEssentia achieves certain milestones within designated timeframes. We will also be eligible to receive tiered royalties in the mid-teens on net sales of each product commercialized by PharmaEssentia utilizing the intellectual property that is the subject of the 2013 PharmaEssentia Agreement. Such royalties will be reduced by 40% when competing generic products have 30% of the market share in the applicable country and will be eliminated entirely when competing generic products have 60% of the market share in the applicable country. Under the November 2018 amendment to the 2013 PharmaEssentia Agreement, we also received an upfront payment of $2.0 million, and we may be entitled to an aggregate of up to $9.1 million in additional development and regulatory milestone payments related to Oral Docetaxel.

Under each agreement, PharmaEssentia is responsible for all clinical studies and development and commercialization activities, and the related expenses, resulting from the agreements. Each of the 2011 PharmaEssentia Agreement and the 2013 PharmaEssentia Agreement expire on the earlier of (1) expiration of the last of our patent rights licensed under the agreement or (2) invalidation of our patent rights which are the subject of the agreement, provided that the term will automatically be extended for consecutive one year periods unless either party gives notice to the other at least 90 days prior to expiration of the patent rights licensed under the agreement or before the then current annual expiration date of the agreement.

Prior to the expiration of the term of each agreement, PharmaEssentia may terminate the agreement in its sole discretion, by providing six months’ notice to us. Subject to certain conditions, we may also terminate the agreement if PharmaEssentia fails to comply with certain development timelines set out in each of the agreements. The agreements also contain customary termination rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party.

Xiangxue License Agreements

2012 License Agreement

In May 2012, we entered into a license agreement with Xiangxue, which we refer to as the Xiangxue 2012 License, pursuant to which we granted to Xiangxue an exclusive, sublicensable license to use certain of our intellectual property to develop and commercialize products containing KX-361 in all indications for brain tumors in China, Taiwan, Hong Kong and Singapore.  Xiangxue is responsible for all development, manufacturing and commercialization, and the related costs and expenses, of any product candidates resulting from the agreement.

We received a $0.75 million payment from Xiangxue upon effectiveness of the Xiangxue 2012 License and in 2013 received a further $0.75 million payment upon meeting the first regulatory milestone under the agreement. We may be entitled to receive an aggregate of up to $4.5 million in additional development and regulatory milestone payments. We will also be eligible to receive royalties in the teens on net sales of each product commercialized by Xiangxue utilizing the intellectual property that is the subject of the. Such royalties will be reduced by 40% when competing generic products have 30% of the market share in the applicable country and will be eliminated entirely when competing generic products have 60% of the market share in the applicable country.

The term of the Xiangxue 2012 License expires on the earlier of (1) expiration of the last of our patent rights licensed under the agreement or (2) invalidation of our patent rights which are the subject of the agreement, provided that the term will automatically be extended for consecutive one year periods unless either party gives notice to the other at least 90 days prior to expiration of the patent rights licensed under the agreement or before the then current annual expiration date of the agreement. Prior to the expiration of the term of the Xiangxue 2012 License, Xiangxue may terminate the agreement in its sole discretion, by providing six months’ notice to us. Subject to certain conditions, we may also terminate the agreement if Xiangxue fails to comply with certain development timelines set forth in the Xiangxue 2012 License. The Xiangxue 2012 License also contains customary termination rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party.

2019 License Agreement

In December 2019, we entered into an exclusive license agreement with Xiangxue, which we refer to as the 2019 Xiangxue License, in which we granted Xiangxue exclusive rights to develop and commercialize certain licensed products for China, Hong Kong and Macau, including Oral Paclitaxel, Oral Irinotecan, and tirbanibulin ointment for certain indications, including oncological and AK indications, as well as other indications that we and Xiangxue mutually agree to pursue under the 2019 Xiangxue License. The 2019 Xiangxue License contains an option, exercisable by Xiangxue, to license two additional product candidates on terms and conditions to be negotiated separately from the 2019 Xiangxue License. Under the terms and conditions of the 2019 Xiangxue License, we and Xiangxue will be jointly responsible for licensed products in the territory covered by the 2019 Xiangxue License in their permitted fields of use and Xiangxue will be responsible for the commercialization of the licensed products in the territory in their permitted fields of use. Xiangxue has agreed to pay us an initial payment of $30.0 million, subject to the satisfaction of certain conditions, including the delivery of required regulatory data, which are expected to occur in the first quarter of 2020. We may be eligible to receive future additional payments up to $150.0 million in the event defined regulatory and sales milestones are achieved, a

