Overview

We are a clinical-stage biopharmaceutical company developing novel therapeutics based on our scientific understanding of key biological pathways underlying cardio-metabolic, liver, oncologic and ophthalmic diseases. These diseases represent leading causes of morbidity and mortality and a significant burden for healthcare systems. Since the commencement of our operations in 2008, we have generated a robust portfolio of product candidates. Our most advanced product candidate, aldafermin, is wholly-owned and entered into Phase 2b development for the treatment of NASH in 2019. Five of our other product candidates are undergoing or have completed Phase 1 clinical trials, and we have other programs in preclinical testing; some of these are subject to our Merck collaboration, as described below. We have created this portfolio using our research and drug discovery approach that employs unbiased, in vivo-based discovery to identify proprietary insights into critical biological processes. We combine this approach with our protein and antibody engineering expertise to find the appropriate modality to enhance each product candidate’s therapeutic potential.

In 2015, we entered into a Collaboration Agreement with Merck that had an initial term of five years. In March 2019, Merck exercised its option to extend the collaboration for two additional years. The collaboration included an exclusive worldwide license to our growth differentiation factor 15 (“GDF15”) program, for which Merck terminated its license effective May 31, 2019. Under the Collaboration Agreement, we also granted Merck options to take exclusive, worldwide licenses for the programs in our research and development pipeline on a program-by-program basis. Our fibroblast growth factor 19 (“FGF19”) program, including aldafermin, is not included in the Collaboration Agreement, and it remains wholly-owned by us.

Merck generally has a one-time right to exercise its option to an exclusive, worldwide license when a program completes a human proof-of-concept trial. In November 2018, Merck exercised its option to license NGM313, an agonistic antibody selectively activating fibroblast growth factor receptor 1c-beta-klotho (“FGFR1c/KLB”), which is a potential treatment for NASH and type 2 diabetes. The collaboration enables us to develop more product candidates for major indications than we could likely advance on our own, with Merck bearing a majority of the associated cost and risk. We retain an option, when a candidate has advanced to Phase 3 clinical trials, to participate in up to 50% of the economic return from that candidate if it becomes an approved medicine. Overall, the Merck collaboration provides us with robust research and development support, while we retain our research independence and the option to split costs and profits on product candidates Merck elects to advance.

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Our most advanced programs are focused on novel discoveries in hormone pathways that regulate cardio-metabolic processes and liver function, including those driving NASH, type 2 diabetes and obesity. We have identified multiple hormone pathways of interest, the most advanced of which are: FGF19, which plays a critical role in controlling bile acid, lipid and glucose metabolism; FGFR1c/KLB, which regulates insulin sensitivity, blood glucose and liver fat; and GDF15, which drives profound metabolic activity by regulating fuel flux and has been considered a challenging therapeutic target. We believe these hormone pathways work through distinct mechanisms and play an important role in metabolic regulation. Our six most advanced proprietary product candidates are summarized below.

We are currently focused on the following programs:

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Using our drug discovery approach, we have identified and are actively investigating over ten additional biological pathways with potential to intervene in diseases. For these pathways, we are further identifying mechanistic insights and their relevance to human biology, and generating biologic drug candidates that appropriately modulate the signals we have identified. These programs are in various stages of development, ranging from functional validation to preclinical testing. Discovery activity in selected therapeutic areas including cardio-metabolic, liver, oncologic and ophthalmic diseases is ongoing and in various stages of research.

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Our Strategy

Our strategy is to leverage our biology-centric drug discovery approach to uncover novel mechanisms of action and generate proprietary insights that will enable us to move rapidly into proof-of-concept studies and deliver first-in-class medicines to patients. Key elements of our strategy are:

Our Approach to Drug Discovery and Development

We pursue drug discovery and development through a multi-step process geared towards translating powerful human biology into first-in-class medicines. Our founding team designed our approach based on many decades of experience in successful drug development at other companies, including Amgen, Genentech and Tularik. Our process pairs a research approach that generates novel insights into pathways demonstrating powerful biological effect with the expertise in protein and antibody engineering to transform those insights into product candidates. This process seeks to address the challenges in drug discovery in diseases that involve complex, integrated biological pathways.

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Identifying Pathways of Interest

We identify target genes or pathways of interest by utilizing three approaches:

We then characterize and confirm the effects of modulating the biological activity of these potential targets using in vivo models designed to mimic the disease of interest. We interrogate the biological activity of candidate targets using in vivo models because in vitro experiments, which take place outside a living organism, are not capable of adequately reflecting complex biological processes and interactions that are regulated by multi-organ systems. Historically, in vivo screening at a scale and speed for drug discovery has not been practical as it has largely been dependent on generating purified protein for functional testing. We use recombinant adeno-associated virus (“rAAV”) vectors, a proven research tool that can introduce the gene of interest directly into disease models to enable the biological function of the resultant protein to be assessed in vivo. With this rAAV technology, we developed an unbiased, in vivo functional evaluation system that formed the foundation of our discovery efforts in cardio-metabolic disease and enabled us to identify novel pathways that demonstrate profound metabolic effects. To interrogate biological function and confirm activities observed in the rAAV gene delivery studies, subsequent pharmacological evaluation of select targets is conducted in disease animal models using bioactive recombinant proteins and/or monoclonal antibodies. In addition, we utilize in vivo models with loss of function mutations or knockouts to understand the function of certain human genes as they relate to the disease of interest. By employing these approaches in animal models of human diseases, we can elucidate the biology of potential human drug targets in a relevant in vivo setting and evaluate their impact on the manifestation and progression of disease.

Translation of Pathway Biology to Product Candidates

Once a strong indication of biological activity is generated for a protein of interest, we employ a differentiated process aimed at quickly identifying a lead candidate to enable us to rapidly advance the program to evaluate the effect of these product candidates on biomarkers of disease or target activity in order to enable early demonstration of human proof of concept. We probe the mechanism of action, signaling pathways and the relationship between the protein structure and function to help inform how to translate the biological activity into a potential product candidate. Through these activities we have been able to identify novel interaction partners, their expression patterns and their signaling activities, which help elucidate biological mechanisms and inform selection of a lead candidate. We leverage our expertise in protein and antibody engineering to translate biological signals into differentiated product candidates. We have an unbiased antibody generation technology, along with an armamentarium of therapeutic protein and antibody engineering capabilities, including bispecific antibodies, bifunctional antibody fusions and methods for extending the half-lives of native proteins. This range of potential modalities not only allows us to generate a portfolio of product candidates from which to select a lead, but also provides important tools to define the biological activity of the candidates.

After we have identified a lead candidate in a program, we design our early clinical trials to provide proof of biological activity, in addition to assessing safety and tolerability, to determine whether the activity we have observed in animal models can be translated into human subjects. We believe our deep understanding of the fundamental biological mechanisms observed for our chosen development candidates and the specific relationship between structure and pharmacological function distinguish our drug discovery approach from many others applied in our industry today.

The cornerstone of our research and development approach is the experienced and talented team of scientists and drug developers who built and run it. A common theme in our team’s expertise is the ability to translate biological signals in animal models into drugs with human activity. Members of our team played significant roles at prior companies in discovering and developing multiple approved drugs, including recombinant human insulin,

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human growth hormone, tissue plasminogen activator and interferon alpha and gamma, as well as metreleptin and evolocumab (Repatha^®). Our team seamlessly integrates discovery biology, protein and antibody engineering, preclinical development, early clinical development and manufacturing for each program. Our scientific advisory board further strengthens our experience base and includes key contributors to the discovery of the statin class of drugs, as well as thought leaders in new areas complementary to our early-stage research efforts.