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payment of $20.0 million in the event of a change of control or assignment of rights involving Xiangxue (as further defined and subject to the conditions set forth in the 2019 License Agreement), and to receive tiered royalties at rates ranging from the low teens to low twenties based on annual net sales of the licensed products in the territory covered by the 2019 Xiangxue License and a percentage of sublicensing revenue. The 2019 Xiangxue License will continue until Xiangxue has no payment obligations under the 2019 Xiangxue License, unless terminated earlier in accordance with the terms of the 2019 Xiangxue License. The 2019 Xiangxue License may be terminated in its entirety upon the mutual agreement of the parties, by Xiangxue for convenience upon requisite notice, or by either party for material breach as set forth in the 2019 Xiangxue License.  The 2019 Xiangxue License also will be terminated with respect to any licensed product for Xiangxue’s failure to meet agreed upon regulatory milestones with respect to such 2019 Licensed Product.

Almirall License Agreement

In December 2017, we entered into a license agreement with Almirall, which we refer to as Almirall License, pursuant to which we granted to Almirall an exclusive, sublicensable license of certain of our intellectual property for the development and commercialization of topical products containing tirbanibulin to treat and prevent skin disorders and diseases in humans (including AK), or the Field, in the licensed territory, which includes the U.S. and substantially all European countries (including Russia and Turkey). We also granted Almirall a right of first negotiation to license from us in the territory covered by the Almirall license any compound (other than tirbanibulin) that we may develop in the future with the same mechanism of action as tirbanibulin for topical treatment of skin disorders and diseases if we decide to collaborate with a third party regarding that newly developed compound. Under the Almirall License, Almirall also grants us an exclusive, sublicensable license to use certain of its intellectual property related to the products containing our licensed tirbanibulin for use in the Field in order to commercialize such products outside of the Licensed Territory and outside of the Field in the Licensed Territory and to commercialize other products containing tirbanibulin for indications outside the Field. If we decide to sublicense that license from Almirall for certain additional products or indications, we will negotiate with Almirall to allow them to reasonably participate in the commercial benefit of such sublicense.

In March 2018, we received an upfront payment of $30.0 million from Almirall under this agreement. In June 2019, we received milestone payment of $20.0 million, and we expect to receive other near-term payments of up to $5.0 million. We may also be entitled to receive an aggregate of $65.0 million in additional milestone payments, as well as sales milestone payments we estimate will likely total $155.0 million. Almirall will reward Athenex with additional sales milestones should the sales exceed the currently projected amounts. In addition, we are eligible to receive tiered royalty payments for a certain period starting at 15% based on annual net sales of the topical products commercialized by Almirall, utilizing the intellectual property subject to the license agreement, with incremental increases in royalty rates commensurate with increased sales. Additionally, under certain circumstances starting after one year following regulatory approval of certain licensed products in the U.S., we would have the option to co-promote such licensed products under pre-negotiated terms and conditions with Almirall.

The term of the Almirall License began in February 2018 when antitrust approval was obtained and continues for the entire life of the licensed topical products on a country-by-country basis. Prior to the expiration of the term of the Almirall License, Almirall may terminate the agreement in its entirety or with regard to a certain territory in its sole discretion by providing six months’ notice to us. We may also be required to reimburse Almirall in the event Almirall provides notice that certain clinical endpoints under the agreement are not met. In addition, Almirall may terminate the agreement effective immediately if the licensed topical products cannot be marketed in the territory due to significant safety concerns, if regulatory approval is finally and irrevocably denied in a territory or if an approved product label is less favorable than the product label submitted to the regulatory authorities in a way that would materially affect the commercial value of the product.

The agreement also contains customary termination rights for both parties, such as in the event of a breach of the agreement or if the other party defaults in performance of its obligations under the agreement.

In October 2019, we announced a progress update from our partner Almirall on tirbanibulin ointment for the treatment of AK.

CJ License Agreement

In December 2018, through our subsidiary Taihao Pharmaceutical, we entered into a series of agreements to license certain intellectual property to Chongqing Jingdong Junzhuo Pharmaceutical Co., Ltd. (“CJ”) to exclusively develop and commercialize tirbanibulin for the treatment of actinic keratosis and oncology indications in humans in mainland China (excluding Hong Kong, Macau and Taiwan). Via the series of agreements, CJ obtained the exclusive right to promote, market, sell and commercialize in mainland China those topical or oral products that contain our proprietary Src/tubulin inhibitor, tirbanibulin, also known as tirbanibulin. We have agreed to manufacture the products and to conduct all clinical trials, and CJ was required to use its reasonable best efforts to commercialize the licensed products in mainland China. Under the agreements, CJ has agreed to pay Taihao (1) an upfront payment of $14.5 million, (2) certain milestone payments totaling $15.0 million and (3) royalty payments based on the amount of sales of the product. These agreements have been terminated by mutual consent of both parties as of March 6, 2019, and we will retain the exclusive right to promote, market, sell and commercialize in mainland China those topical or oral products that contain tirbanibulin. We are not subject to any termination penalties related to the termination of the license and sublicense agreements.

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Collaboration Agreement

Eli Lilly and Company Agreement

In October 2016, we entered into a Clinical Trial Collaboration and Supply Agreement with Lilly, which we refer to as the Lilly Agreement, under which we and Lilly will conduct a Phase 1b trial of Oral Paclitaxel in combination with Lilly’s ramucirumab in patients with gastric, gastro-esophageal and esophageal cancers. Under the terms of the Lilly Agreement we will act as the sponsor of the study and will hold the IND/clinical trial application (“CTA”) relating to the study, while all clinical data generated under the study will be jointly owned by us and Lilly. Other than Lilly’s obligation to supply ramucirumab to us, we will be responsible for all other costs associated with the conduct of the study.

The Lilly Agreement will remain in effect until the study contemplated by the agreement has been completed. The agreement also contains customary termination rights for either party, such as in the event of a breach of the agreement by the other party, or in the event a regulatory authority takes any action against or raises any objection to the study.

Competition

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

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

Src Kinase inhibitors: Picato and Temodar.

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

Intellectual Property

We strive to protect and enhance the proprietary technologies, inventions, products and product candidates, methods of manufacture, methods of using our products and product candidates, and improvements thereof that are commercially important to our business. We protect our proprietary intellectual property position by, among others, filing patent applications in the U.S. and in jurisdictions outside of the U.S. covering our proprietary technologies, inventions, products and product candidates, methods, and improvements that are important to the development and implementation of our business. We also rely on trade secrets, know-how, continuing innovation, and licensing opportunities to develop, strengthen and maintain our proprietary intellectual property position. As of December 31, 2019, we owned more than 150 granted patents and approximately 65 pending patent applications worldwide. In addition, we have in-licensed patents and patent applications relating to our Orascovery platform technology from Hanmi. In our Orascovery platform, the lead compound is covered as composition-of-matter in granted patents in the U.S. and other territories, such as China and Europe. These patents will expire in October 2023 or 2024, excluding any potential patent term adjustments and/or patent term extensions that may be available. The lead compounds in our Src Kinase Inhibition platform are covered as composition-of-matter in granted patents in the US and other territories, including China and Europe. These patents will begin to expire in December 2025, excluding any potential patent term adjustments and/or patent term extensions that may be available.  As of December 31, 2019, we have in-licensed patents and technologies in relation to our TCR T-cell therapy.  Some of these patents will expire in 2034, excluding any potential patent term adjustments and/or patent term extensions that may be available.  We have in-

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licensed a patent relating to the site-directed PEGylation of arginases and their use as anti-cancer and anti-viral therapies granted in the U.S. and other territories, such as China and Europe. This patent will expire in March 2030, excluding any potential patent term adjustments and/or patent term extensions that may be available. A PCT application has entered national phases in the U.S. and other territories, such as China and Europe covering the compositions and methods for amino acid depletion therapy.

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

Granted patents and pending patent applications related to the SRC Kinase Inhibition platform cover such aspects as composition-of-matter claims to our lead product candidates and their analogs, claims to pharmaceutical compositions comprising such candidates and claims to methods of making and method of treatment using such candidates. Not accounting for any patent term adjustment, patent term extension or terminal disclaimer, and, assuming that all annuity and/or maintenance fees are paid, the patents and, if granted, patent applications, will expire from 2025 to 2040.

Government Regulation and Product Approval

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

U.S. Government Regulation

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

NDA approval processes

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

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Once a pharmaceutical candidate is identified for development, it enters the preclinical or nonclinical testing stage. Nonclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. Such studies must generally be conducted in accordance with the FDA’s GLPs. An IND sponsor must submit the results of the nonclinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND application. Some nonclinical testing may continue even after the IND application is submitted. In addition to including the results of the nonclinical studies, the IND application will also include a protocol detailing, among other things, the objectives of the clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated if the first phase lends itself to an efficacy determination. The IND application automatically becomes effective thirty days after receipt by the FDA, unless the FDA, within the 30-day time period, places the IND on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. A clinical hold may occur at any time during the life of an IND and may affect one or more specific studies or all studies conducted under the IND application.

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

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

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

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

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

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

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

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

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

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

The results of product development, nonclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests and other control mechanisms, proposed labeling and other relevant information are submitted to the FDA as part of an NDA requesting approval to market the product. Under the Prescription Drug User Fee Act, or PDUFA, as amended, each NDA must be accompanied by a significant user fee. The FDA adjusts the PDUFA user fees on an annual basis. PDUFA also imposes an annual program fee for each prescription drug. Fee waivers or reductions are available in certain circumstances, such as where a waiver is necessary to protect the public health, where the fee would present a significant barrier to innovation or where the applicant is a small business submitting its first human therapeutic application for review. Product candidates that are designated as orphan drugs are also not subject to user fees unless the application contains an indication other than an orphan indication.