Our Initial Focus on Cardio-Metabolic and Liver Disease

Cardio-metabolic and liver diseases, including NASH, diabetes and obesity, represent a leading cause of morbidity and mortality, a significant burden for healthcare systems and an area of relative underinvestment by the pharmaceutical industry. Metabolic syndrome is exhibited by 34% of adults in the United States and comprises a constellation of co-morbid conditions, including type 2 diabetes, obesity, high blood pressure, poorly regulated lipids and NAFLD, a precursor condition to NASH. Despite a wave of public health campaigns to promote better diet and exercise habits and a range of treatment options available for many of these cardio-metabolic diseases, morbidity and mortality rates remain high and more effective therapeutics are needed.

Cardio-metabolic and liver diseases represent areas of both rapidly growing unmet medical need and underinvestment, driven in part by the biological complexity of the diseases and the substantial costs necessary to develop new therapeutics. Leveraging our differentiated drug discovery approach, we have spent the last decade discovering and developing a portfolio of clinical-stage drug candidates that target various forms of cardio-metabolic disease including NASH, type 2 diabetes and obesity. Each of these drug candidates stem from novel insights we have made in understanding hormone pathways that regulate cardio-metabolic processes. Aldafermin is our lead product candidate in development for treating NASH, a cardio-metabolic liver disease. As explained below, the clinically validated, dual mechanism of action of aldafermin supports its therapeutic potential in NASH, an indication with a high prevalence and for which there are no approved treatments. Our investment in cardio-metabolic diseases was further expanded in 2015 through our collaboration with Merck, which provided resources to advance multiple programs, in addition to our wholly-owned aldafermin program. Five of our most advanced clinical candidates—aldafermin, NGM313, NGM120, NGM217 and NGM395—are notable because their preclinical profiles suggest the potential to broadly impact the drivers of various diseases with an underlying metabolic dysregulation.

Other Focus Areas

Beyond cardio-metabolic and liver diseases, we are also pursuing treatments for oncologic and ophthalmic diseases, which are also major disease categories that are growing in incidence and lack adequate treatments. NGM120 is our first product in oncology and NGM621 is our first product candidate in ophthalmic disease. All of our programs embody our focus on delivering transformative therapeutics to patients by applying our proprietary insights into powerful biology underlying major diseases.

Our Programs

Aldafermin: A Rapid and Potent Approach to Treating NASH

Aldafermin, an engineered version of human hormone FGF19 that is administered through a once-daily subcutaneous injection, has demonstrated the ability to rapidly improve NASH and reverse liver fibrosis in clinical and preclinical studies. We believe the combination of breadth, magnitude and speed of effect demonstrated by aldafermin in these studies results in an agent that, if ultimately approved, could provide a needed medicine for physicians to treat NASH patients with moderate to advanced fibrosis. We have tested aldafermin in over 475 subjects, including more than 200 NASH patients. We initiated the ALPINE 2/3 clinical trial in 2019 and plan to initiate the ALPINE 4 clinical trial in the first half of 2020. Aldafermin is wholly-owned and it is not subject to our collaboration with Merck.

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NASH: A Progressive Metabolic and Fibrotic Disease of the Liver that Affects Millions

NASH is a life-threatening form of liver disease. It results from the progression of NAFLD, which is a common co-morbidity of the metabolic syndrome and obesity. NAFLD is characterized by abnormal amounts of fat in the liver, a condition known as steatosis, and is often associated with insulin resistance. This abnormal fat in the liver contributes to the progression in certain NAFLD patients to NASH by developing a necroinflammatory state in the liver that ultimately drives scarring, also known as fibrosis, and, for many, progresses to liver failure, also known as cirrhosis.

The estimated global prevalence of NAFLD and NASH has risen rapidly in parallel with the dramatic rise in population levels of obesity and diabetes. NAFLD now represents the most common cause of liver disease in the Western world. In the United States alone, the prevalence of NASH was estimated to total 16.5 million cases and is projected to reach 27 million cases by 2030, with similar trends occurring globally. The annual economic burden associated with NAFLD and NASH in the United States was estimated to have been over $100 billion in 2016.

Although the mechanism underlying the development and progression from simple steatosis to NASH and cirrhosis is poorly understood, insulin resistance and inflammatory mediators, including lipotoxicity, cytokines and oxidative stress, are believed to promote the development of NASH and its extrahepatic complications. Excess lipotoxic, or fat, metabolites in the liver are believed to provide the primary insult in the pathogenesis of NASH, and several treatments are in development targeting mechanisms to reduce these disease drivers. Other treatments in development aim to reduce the inflammatory and fibrotic damage created by this metabolic dysregulation. Evidence also supports a role for bile acids in the pathogenesis of liver inflammation and fibrosis. Accumulation of bile acids, in particular, more toxic hydrophobic bile acids, within hepatocytes can cause mitochondrial dysfunction, endoplasmic reticulum stress and immune cell infiltration that can ultimately lead to inflammation, cell death and liver injury.

Most patients with NASH are diagnosed in their forties or fifties; however, NASH develops across all ages, including in children, which is thought to be linked to an increase in childhood obesity. Most NASH patients are asymptomatic, although some may present with fatigue, malaise and vague right-upper abdominal discomfort. Patients are more likely to be initially identified by elevated liver aminotransferases on routine lab tests or hepatic steatosis detected incidentally on abdominal imaging. While non-invasive diagnostic tools are under development, a definitive diagnosis of NASH is currently only achievable through liver biopsy to assess the components of the NAFLD activity score (“NAS”).

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The histologic criteria for the diagnosis of adult NASH include steatosis, lobular inflammation and hepatocellular ballooning. Portal and periportal fibrosis followed by bridging fibrosis and cirrhosis are seen in patients as NASH progresses. Physicians assess the severity of NASH by liver biopsy using two different scoring systems, the NAS and the fibrosis stage (F0 to F4). The tables below describe the scoring criteria of the two systems:

NAFLD Activity Score System

Fibrosis Score

The NAS is a validated score of liver histology that is used to grade disease activity in patients with NAFLD and NASH. The NAS is the sum of the liver biopsy’s individual scores for steatosis (0–3), lobular inflammation (0–3) and hepatocellular ballooning (0–2), with fibrosis (F0–F4) scored separately. Advanced liver fibrosis is generally considered fibrosis stage F3 and F4, which may ultimately lead to end-stage liver disease, liver cancer, liver transplant and/or death.

U.S. Food and Drug Administration (“FDA”) Draft Industry Guidance on NASH Drug Development and Endpoints

There are no FDA-approved therapeutics for NASH. The FDA has provided draft guidance to the industry regarding acceptable development pathways for investigational NASH agents as follows:

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We believe many agents in development for NASH will opt for a Subpart H/E accelerated approval pathway and rely on surrogate endpoints for initial approval. As detailed further below, fibrosis stage is currently the only measurement that is correlated to liver outcomes and, therefore, the potential for many agents that will rely only on the resolution of a NASH surrogate endpoint to demonstrate clinical benefit will remain uncertain until a confirmatory outcomes study is successfully completed.

Stage of Fibrosis Predictive of Outcomes for NASH Patients

The presence of fibrosis is the only factor that is highly predictive in identifying those patients who will progress to cirrhosis. The natural history of NASH is variable from patient to patient and, while the NAS is a valuable tool for diagnosing the disease, it does not appear to be predictive of disease progression. Of the estimated 64 million patients in the United States with NAFLD, approximately 10%–20% will progress to NASH over time. Of these NASH patients, approximately 10%–15% will progress to cirrhosis by advancing one fibrosis stage approximately every seven years. The mortality rate of NASH patients with fibrosis has been estimated at 1.5%–3.5% per year, largely due to cardiovascular disease, followed by liver-related causes. However, patients with F2 or greater fibrosis stage have a greater chance of liver-related mortality than cardiovascular-related mortality, and each stage of worsening of fibrosis correlates to an exponential increase in liver-related mortality rates. Patients with F3 and F4 fibrosis have an approximately 17 times greater risk and 42 times greater risk, respectively, of liver-related mortality than those NASH patients without fibrosis. Therefore, it is expected that treatments that can drive the regression of fibrosis are more likely to have a meaningful impact on clinical outcomes for NASH patients with F2 to F4 fibrosis.

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Current Treatments

Currently, no agents have been approved for the treatment of NASH. Weight loss through diet and lifestyle management is currently considered the first-line treatment strategy for NASH and is associated with improvement in liver histology and a reduction in cardiovascular and metabolic complications. However, fewer than 10% of patients are successful in achieving or maintaining at least a 10% total body weight loss that is sufficient to improve fibrosis and, therefore, require other interventions. In cases of morbid obesity, gastric bypass surgery has been successful in resolving NASH in a majority of patients; however, the effect on fibrosis improvement was less substantial and the risk of complications and expense of the surgery limit more widespread use.

In the absence of approved products, some physicians utilize agents approved for other indications, including Vitamin E and pioglitazone; however, the evidence of their effect on NASH is modest and/or they have safety issues that limit acceptance. Given the increasing disease burden and lack of approved treatment options, the development of novel pharmacologic therapies to treat NASH is critical.

Treatments in Development

While there are many agents in clinical development for NASH, the landscape can be subdivided into a few mechanistic classes based on the putative disease drivers they target. Most treatment approaches for NASH have focused on the prevention or reversal of liver injury either by predominantly treating the metabolic dysregulation of the disease or through directly targeting inflammatory or fibrogenic pathways. NASH is a chronic, slowly progressing disease and, currently, many believe that slowing the progression or reversing disease requires treatment periods of at least 12 months. To attempt to overcome modest individual agent activity, combination therapy is being pursued by some NASH drug developers on the theory that the complex underlying pathophysiology of NASH will require targeting multiple mechanisms to achieve a sufficient disease-modifying effect to be clinically relevant.

Drug Candidates Pursuing a Metabolic Approach to Treating NASH

Certain NASH drug development candidates are focused on the metabolic components of the disease, such as insulin resistance and lipotoxicity that are associated with the inception and early stages of the disease pathology. The rationale for these treatment candidates is based on an expectation that the improvement of the underlying liver insult of metabolic dysregulation will allow the liver to recover over the long term, which would potentially allow the liver to repair itself and eventually improve fibrosis. Although clinical data for some compounds in this mechanistic class show a beneficial effect on steatosis and an improvement in the NAS, the effect on fibrosis is likely to be highly dependent on the compound being tested. Any of these metabolic-focused compounds that are ultimately approved may be appropriate to halt the progression of disease in earlier-stage NASH patients or used in combination with other agents. Considering the correlation of liver failure outcomes with fibrosis stage, we believe the NASH patients with moderate to advanced fibrosis (F2 to F4) will require a more potent and fast-acting agent to prevent the progression to end-stage liver disease.

Drug Candidates Pursuing an Anti-Inflammatory and/or Anti-Fibrotic Approach to Treating NASH

Candidates targeting various mechanisms with possible anti-inflammatory and anti-fibrotic effects are also in clinical testing for NASH. These classes of compounds have shown mixed results in meaningfully improving the fibrosis score of patients. Where fibrosis improvements have been shown, results have either been transient or not accompanied by significant improvements in other histological measures of the disease. These classes of compounds have also shown limited ability to improve NASH.

We believe the minimal efficacy on fibrosis improvement and lack of activity on resolving NASH that has been observed to date with anti-inflammatory and anti-fibrotic agents may reflect the difficulty in treating the disease without removing the underlying insult of lipotoxicity, or the challenge of impinging on the complex process of hepatocellular death and fibrosis from collagen deposition by intervention through a single pathway.

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Drug Candidates with Multiple Mechanisms

To date, drug candidates with multiple mechanisms of activity have shown the most promising effect on NASH. The FXR agonist, obeticholic acid (“OCA”), demonstrated improvements in the NAS and fibrosis, but not resolution of NASH as defined by the Phase 2 and Phase 3 study protocols. FXR agonists are known to regulate hundreds of genes, and one of the factors upregulated is FGF19. We believe FGF19 is the primary mediator of the activity of FXR agonists in NASH. FXR agonists are limited, however, in the magnitude of FGF19 levels they can achieve by the boundaries of normal physiology. We believe this limitation to sub-pharmacological levels of FGF19 will limit the ability of FXR agonists to produce a meaningful effect in NASH, in the same way that insulin secretagogues have mild activity compared to insulin itself in treating diabetes. Additionally, treatment with OCA and other FXR agonists has been associated with pruritus, or whole body itching, which can cause patients to discontinue treatment. There are multiple FXR agonists in preclinical or clinical development seeking to improve on the properties of OCA; however, we believe their activity on NASH will be limited by their inability to sufficiently elevate FGF19 levels over a sustained period of time and/or their utility will be reduced by side effects. A New Drug Application (“NDA”) for OCA was filed with the FDA in September 2019 and the completion of their review is expected in June 2020.

To our knowledge, aldafermin is the only program in clinical development for NASH directly activating the native FGF19 pathway to drive both a regression of fibrosis and resolution of NASH.

Aldafermin: A rapid and potent approach to treating NASH

Aldafermin, an engineered version of human hormone FGF19 that is administered through a once-daily subcutaneous injection, has demonstrated the ability to rapidly improve NASH and reverse liver fibrosis in clinical and preclinical studies. We believe the combination of breadth, magnitude and speed of results demonstrated by aldafermin in these studies suggests an agent that, if ultimately approved, could provide a needed medicine for physicians to treat NASH patients with moderate to advanced fibrosis. We have tested aldafermin in over 475 subjects, including more than 200 NASH patients. We initiated the ALPINE 2/3 clinical trial in 2019 and plan to initiate the ALPINE 4 clinical trial in the first half of 2020. We obtained Fast Track designation for aldafermin for the treatment of NASH and primary biliary cholangitis (“PBC”) in adults. See “Government Regulation and Product Approval—Accelerated Approval Requirements.” Aldafermin is wholly-owned by us and it is not subject to our collaboration with Merck.