Within sixty days following submission of an NDA, FDA reviews the application to determine if it is substantially complete before the agency accepts it for filing. The FDA may refuse to accept any NDA that it deems incomplete or not properly reviewable at the time of submission and may request additional information. In this event, the NDA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review of the NDA. The FDA has agreed to certain performance goals in the review of NDAs. FDA seeks to review NDAs for standard review products that are not new molecular entities, or NMEs, within ten months of the date the NDA is submitted, while FDA seeks to review NDAs for standard review NMEs within ten months of the date FDA files the NDA.  FDA seeks to review NDAs for priority review products that are not NMEs within six months of the date the NDA is submitted, while FDA seeks to review NDAs for priority review NMEs within six months of the date FDA files the NDA. The review process for both standard and priority review may be extended by the FDA for three additional months to consider certain late-submitted information, or information intended to clarify information already provided in the submission.

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

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

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

Notwithstanding the submission of relevant data and information, the FDA may ultimately decide that the NDA does not satisfy its regulatory criteria for approval. Data obtained from clinical trials are not always conclusive, and the FDA may interpret data differently than the applicant. If the agency decides not to approve the NDA in its then present form, the FDA will issue a complete response letter that describes all of the specific deficiencies in the NDA identified by the FDA. The deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally, the complete response letter may include recommended actions that the applicant might take to place the application in a condition for approval. If a complete response letter is issued, the applicant must either resubmit the NDA, addressing all of the deficiencies identified in the letter, withdraw the application, or appeal the decision.

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

Expedited Review and Approval

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

Although Fast Track and priority review do not affect the standards for approval, the FDA will attempt to facilitate early and frequent meetings with a sponsor of a Fast Track designated product candidate and expedite review of the application for a product candidate designated for priority review. Accelerated approval, which is described in Subpart H of 21 CFR Part 314, provides for an earlier approval for a new product candidate that is (1) intended to treat a serious or life-threatening disease or condition; (2) generally provides a meaningful advantage over available therapies and (3) demonstrates an effect on either a surrogate endpoint that is reasonably likely to predict clinical benefit or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, or IMM, and is reasonably likely to predict an effect on IMM or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. A surrogate endpoint is a laboratory measurement or physical sign used as an indirect or substitute measurement representing a clinically meaningful outcome. As a condition of approval, the FDA will require that a sponsor of a product candidate receiving accelerated approval perform post-

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marketing studies to verify and describe the predicted effect on IMM or other clinical endpoint. The product may be subject to accelerated withdrawal procedures under certain circumstances.

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

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

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

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

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

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

Patent Term Restoration and Marketing Exclusivity

Depending upon the timing, duration and specifics of FDA approval of the use of our drug candidates, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of fourteen years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND application and the submission date of an NDA plus the time between the submission date of an NDA and the approval of that application, except that this review period is reduced by any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved product is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent. The USPTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, if available, we intend to apply for restorations of patent term for some of our currently owned patents beyond their current expiration

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dates, depending on the expected length of the clinical trials and other factors involved in the filing of the relevant NDA; however, there can be no assurance that any such extension will be granted to us.

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

Orphan Drug Designation

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

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

Pediatric Exclusivity and Pediatric Use

Under the Best Pharmaceuticals for Children Act (BPCA), certain therapeutic candidates may obtain an additional six months of exclusivity if the sponsor submits information requested in writing by the FDA, referred to as a Written Request, relating to the use of the active moiety of the product candidate in children. Although the FDA may issue a Written Request for studies on either approved or unapproved indications, it may only do so where it determines that information relating to that use of a product candidate in a pediatric population, or part of the pediatric population, may produce health benefits in that population.

In addition, the Pediatric Research Equity Act, or PREA, requires a sponsor to conduct pediatric studies for most therapeutic candidates, for a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration. Under PREA, original NDAs and supplements thereto must contain a pediatric assessment unless the sponsor has received a deferral or waiver. The required assessment must assess the safety and effectiveness of the product candidate for the claimed indications in all relevant pediatric subpopulations and support dosing and administration for each pediatric subpopulation for which the product candidate is safe and effective. The sponsor or FDA may request a deferral of pediatric studies for some or all of the pediatric subpopulations. A deferral may be granted for several reasons, including a finding that the product candidate is ready for approval for use in adults before pediatric studies are complete or that additional safety or effectiveness data needs to be collected before the pediatric studies begin. The law requires the FDA to send a PREA Non-Compliance letter to sponsors who have failed to submit their pediatric assessments required under PREA, have failed to seek or obtain a deferral or deferral extension or have failed to request approval for a required pediatric formulation. It further requires the FDA to post the PREA Non-Compliance letter and sponsor’s response.

Post-Approval Requirements

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is not maintained or if problems occur after the product candidate reaches the market. Later discovery of previously unknown problems with a product candidate may result in restrictions on the product candidate or even complete withdrawal of the product candidate from the market.

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After approval, some types of changes to the approved product candidate, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval. In addition, the FDA may under some circumstances require testing and surveillance programs to monitor the effect of approved therapeutic candidates that have been commercialized, and the FDA under some circumstances has the power to prevent or limit further marketing of a product candidate based on the results of these post-marketing programs.

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

Therapeutic manufacturers and other entities involved in the manufacture and distribution of approved therapeutic products are required to register their establishments with the FDA and obtain licenses in certain states and are subject to periodic unannounced inspections by the FDA and some state agencies for compliance with cGMP and other laws. The FDA periodically inspects manufacturing facilities to assess compliance with cGMP, which imposes extensive procedural, substantive and record-keeping requirements. In addition, changes to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require FDA approval before being implemented. FDA regulations would also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon us and any third-party manufacturers used. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.

Disclosure of Clinical Trial Information

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

Regulation of Compounding Pharmacies

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

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FDA has not yet finalized its list of bulk drug substances for which there is a clinical need, but FDA has announced an interim policy pursuant to which bulk drug substances for which there is sufficient supporting information for FDA to evaluate them may be nominated for inclusion on FDA’s “Category 1” list.  Provided certain conditions are met, FDA will exercise enforcement discretion concerning Category 1 substances pending evaluation of the substances for inclusion on FDA’s final list of bulk drug substances for which there is a clinical need.

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

Pharmaceutical Coverage, Reimbursement and Pricing

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

The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the Secretary of the Department of Health and Human Services as a condition for states to receive federal matching funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. Effective in 2010, the Affordable Care Act (“ACA”) made several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability by raising the minimum basic Medicaid rebate on most branded prescription drugs from 15.1% of average manufacturer price, or AMP, to 23.1% of AMP, and adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations) of solid oral dosage forms of branded products, as well as potentially impacting their rebate liability by modifying the statutory definition of AMP. The ACA also expanded the universe of Medicaid utilization subject to drug rebates by requiring pharmaceutical manufacturers to pay rebates on Medicaid managed care utilization as of 2010 and by expanding the population potentially eligible for Medicaid drug benefits. Centers for Medicare and Medicaid Services (“CMS”) will expand Medicaid rebate liability to the territories of the United States as well, beginning in 2020, if the territories elect to enroll in the Medicaid Drug Rebate Program. In addition, the ACA provides for the public availability of retail survey prices and certain weighted average AMPs under the Medicaid program. The implementation of this requirement by CMS may also provide for the public availability of pharmacy acquisition cost data, which could influence our decisions related to setting product prices and offering related discounts.

In order for a pharmaceutical product to receive federal reimbursement under the Medicare Part B and Medicaid programs or to be sold directly to U.S. government agencies, the manufacturer must extend discounts to entities eligible to participate in the 340B drug pricing program. The required 340B discount on a given product is calculated based on the AMP and Medicaid rebate amounts reported by the manufacturer. Effective in 2010, the ACA expanded the types of entities eligible to receive discounted 340B pricing; although, under the current state of the law, with the exception of children’s hospitals, these newly eligible entities will not be eligible to receive discounted 340B pricing on orphan drugs when used for the orphan indication.

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

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

The U.S. government and state legislatures have shown significant interest in implementing cost containment programs to limit the growth of government-paid health care costs, including price controls, restrictions on reimbursement and requirements for

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substitution of generic products for branded prescription drugs. Further, the ACA, contains provisions that may reduce the profitability of drug products, including, for example, increased rebates for drugs reimbursed by Medicaid programs and the extension of Medicaid rebates to Medicaid managed care plans. Several other provisions of the ACA focused on cost containment include:

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

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

Generic Drugs

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

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

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

Laboratory Testing Services Coverage and Reimbursement

Given that we market medical devices in the form of in vitro diagnostic devices, or IVDs, used in the performance of clinical laboratory tests, currently limited to drugs of abuse, pregnancy and alcohol testing in the U.S., and cardiac marker and infectious disease testing in Asia, our business may be impacted by laws and policies governing the coding, coverage, reimbursement and demand for clinical laboratory services. With regard to the clinical laboratory services performed on Medicare beneficiaries, health care providers utilizing such tests generally either are paid under prospective payment systems for most tests performed on hospital