In a study, gastric bypass surgery led to a resolution of NASH in approximately 80% of patients studied. We initially identified FGF19 using our rodent gastric bypass surgery model that was designed to discover hormones that may drive the beneficial metabolic effects observed following this type of surgery. We also demonstrated that serum levels of FGF19 are significantly increased in humans after gastric bypass surgery. FGF19 acts as an endocrine hormone to regulate systemic carbohydrate and energy homeostasis, similar to insulin, and also inhibit the production of bile acids in the liver. Systemic FGF19 levels are decreased in patients with NASH, type 2 diabetes or metabolic syndrome, and are normalized after gastric bypass surgery in diabetic human subjects.

The spectrum of activities ascribed to FGF19 appears to be mediated primarily through two different receptor complexes: fibroblast growth factor receptor 4-beta-klotho (“FGFR4/KLB”) and FGFR1c/KLB. FGFR4/KLB receptor complexes are found primarily in the liver and FGFR1c/KLB receptor complexes are found primarily in adipose tissue and the central nervous system. When activated, FGFR4/KLB inhibits the expression of the cholesterol 7alpha-hydroxylase 1 (“CYP7A1”) gene, which modulates bile acid production through the classical pathway in the liver. There is increasing evidence supporting the role of bile acids as a pathophysiological driver of NASH. Individuals with NASH are reported to have elevated hepatic and circulating concentrations of bile acids, as well as increased concentrations of fecal and urine bile acids. As NASH patients progress to F2 and F3 fibrosis stages, serum levels of bile acids double as compared to healthy volunteers. Furthermore, serum levels of FGF19 are increasingly depressed as fibrosis levels increase in NASH patients as compared to healthy volunteers. A combination of activities from FGFR4/KLB and FGFR1c/KLB are believed to promote multiple beneficial metabolic effects in the liver and systemically, including improved insulin sensitization, a reduction in de novo lipogenesis and an increase in fatty acid oxidation.

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We designed aldafermin as an analog of human FGF19 to improve the drug-like properties of the protein, remove a tumorigenic signal observed in rodents and retain the beneficial properties of triggering the FGFR4/KLB and FGFR1c/KLB pathways. We believe this tandem receptor-complex activation enables an improvement in the metabolic function of the liver and reduction in bile acid synthesis, which, in turn, enables aldafermin to have a more rapid and direct impact on fibrosis as compared to other agents that only address the metabolic dysfunction of NASH, as illustrated in the figure below.

Our Clinical Experience with Aldafermin

Our clinical development program for aldafermin was designed to first assess safety and tolerability of the agent and then test for activity in humans in a variety of disease settings we believed may benefit from the signaling activity of the FGF19 pathway. Each of these trials has provided insights into the agent’s activity in humans and informed our development plans for NASH. A consistent profile of activity and tolerability has emerged for the compound across these studies.

After a Phase 1 clinical trial to assess safety and tolerability, we conducted a Phase 2 clinical trial in type 2 diabetes patients to assess the impact of aldafermin on insulin resistance and blood glucose levels. Although they were not histologically confirmed for NASH, the characteristics of many of the patients enrolled in this study are consistent with a population of presumptive NASH patients as they demonstrated many of the hallmarks of NASH, including elevated levels of the liver transaminases known as alanine transaminase (“ALT”) and aspartate transaminase (“AST”). This trial validated the metabolic pathways of the drug by demonstrating improvements in many metabolic parameters across the patient population, but did not result in significant blood glucose lowering after 28 days of treatment. A consistent improvement in ALT and AST was observed for patients on treatment with aldafermin, which suggested the agent was having a beneficial effect on liver health and, therefore, could have application in the treatment of NASH.

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We have also explored the utility of aldafermin-mediated bile acid synthesis inhibition in two cholestatic diseases, PBC and primary sclerosing cholangitis (“PSC”), but have decided not to pursue further development of aldafermin in these diseases at this time. Although we do not currently intend to pursue aldafermin for the treatment of PBC or PSC, we previously obtained orphan drug designations for aldafermin for the treatment of PBC in adults in the United States and PBC and PSC in adults in the European Union (“EU”). See “Government Regulation and Product Approval—Orphan Drug Designation.” Both of these conditions are believed to have a strong bile acid component underlying the disease. Aldafermin achieved a significant reduction in alkaline phosphatase (“ALP”), an FDA-validated biomarker of disease in PBC, however, we determined the once-daily injectable nature of the product and competitive landscape compared to other development paths for aldafermin was not optimal. Similarly, in PSC, aldafermin treatment resulted in sustained reductions in exploratory biomarkers of fibrosis, PRO-C3 and Enhanced Liver Fibrosis (“ELF”) score, although there was no benefit in the primary endpoint of the trial, ALP. The FDA has not provided guidance on a development path for PSC that does not involve ALP and, therefore, we have determined not to move forward in this indication until a clear path is defined. Notably, PSC patients have a normal LFC level and the indication of fibrosis improvement in this population supports a role for the activity of a bile acid inhibitor, such as aldafermin, as an anti-fibrotic in the liver.

Aldafermin Phase 2 Trial in NASH Patients

Our Phase 2 clinical trial in patients with histologically-confirmed NASH included an initial double-blind placebo-controlled cohort (cohort 1), followed by a series of adaptive, open-label, single-blind cohorts evaluating 12 weeks of treatment (cohorts 2 and 3) and a double-blind, placebo-controlled study with liver biopsies at baseline and following 24 weeks of treatment (Cohort 4). Cohort 1 was designed to measure LFC by magnetic resonance imaging proton density fat fraction (‘MRI-PDFF”) and serum biomarker data at 12 weeks. This portion of the study generated distinct signals of therapeutic benefit and appropriate tolerability characteristics, which subsequently informed the adaptive cohorts 2 and 3. The open-label, single-blind 12 week cohorts (cohorts 2 and 3) were designed to explore additional dose levels of aldafermin, as well as confirm the impact of aldafermin on liver histology, as defined by improvements in fibrosis and NAS. Additionally, the protocol was amended to study statin use for those patients that experienced a low density lipoprotein (“LDL”) cholesterol increase during the first two weeks of aldafermin treatment, as further described below.

Components of the aldafermin Phase 2 Clinical Trial in NASH

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Aldafermin activity has been measured across a variety of imaging and serum biomarker measures, or non-invasive measures, as well as histological measures in order to provide a comprehensive assessment of the drug’s activity on NASH disease pathology. For each of cohorts 1-4, the primary endpoint was the absolute change from baseline to end of treatment in LFC. Responders were defined as patients who achieved a 5% or larger reduction in absolute LFC as measured by MRI-PDFF. Key secondary endpoints included assessments of safety and tolerability, percentage change from baseline (or relative change) in absolute LFC, normalization of LFC to less than 5% and changes from baseline and normalization in ALT and AST. Exploratory endpoints included the evaluation of biomarkers of NASH pathogenesis and fibrosis, as well as assessment of changes in liver histology in a sub-population of patients (3 mg dose group in cohort 2, 1 mg dose group in cohort 3 and all patients in Cohort 4). The table below summarizes the preliminary data generated to date and demonstrates the consistent effect across each of the non-invasive measure of NASH in each of cohorts 1-4 of this Phase 2 clinical trial, followed by a matrix explaining the significance of each of the metrics and biopsy measurements:

Aldafermin Significantly Impacts Key Parameters Consistent with Improvements in NASH

A description of the key non-invasive and histological measurements collected in this trial is included in the table below:

Cohorts 2 and 3, summarized in more detail below, included patients who received liver biopsies after 12 weeks of treatment with either 1 mg or 3 mg of daily aldafermin to enable an assessment of any improvements in histological measures of NASH, such as fibrosis. Cohort 4 included patients who received liver biopsies after 24 weeks of treatment with either 1 mg aldafermin or placebo. Preliminary data from the 3 mg dose group of cohort 2, the 1 mg dose group of cohort 3 and Cohort 4 demonstrated that aldafermin has an impact on fibrosis improvement without worsening of NASH, with 42%, 25% and 38%, respectively, registering at least a one-stage improvement in fibrosis in as early as 12 and 24 weeks. In addition, in Cohort 4, 24% of patients in the aldafermin treatment arm achieved the endpoint of resolution of NASH with no worsening of liver fibrosis as compared to 9%

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of placebo patients. Of note, 22% of patients in the aldafermin treatment arm versus 0% in the placebo arm achieved the composite endpoint of both fibrosis improvement and resolution of NASH, which was statistically significant. We believe these histology results offer compelling support for aldafermin’s potential as a rapidly-acting agent for NASH patients with moderate to advanced fibrosis.

Aldafermin Phase 2 Clinical Trial in NASH Patients: Cohort 1

In this double-blind cohort of the Phase 2 clinical trial, 82 subjects with biopsy-confirmed NASH were randomized to aldafermin clinical doses of 3 mg or 6 mg (n = 55) or placebo (n = 27), administered as a daily subcutaneous injection for 12 weeks. Histologic inclusion criteria included biopsy-proven NASH with a NAS 4 (at least 1 point in each component), F1 to F3 fibrosis and 8% LFC.

As published in The Lancet in 2018, significant reductions in absolute and relative LFC were seen with both doses, with 79% of the 6 mg-treated subjects and 74% of the 3 mg-treated subjects meeting the primary endpoint of 5% reduction in absolute LFC as measured by MRI-PDFF. There was no significant difference in absolute LFC reduction between the 3 mg and 6 mg doses. Normalization of absolute LFC (defined as < 5% measured by MRI-PDFF) was observed in 26% and 39% of subjects treated with 3 mg and 6 mg, respectively, at week 12. Over 85% of aldafermin treated subjects achieved a decrease in relative LFC of > 30%, which has been correlated to improvements in histology in several studies. These results were maintained across key baseline characteristics of gender (male vs. female), ethnicity (Hispanic vs. Non-Hispanic), diabetic status, ALT levels (< vs. > 40 U/L), body mass index (“BMI”) (< vs. > 30), fibrosis stage (F1 vs. F2/F3) and statin use, with no significant difference in any sub-category.

Greater reductions from baseline in mean absolute ALT levels were observed for both aldafermin 3 mg (-35 international units (“IU”), p<0.0001) and 6 mg (-32 IU, p<0.0001) clinical doses at week 12 as compared with placebo. The p-value is a measure that states the probability that a comparable or better result would be produced purely by chance. A p-value of less than 0.05 means that if the drug was only as effective as the placebo, there would be less than a 5% chance that a comparable or better result would be produced purely by chance. Differences with a p-value of less than 0.05 are generally considered statistically significant, indicating a high degree of confidence that the result is due to therapy with the drug and not due to chance. This decrease in ALT levels achieved statistical significance as early as week one, with a sustained reduction throughout the entire 12-week study treatment period. The mean relative percentage decreases in ALT levels from baseline to week 12 were also significant in both doses, ranging from 43% to 44% (p<0.001). ALT levels achieved normalization (defined as <19 IU in females and < 30 IU in males) in 24% of aldafermin-treated patients by week 2 and 36% of treated subjects by week 12. Similarly, treatment with aldafermin resulted in significant mean absolute reductions in AST levels from baseline to week 12 as compared with placebo, with the majority of subjects decreasing below 40 IU as early as two weeks after starting treatment. We believe the potent and sustained inhibitory effect that aldafermin has on the classical bile acid synthesis pathway is important to achieving this rapid therapeutic effect. FXR agonists can only elevate FGF19 to the upper end of normal physiological levels, which we believe is insufficient to achieve the complete and sustained inhibition of the classical bile acid pathway.

PRO-C3 levels, as well as levels of propeptide of type III procollagen (“PIIINP”) and TIMP metallopeptidase inhibitor 1 (“TIMP-1”), which are components of the ELF score, were reduced in the treated subjects, supporting a potential anti-fibrotic effect. Notably, more than 74% of aldafermin-treated subjects achieved a reduction in PRO-C3 levels of 15% at 12 weeks, as compared to 24% of placebo-treated subjects. The overall ELF score for the 3 mg- and 6 mg-treated subjects was reduced by an average of 0.3 and 0.2, respectively, compared to no change for the placebo group.

Triglyceride level decreases were consistent with FGFR1c/KLB activity triggered by aldafermin, while significant LDL cholesterol increases reflect potent FGFR4/KLB-mediated CYP7A1 inhibition. There were highly significant correlations between decreases in LFC and reductions in the serum levels of ALT, AST and C4.

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Aldafermin Phase 2 Clinical Trial in NASH Patients: Cohort 2 and 3 Imaging and Biomarker Results

Based on the impact seen with aldafermin in NASH patients across the measured non-invasive parameters assessed in cohort 1, an adaptive, open-label, single-blind cohort of three dosing groups known as cohort 2 was added to evaluate: 1) lower doses of aldafermin (0.3 and 1 mg); 2) histologic response at 12 weeks in a 3 mg dose group; and 3) the ability of concomitant statin use to mitigate drug-induced LDL cholesterol elevations. Cohort 3 was added to evaluate histologic response at 12 weeks in a 1 mg dose group. Additional MRI-PDFF images were collected at week 6 to further assess the potential for LFC responses at an earlier point in time and to evaluate the persistence of response at week 18 (six weeks after the end of treatment). The demographics and baseline patient characteristics of cohorts 2 and 3 were similar to those in cohort 1. Preliminary data for the 3 mg dose in Cohort 2 and 1 mg dose in Cohort 3 include only those patients who completed treatment with paired biopsies at baseline and week 12. Preliminary data from cohort 2 demonstrates that a significant amount of the decrease in LFC occurs by week 6 and further consolidates towards normalization at week 12 in the 1 mg and 3 mg dosing groups. The 1 mg and 3 mg dose groups in cohort 2, and the 1 mg dose group in cohort 3, showed similar reductions of LFC and ALT levels, and were consistent with the week 12 changes observed with the 3 mg dose in cohort 1. Preliminary data from the 1 mg and 3 mg dose groups in cohort 2 and the 1 mg dose group in cohort 3 also had statistically significant reductions from baseline in PRO-C3 levels (-4.7, -11.1 and -4.5 ng/ml, respectively, p<0.05) and PIIINP (-2.0, -3.3 and -3.2 ng/ml, respectively, p<0.001) and TIMP-1 (-33.1, -42.7 and -38.4 ng/ml, respectively, p<0.05) components of the ELF score at week 12. Based on the reductions in LFC, levels of ALT and the fibrosis markers, the 0.3 mg dose group in cohort 2 demonstrated a reduced treatment response overall as compared to the 1 mg and 3 mg dose groups of cohort 2 and the 1 mg dose group of cohort 3. Preliminary data indicates that, six weeks after the end of aldafermin treatment, the relative levels of LFC and ALT levels remained suppressed, with reductions approximately 20% to 39% and 18% to 44% below baseline levels across doses evaluated in cohorts 2 and 3, respectively. Similarly, reductions in PRO-C3 levels and ELF score components in aldafermin-treated patients were sustained six weeks after the end of aldafermin treatment.