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inpatients and outpatients or must bill the Medicare Part B program directly in compliance with applicable coding, coverage and reimbursement rules and accept the amount paid by the Medicare contractor under the Medicare Clinical Laboratory Fee Schedule (“CLFS”) as payment in full. Currently, Medicare does not require the beneficiary to pay a co-payment for clinical laboratory services paid under the CLFS. Pursuant to Section 216 of-the federal Protecting Access to Medicare Act of 2014 (“PAMA”), CMS is modernizing the CLFS by creating a market-based reimbursement system which will require clinical laboratories subject to the law to report certain private payor prices and test volumes, and CMS will set new payment rates for CLFS tests based on the weighted median of reported prices, effective January 1, 2018. It is unclear how this new law will affect testing services that use our products at this time, but, as a general matter, CMS has indicated that prices of many clinical laboratory tests will decrease under PAMA. In addition, state Medicaid programs are prohibited from paying more (and in many instances, pay significantly less) than Medicare, and payment is subject to state-specific coverage, reimbursement and laboratory law requirements. Certain state Medicaid programs also require Medicaid recipients to pay co-payment amounts for clinical laboratory services. Likewise, payment by private payors is subject to payor-determined coverage and reimbursement policies that vary considerably and are subject to change without notice. Finally, there is increasing legislative attention to opioid abuse in the United States, including passage of the Comprehensive Addiction and Recovery Act of 2016 which, among other things, strengthens state prescription drug monitoring programs and expands educational efforts for certain populations, which may increase the need for drugs of abuse testing. Changes like these related to clinical laboratory services and any other changes related to coverage or reimbursement may impact the demand for and pricing of some of our products which could adversely affect our ability to operate our business and our financial results.

Reimbursement for Compounded Drugs

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

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

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

Healthcare Fraud and Abuse Laws and Compliance Requirements

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

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

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

Medical Devices

Through our subsidiary Polymed, we marketed in vitro diagnostic, or IVD, rapid test kits used in the performance of clinical laboratory tests (limited to drugs of abuse and pregnancy testing in the U.S.). We discontinued this line of product sales during the beginning of 2019. These IVD test kits are regulated by the FDA as medical devices under the FDCA and related regulations, and are subject to premarket notification requirements pursuant to Section 510(k) of the FDCA.  FDA’s medical device regulations address, among other topics, the development, design, non-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, servicing, recordkeeping, premarket clearance or approval, import, export, adverse event reporting, advertising, promotion, marketing and distribution of medical devices, for the purpose of ensuring that medical devices manufactured or distributed in the U.S. are safe and effective for their intended uses and otherwise meet the requirements of the FDCA. These requirements apply to varying extents, depending on the level of risk posed by a device. Medical devices may also be subject to other federal and state authorities in the U.S., as well as comparable authorities in foreign jurisdictions.

In addition, the Clinical Laboratory Improvement Amendments of 1988, or CLIA, established quality standards for laboratory testing to ensure the accuracy, reliability and timeliness of patient test results regardless of where the test was performed. Pursuant to CLIA, the FDA categorizes IVDs based on their level of complexity (e.g., knowledge and training necessary to perform the test).  Waived tests are those that are simple to use and pose little risk of providing incorrect information or causing harm if performed incorrectly.  Laboratories that perform only waived tests must obtain a Certificate of Waiver but otherwise are subject to minimal requirements under CLIA.  Tests categorized as moderate complexity are more complex than waived tests, and laboratories performing them are subject to CLIA requirements for quality control, quality assurance, proficiency testing and limited personnel requirements.  Finally, high complex tests are the most difficult to perform or pose the greatest risk if performed incorrectly.  In addition to the requirements applicable to moderate complexity tests, laboratories performing high complexity tests are subject to

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additional personnel requirements.   Labs performing tests other than waived tests must obtain either a Certificate of Accreditation or Certificate of Compliance. Foreign countries may require similar or more onerous approvals to manufacture or market our products or to allow the use of our products in certain settings. Most of our test strips are categorized as CLIA waived, but some of our test strips are categorized as moderate in complexity.

Risk Classification

Unless an exemption applies, each medical device commercially distributed in the U.S. requires either FDA clearance of a 510(k) premarket notification submission, granting of a de novo classification request, or approval of a premarket approval application, or PMA. The FDCA establishes three classes of devices - Class I (low risk), Class II (moderate risk) or Class III (high risk) - depending on the degree of risk associated with each medical device. Class I devices are those for which general controls are sufficient to provide reasonable assurance of safety and effectiveness. General controls include establishment registration and product listing, complaint handling, reporting of adverse events recordkeeping, and compliance with the applicable portions of the Quality System Regulation, or QSR. Class II devices are those for which general controls are insufficient by themselves to provide reasonable assurance of the safety and effectiveness of the device and for which special controls can be established to provide such assurance.  Special controls may include performance standards, post-market surveillance, patient registration, and the development and dissemination of guidelines. Class III devices are those for which reasonable assurance of safety and effectiveness cannot be provided through the imposition of general and special controls and that are either purported or represented for use in supporting or sustaining life or of substantial important in preventing impairment of human health or that present a potential unreasonable risk of illness or injury.

Premarket Authorization Pathways

In addition to general and special controls, medical devices may be subject to the requirement for premarket review and authorization by FDA in order to be commercially distributed.  The three premarket authorization pathways for medical devices are the 510(k) premarket notification, request for de novo classification, and an application for premarket approval, or PMA.  Most Class I devices are exempt from any premarket authorization requirement.  Many Class II devices are subject to 510(k) premarket notification.  Our currently marketed products are Class II devices subject to 510(k) clearance.  If no predicate exists, a device is automatically designated as Class III.  However, if the device does not pose high risk, a request for de novo classification may be submitted. Class III devices require FDA approval of a PMA application.

510(k) Marketing Clearance and De Novo Pathways

To obtain 510(k) clearance, a premarket notification submission must be submitted to the FDA demonstrating that the proposed device is “substantially equivalent” to a predicate device. A predicate device is a legally marketed device that is not subject to premarket approval, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that has been reclassified from Class III to Class II or I or a device that was found substantially equivalent another device cleared through the 510(k) process. Pursuant to FDA’s user fee-based performance goals,  the agency has 90 days to review a 510(k) notification submission once it has been accepted, but the review process may take longer if the agency has questions or requires additional information, including clinical data, in order to make a determination regarding substantial equivalence.

If the FDA agrees that the device is substantially equivalent to a predicate device, it will grant 510(k) clearance to market the device. If the FDA determines that the device is “not substantially equivalent” to a previously cleared device, the device cannot be lawfully marketed. In the absence of a suitable predicate, the device is  automatically designated as Class III. The sponsor may be able to seek reclassification through the de novo process.  If a de novo request is granted, the device may be legally marketed and a new classification is established. If the device is classified as Class II, the device may serve as a predicate for future 510(k) submissions. If the de novo pathway is not available, the sponsor must fulfill more rigorous PMA requirements.

PMA Approval Pathway

Class III devices require PMA approval before they can be lawfully marketed in the U.S. The PMA process is more demanding than the 510(k) process. A PMA must include information from investigations sufficient to show there is a reasonable assurance of safety and effectiveness under the labeled conditions of use proposed by the sponsor.  A PMA submission generally includes data from preclinical studies and human clinical trials.  The FDA may approve a PMA with post-approval conditions intended to ensure the safety and effectiveness of the device, including, among other things, restrictions on labeling, promotion, sale and distribution and collection of long-term follow-up data from patients in the clinical trial that supported PMA approval or requirements to conduct additional clinical trials post-approval. Failure to comply with the conditions of approval can result in material adverse enforcement action, including withdrawal of the approval.

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Our products are not currently subject to PMA requirements. However, we may in the future develop devices that will require the submission of a PMA, or FDA may find that some of our proposed uses are not substantially equivalent to previously cleared and marketed devices, and thus a PMA is required.

Clinical Trials

Clinical trials are almost always required to support a PMA and are sometimes required to support a 510(k) submission. All clinical investigations of devices to determine safety and effectiveness must be conducted in accordance with the FDA’s investigational device exemption, or IDE, regulations, which specify obligations on study sponsors and clinical investigators.  These regulations include restrictions on promotion and commercialization of the device, specified labeling, reporting, and monitoring obligations, and compliance with human protection requirements (e.g., IRB approval, informed consent of subjects). If the device presents a “significant risk,” to human health, as defined by the FDA, the FDA requires the device sponsor to submit an IDE application to the FDA, which must be approved prior to commencing human clinical trials. A significant risk device is one that presents a potential for serious risk to the health, safety or welfare of a patient and either is implanted, used in supporting or sustaining human life, substantially important in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment of human health or otherwise presents a potential for serious risk to a subject. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE will automatically become effective thirty days after receipt by the FDA unless the FDA notifies us that the investigation may not begin. If the FDA determines that there are deficiencies or other concerns with an IDE that require a modification, the FDA may, depending on whether the issues need to be addressed prior to study enrollment, either disapprove the IDE or approve the IDE with conditions.