Aldafermin Phase 2 Clinical Trial in NASH Patients: Cohort 2 (3 mg) and Cohort 3 Preliminary Histology Results

Liver histology was evaluated at 12 weeks in the 3 mg dosing group of cohort 2 and in the 1 mg dosing group of cohort 3. Each of these cohorts enrolled primarily NASH patients with moderate to advanced fibrosis. Eighty-four percent of the 19 patients in the 3 mg dosing arm of cohort 2 had been diagnosed with F2 or worse fibrosis at baseline. Eighty-three percent of the 24 patients in cohort 3 had F2 or worse fibrosis at baseline. Liver biopsies at baseline and 12 weeks were blinded by both patient and treatment sequence. They were subsequently read by a central independent liver hepatopathologist using the NASH CRN criteria. Preliminary data from cohorts 2 and 3 showed improvements in fibrosis scores in both groups, with 42% of patients in the 3 mg dosing group of cohort 2 and 25% of the patients in cohort 3 improving by at least one stage, and a mean change of -0.5 and -0.1 fibrosis stage, respectively. All of the patients experiencing improvements in fibrosis scores were F2 or worse at baseline. Between the two cohorts, a total of four patients achieved a two stage improvement in fibrosis during the 12 weeks of treatment (three in the 3 mg dosing group of cohort 2 and one in cohort 3). There were two subjects in the 3 mg dosing group of cohort 2 who worsened by one stage in fibrosis (Stage 1b to 2 and Stage 3 to 4), with no substantive worsening of their NAS and reductions in LFC and ALT. Four patients in cohort 3 worsened by one stage in fibrosis. While each cohort involved a relatively small number of patients, these preliminary results demonstrated, for the first time, the possibility of improving fibrosis in F2 to F4 NASH subjects in as early as 12 weeks of treatment with a therapeutic agent. In addition, the patients with fibrosis improvements also had a mean reduction in NAS of 3.5 and 3.2 in the 3 mg dosing group of cohort 2 and cohort 3, respectively.

At 12 weeks, aldafermin treatment resulted in resolution of NASH, defined as having a lobular inflammation score of 0 or 1 and a hepatocellular ballooning score of 0, with no worsening of fibrosis, in two patients in the 3 mg dosing arm of cohort 2 and three patients in cohort 3. Furthermore, 58% and 50% of patients achieved NAS improvements of two points or greater (with at least one-point reduction in lobular inflammation or hepatocellular ballooning) in the 3 mg dosing arm of cohort 2 and the 1 mg dosing arm of cohort 3, respectively. We anticipate that an increased proportion of patients could achieve resolution of NASH over a longer treatment duration beyond 12 weeks. In conjunction with the fibrosis improvement described above, these data support the notion that aldafermin, as a single agent, has the potential to improve NASH and fibrosis to a larger degree and in a shorter period of time than other investigative agents have demonstrated to date.

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Aldafermin Phase 2 Clinical Trial in NASH Patients: Cohort 4 Results

In a double-blind, placebo-controlled cohort of the Phase 2 clinical trial (Cohort 4), 78 biopsy-confirmed NASH patients with F2 and F3 liver fibrosis were enrolled and treated with placebo (n=25) or aldafermin (n=53) for a duration of 24 weeks. The primary endpoint was the treatment effect on absolute changes in LFC as measured by MRI-PDFF compared to placebo. Secondary and exploratory endpoints include relative changes in LFC, biomarkers of liver function and effect on liver histology.

Preliminary topline results indicate that aldafermin achieved its primary endpoint, demonstrating a statistically significant absolute least square (LS) mean reduction in LFC of 8% and a statistically significant LS mean relative reduction in LFC of 39% in the treatment arm, as compared to reductions of 3% and 13%, respectively, in the placebo arm. A statistically significant proportion of patients (68%) treated with aldafermin achieved a ≥5% absolute reduction in LFC compared to placebo (24%). Similarly, a statistically significant proportion of patients treated with aldafermin (66%) achieved a ≥30% relative reduction in LFC compared to placebo (29%). Statistically significant improvements were also observed in the aldafermin treatment arm versus placebo related to biomarkers of liver inflammation and injury (ALT and AST) and PRO-C3. The reductions in key biomarkers to near normal levels were observed as early as week 2 and sustained through week 24, demonstrating that the significant reductions achieved previously at week 12 were durable throughout the treatment period.

Patient liver biopsies were performed at baseline screening and at the end of 24 weeks of treatment and were read using the NASH CRN criteria by one central, independent hepatopathologist who was blinded to patient and treatment assignment. As per protocol, liver biopsy data were analyzed using the “liver histologic population," which was defined as the subset of enrolled patients who had valid, non-missing biopsy data at both baseline and week 24 (n=72). Six patients (three in the aldafermin arm and three in the placebo arm) withdrew prior to the week 24 biopsy for reasons not due to adverse events related to treatment.

The histology results, summarized in the table below, revealed that treatment with aldafermin led to clinically meaningful improvements at 24 weeks versus placebo in fibrosis and in resolution of NASH. Treatment with aldafermin 1 mg resulted in a fibrosis improvement of ≥1 stage with no worsening of NASH in 38% of patients compared to 18% in the placebo arm. 24% of patients in the aldafermin treatment arm achieved the endpoint of resolution of NASH with no worsening of liver fibrosis as compared to 9% of placebo patients. Of note, 22% of patients in the aldafermin treatment arm versus 0% in the placebo arm achieved the composite endpoint of both fibrosis improvement and resolution of NASH, which was statistically significant. Draft guidance by the FDA indicates that each of these is an acceptable endpoint for potential accelerated approval in a future pivotal trial.

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^* p < 0.05; ^*** p < 0.0001

Aldafermin Increases in Serum Levels of LDL Cholesterol in NASH Patients

A byproduct of aldafermin’s potent inhibition of the classical bile acid synthesis pathway is the elevation of LDL cholesterol in the serum. Cholesterol serves as the precursor molecule in a multi-step enzymatic pathway that generates various forms of bile acids. CYP7A1 is the rate-limiting enzyme in this pathway and, therefore, serves as a regulatory control point for the primary pathway for bile acid synthesis, also known as the classical pathway. Notably, there is an alternative pathway for bile acid synthesis that is not regulated by CYP7A1 activity and produces a subset of the bile acid pool that is believed to produce less caustic varieties of bile. We believe a primary role of FGF19 and aldafermin is to inhibit bile acid synthesis through the classical pathway by activating a signaling cascade that shuts down CYP7A1 activity. As a direct effect of this on-target activity, cellular cholesterol is no longer metabolized to bile acids and is instead shunted into the blood stream, causing an elevation of serum LDL cholesterol. We did not observe the same magnitude of LDL cholesterol elevations with aldafermin in trials we conducted in cholestatic disease patients, such as PBC and PSC.