During a clinical trial, the sponsor is required to comply with applicable FDA requirements, and the clinical investigators are also subject to FDA’s regulations. Both must comply with GCPs, which among other things require that informed consent be obtained from each research subject prior to enrollment, that the investigational plan and study protocol be followed, that the disposition of the investigational device be controlled and that reporting and recordkeeping requirements are followed. Additionally, after a trial begins, the sponsor, the FDA or the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a clinical trial is completed, there can be no assurance that the data generated during a clinical trial will meet the prespecified safety and effectiveness endpoints or otherwise produce results that will lead the FDA to grant marketing clearance or approval.

Post-Market Regulation

After a device is cleared or approved for marketing, the manufacturer is subject to numerous post-market requirements. These include:

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Our manufacturing processes are required to comply with the applicable portions of the QSR, which cover the methods used in, and the facilities and controls used for, the design, manufacture, labeling, packaging, installation and servicing of finished devices intended for human use. The QSR includes requirements to establish and maintain procedures relating to design controls (including design history file), document controls, purchasing controls, production and process controls, labeling and packaging controls, corrective and preventive action, quality audits, and records (including device master record, device history record, and complaint files). As a manufacturer, we and our third-party manufacturers are subject to periodic scheduled or unscheduled inspections by the FDA. Our failure to maintain compliance with the QSR requirements could result in the shut-down of, or restrictions on, our manufacturing operations and the recall or seizure of our product. The discovery of previously unknown problems with our product, including unanticipated adverse events or adverse events of increasing severity or frequency, whether resulting from the use of the device within the scope of its clearance or off-label by a physician in the practice of medicine, could result in restrictions on the device, including the removal of the product from the market or voluntary or mandatory device recalls.

New Legislation and Regulations

From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing the testing, approval, manufacturing, marketing, coverage and reimbursement of products regulated by the FDA or other government agencies. In addition to new legislation, FDA and healthcare fraud and abuse and coverage and reimbursement regulations and policies are often revised or interpreted by the agency in ways that may significantly affect our business and our products. In particular, we expect that the current presidential administration and U.S. Congress will continue to seek to modify, repeal or otherwise invalidate all, or certain provisions of, the ACA. Most recently, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted, which, among other things, removes penalties for not complying with the individual mandate to carry health insurance. There is still uncertainty with respect to the impact President Trump’s administration and the U.S. Congress may have, if any, and any changes will likely take time to unfold. Such reforms could have an adverse effect on anticipated revenues from therapeutic candidates that we may successfully develop and for which we may obtain regulatory approval and may affect our overall financial condition and ability to develop therapeutic candidates. However, we cannot predict the ultimate content, timing or effect of any healthcare reform legislation or the impact of potential legislation on us.

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

Foreign Corrupt Practices Act

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

Environment

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

China Government Regulation

In the People’s Republic of China ( “PRC” or “China”), we operate in an increasingly complex legal and regulatory environment. We are subject to a variety of Chinese laws, rules and regulations affecting many aspects of our business. This section summarizes the principal Chinese laws, rules and regulations relevant to our business and operations.

Foreign Investment in Pharmaceutical Industry

Foreign investment in China was previously subject to the Catalogue for the Guidance of Foreign Investment Industries (2017 Revision) issued and effective beginning July 28, 2017, and the Special Administrative Measures for the Access of Foreign Investment (“Negative List”) issued and effective beginning July 28, 2018, which together comprised the encouraged foreign-invested

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industries catalogue and the special administrative measures for the access of foreign investments to the restricted or the prohibited foreign-invested industries. The latter set out restrictions such as percentage of shareholding and qualifications of senior management. The Catalogue of Industries in which Foreign Investment is Encouraged (2019 Revision), the 2019 Catalogue, and the Special Administrative Measures for the Access of Foreign Investment (Negative List) (2019 Revision), and the 2019 Negative List, which were issued on June 30, 2019 and came into effect on July 30, 2019, further reduced restrictions on the foreign investment. Manufacturing and producing of new anti-cancer drugs, new cardiovascular medicine and new nervous system drugs falls within the field of encouraged catalogue. After the 2019 Catalogue and the 2019 Negative List came into effect, they replaced the Catalogue for the Guidance of Foreign Investment Industries (2017 Revision) and the Special Administrative Measures for the Access of Foreign Investment (Negative List).

General Regulations on China Drug Administration

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

The NMPA monitors and supervises the administration of pharmaceutical products, as well as medical devices and equipment. The NMPA’s primary responsibility includes evaluating, registering and approving new drugs, generic drugs and imported drugs; approving and issuing permits for the manufacture, export and import of pharmaceutical products and medical appliances; approving the establishment of enterprises for pharmaceutical manufacture and distribution; formulating administrative rules and policies concerning the supervision and administration of pharmaceuticals and handling significant accidents involving these products. The local provincial drug administrative authorities are responsible for supervision and administration of drugs within their respective administrative regions.

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

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

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

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