We believe elevated serum LDL cholesterol is a confirmatory indication of aldafermin and FGF19 activity in NASH patients, which correlates with its beneficial effects on liver health. The impact of these drug-induced changes in cholesterol are unknown. Sustained LDL cholesterol elevations in untreated patients, however, are associated with cardiovascular disease through atherosclerotic plaque development. Through both preclinical studies in cynomologous monkeys and in cohorts 2, 3 and 4 of our Phase 2 clinical trial, we have demonstrated the ability of concomitant statin use to mitigate the serum LDL cholesterol elevations driven by aldafermin activity. The figure below illustrates the mean LDL cholesterol levels over time for patients in cohort 2. Per protocol, the patients’ LDL cholesterol levels were measured at baseline and then re-measured after two weeks of aldafermin treatment. If an elevation of LDL cholesterol of at least 10 mg/dl was recorded, patients were directed to take 20 mg of rosuvastatin daily for the remainder of the trial. Nearly all of the treated patients required statin use in cohorts 2, 3 and 4. Where required, patients were elevated to 40 mg rosuvastatin to adequately control their LDL cholesterol while on treatment. Notably, approximately 80% of cohort 2, 87% of cohort 3 and 68% of Cohort 4 at enrollment were not previously receiving statin treatment and, on average, the cohorts had baseline LDL cholesterol levels at or above recommended levels recommended by the American Association of Clinical Endocrinologists and the

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European Society of Cardiology/European Atherosclerotic Society, suggesting a statin would already be prescribed as standard of care. For each dose level in cohorts 2, 3 and 4, concomitant statin use mitigated the drug-induced LDL cholesterol rise indicative of CYP7A1 suppression and, in many cases, brought patients below their baseline levels. Additionally, we have investigated the composition of the drug-induced LDL cholesterol particles. This analysis indicated that the aldafermin-induced serum LDL cholesterol manifests as large and potentially less atherogenic lipoproteins, as opposed to the small dense lipoparticles that are thought to be more atherogenic. We believe concomitant statin use, along with aldafermin’s triglyceride lowering and high density lipoprotein (“HDL”) cholesterol elevating properties, will provide an overall neutral to positive impact on patients’ cardiovascular health.

Aldafermin Phase 2 Clinical Trial in NASH: Safety and Tolerability Profile

The most common adverse events in the cohorts 1-3 included increased stool frequency, loose stools, nausea and injection site erythema, with the majority being Grade 1 (mild). A consistent tolerability observation across cohorts 1-3 has been dose-dependent gastrointestinal (“GI”) adverse events that manifest in both the upper and lower GI tract. We conducted a Phase 1b trial in patients with chronic constipation and determined that aldafermin has a pro-kinetic effect on the GI tract, which means the increase in stool frequency is caused by greater GI motility and is not related to elevated fecal fat or elevated bile acid content. These results have helped inform mitigation protocols to help patients lessen these GI side effects. This was evidenced in Cohort 4, where the most common adverse events in either treatment arm (diarrhea, headache, abdominal distension, nausea, fatigue, diabetes mellitus and peripheral edema) were primarily mild to moderate and occurred with comparable frequency in both the aldafermin and placebo arms.

A single serious adverse event of acute pancreatitis was reported in cohort 1 and assessed as possibly related to study drug. A total of seven serious adverse events (pleurisy, vertigo, headache, hypertension, cardiac arrest, chest pain and pneumonia), none of which were considered related to study drug, were reported in five subjects in cohort 2. One serious adverse event (kidney mass) was reported in cohort 3 and was not considered related to study drug. In Cohort 4, none of the reported serious adverse events (two in the aldafermin arm and three in the placebo arm) were deemed related to treatment by the clinical site investigator. Preliminary data indicates that there were no tolerability signals identified in this population.

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Aldafermin Phase 2b Clinical Trial in NASH – ALPINE 2/3

The ALPINE 2/3 clinical trial is evaluating three dose levels of aldafermin in NASH patients with F2 and F3 liver fibrosis. The ALPINE 2/3 clinical trial is a multi-center, double-blind, placebo-controlled study administering 0.3 mg, 1 mg or 3 mg of aldafermin or placebo, once-daily, subcutaneously for 24 weeks. We expect to enroll a total of approximately 150 patients across 30 sites in the United States. Patients receive liver biopsies to qualify for the trial and at the end of the 24-week treatment. The primary objective of this 24-week trial is to measure the treatment effect of various dose levels of aldafermin on liver histology according to preliminary FDA recommended Phase 3 endpoints of resolution of NASH with no worsening of fibrosis, and fibrosis improvement with no worsening of NASH, as defined above. The enrollment criteria, study design and study conduct are consistent with the FDA draft industry guidance regarding the development of drugs for NASH that was published in December 2018. We plan to report topline results from our ALPINE 2/3 clinical trial in the first half of 2021.

Aldafermin Phase 2b Clinical Trial in NASH – ALPINE 4

The ALPINE 4 clinical trial is designed to evaluate the treatment effect of aldafermin in a population of NASH patients with well-compensated cirrhosis. The objective of this trial is to evaluate whether the fibrosis regression we have observed in patients with F2 and F3 fibrosis can also be achieved in compensated cirrhotic NASH patients, for which liver mortality rates are high and liver transplant is the only option. We plan to initiate the ALPINE 4 clinical trial in the first half of 2020 and expect to enroll approximately 150 patients across 70 sites in the United States, Europe, Hong Kong and Australia. The population of compensated cirrhotic NASH patients in the United States and EU is expected to reach 4.9 million in 2030.

Aldafermin Future Clinical Development Plans

Our development strategy is to leverage the results of our completed 24-week double-blind, placebo-controlled Cohort 4 of our Phase 2 clinical trial to inform early Phase 3 planning and design. We expect that ALPINE 2/3 clinical trial results in the first half of 2021 will provide further information to support a pivotal, single dose level, Phase 3 program to enable a biologics license application (“BLA”) filing.

We believe the totality of the data produced by these Phase 2 clinical trials will provide insights required to appropriately design Phase 3 clinical trials required for drug approval and optimally position the therapeutic in the market.

Future Commercial Positioning of Aldafermin as a Therapeutic in the NASH Market

We believe the clinical data produced with aldafermin in NASH patients to date suggests a potential drug profile that is unique in the current landscape of NASH therapeutics in development. Our preliminary data suggests aldafermin is capable of improving fibrosis in patients as early as 12 weeks of treatment, while also exerting a positive impact on the other parameters of NASH, including steatosis, lobular inflammation and hepatocellular ballooning.

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If our initial signals of activity continue in later-stage clinical development, we believe that aldafermin, as a once-daily injectable medication, will be well suited to treat NASH patients with F2, F3 and, potentially, early F4 fibrosis. Together, these target patient populations were believed to encompass approximately 6.7 million patients in the United States in 2015, and are expected to grow to 14.1 million by 2030. As diagrammed below, our goal is to position aldafermin, if approved, to physicians as a potent, rapidly-acting medication that can repair NASH-damaged livers to avoid progression to end-stage liver disease and liver transplantation. This advanced disease population is typically under the care of hepatologists, as contrasted with the typically asymptomatic early-stage NASH population, the majority of whom have not yet been diagnosed. We expect other agents in development, many of which are delivered orally, will serve a complementary role in the treatment of earlier-stage disease or may ultimately require combination treatment with other mechanisms to have an improved effect over its single-agent activity.

Commercial Product Development and Life-cycle Management

In clinical trials to date, aldafermin has been delivered using a pre-filled single-use glass syringe. We are seeking to develop a formulation of the agent to enable testing a more commercially-attractive multi-use pen injector, similar to the devices currently delivering injectable type 2 diabetes treatments. We expect that the multi-dose pen format could be available for product launch, if aldafermin is approved. Our objective is to present a multi-dose pen with needle gauge 29 or smaller, which will be familiar to the large number of NASH patients with type 2 diabetes who also require injections of insulin or GLP-1 products.

Longer term, we are pursuing a life-cycle management strategy to develop a longer half-life version of aldafermin that will require less frequent dosing. At present, we have programs investigating delayed-release technologies and protein modification to support this strategy. These efforts are currently at the research stage.

Early Aldafermin Clinical Development and Preclinical Development

Our development program for aldafermin in NASH has been informed by several precursor and parallel clinical studies, as well as preclinical findings in a variety of NASH animal models. In all clinical trials, aldafermin had an acceptable tolerability profile. A summary of the studies conducted with aldafermin are listed below:

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Aldafermin Phase 1 Clinical Trial

We conducted a Phase 1 randomized, double-blind, placebo-controlled, single ascending dose (“SAD’) and multiple ascending dose (“MAD”), study to evaluate the safety, tolerability and pharmacokinetics of aldafermin in healthy adult participants.

In this blinded, placebo-controlled, Phase 1 clinical trial, 119 overweight or obese but otherwise healthy adults were randomized to receive aldafermin or placebo as a daily subcutaneous injection in escalating doses. In both the SAD and MAD trials, aldafermin was well tolerated and exhibited approximately linear pharmacokinetics with no immunogenicity. There were no serious adverse events. The most frequently observed adverse events were diarrhea, vomiting, nausea and injection site reactions. Also, there were no laboratory changes in aldafermin‑treated subjects that would indicate an abnormality in any organ system, as determined by the Safety Data Monitoring Committee for the study, nor were anti-drug antibodies observed.

Aldafermin Phase 2a Clinical Trial (Type 2 Diabetes)

We conducted a 28-day, randomized, double-blind, multi-center trial to evaluate aldafermin in subjects with type 2 diabetes that were inadequately controlled by metformin. As a consequence of the contribution of obesity and insulin resistance to both conditions, there is a substantial overlap in the prevalence of type 2 diabetes and NASH patients. The type 2 diabetes trial was also designed to measure several of the metabolic parameters that are believed to play a role in the disease progression of NAFLD and NASH, including indicators of insulin sensitivity, triglyceride levels and enzyme levels of liver transaminases, such as ALT and AST. Three doses of aldafermin were tested to assess changes from baseline in biochemical markers associated with type 2 diabetes, such as fasting plasma glucose and stimulated glucose/insulin.

The primary endpoint measured by this trial was the change in fasting plasma glucose after 28 days of treatment. Although this endpoint was not different in the aldafermin subjects as compared to the control arm, there were trends towards improvement in insulin sensitivity, as measured by Homeostatic Model Assessment of Insulin Resistance (“HOMA-IR”), and a statistically significant weight loss observed in the 10 mg group, which lost an average of 2.6 kilograms over the 28 days of treatment (p<0.05). Moreover, there was a statistically significant reduction in triglyceride concentrations with the 2 mg (p<0.001) and 10 mg (p<0.001) doses, and dose-dependent reductions in ALT and AST levels, consistent with improvements in liver health. However, as this trial did not meet its primary endpoint, we decided not to pursue development of aldafermin in type 2 diabetes. The trial did establish that aldafermin demonstrated improvements in both metabolic and liver health in a patient population that closely resembles NASH patients.

Overall, aldafermin was well tolerated at each dose. There were no serious adverse events reported, though nine subjects withdrew due to adverse events. The most frequently observed adverse events were GI side effects, which were primarily loose stools/diarrhea, nausea and injection site reactions. One subject developed antibodies against aldafermin that appear to cross-react with FGF19. This subject did not demonstrate any biochemical or clinical safety concerns while in the study, and we have not identified any safety concerns while monitoring the subject following the study.

Aldafermin Phase 2 Clinical Trials in Cholestatic Diseases: PBC and PSC

We conducted an exploratory Phase 2a clinical trial in PBC patients testing daily subcutaneous injections of aldafermin for 28 days, and followed it with a 52-week extension study to assess longer-term safety and tolerability of daily aldafermin. While both doses tested in the 28-day study met the primary endpoint of a statistically significant reduction in ALP levels (a validated surrogate endpoint by the FDA), we determined that, with two oral alternatives on the market with similar efficacy, the indication was not well-suited for aldafermin. Aldafermin was well tolerated at each dose and showed no evidence of drug-induced pruritus. The majority of adverse events were mild or moderate. A statistically significant elevation of LDL cholesterol concentration was not observed in this patient population.

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We also conducted an exploratory Phase 2 clinical trial in PSC patients with aldafermin. Unlike PBC, there are currently no approved medications for PSC and, similarly, there are no validated clinical endpoints accepted by the FDA for approval. Aldafermin did not achieve the primary endpoint in the study, which was a statistically significant reduction in ALP levels at the end of treatment. While ALP concentration has also been viewed as a possible surrogate endpoint in PSC, the correlation with disease progression is not as clear as in PBC, and the FDA is developing guidance to drug developers as to an acceptable path to approval. We do not intend to further develop aldafermin in PSC until a development path is more specifically defined in the indication. However, the results of the study also provide utility in understanding the mechanism of aldafermin across the diseases tested. Notably, PRO-C3 and ELF levels, which are markers of fibrosis, improved significantly in the treatment group, suggesting that aldafermin may also have a direct impact on fibrosis that is independent from its metabolic activity, as the PSC patient population does not have elevated LFC. Furthermore, a statistically significant elevation of LDL cholesterol concentration was not observed in this patient population.

Aldafermin Phase 1 Clinical Trial in GI Motility

A consistent finding in our Phase 2 clinical trials has been an association of aldafermin to dose-related abdominal cramping and increased stool frequency. To further investigate and characterize these GI effects, we conducted a randomized, placebo-controlled, 14-day study in patients with functional constipation that tested two doses of aldafermin, 1 mg once-daily and 6 mg once-daily. The objective of the study was to evaluate the effects of aldafermin on colonic transit, stool frequency and consistency, hepatic bile acid synthesis, fecal fat and bile acid levels. Thirty-one patients with functional constipation were randomized on a 1:1:1 basis to placebo (n=10), 1 mg aldafermin (n=10) and 6 mg aldafermin (n=11) arm. Overall, aldafermin altered bowel function in this group of chronic constipation subjects through increased frequency of bowel movements, looser stool form and increased ease of passage, and significantly accelerated gastric and colonic transit. There were no significant differences in fecal fat or weight between the placebo and treatment groups, suggesting that GI effects of aldafermin are not secondary to an increase in fecal fat. We believe the results of this study show that GI side effects are primarily due to increased colonic motility, rather than increased small bowel or colonic secretion, the latter of which is more characteristic of diarrhea than loose stools. We have applied this mechanistic understanding to our clinical trial by suggesting that subjects time their dosing around meals and moderate the size of a meal in proximity to dose. While the GI side effects of aldafermin are consistent through the clinical studies conducted to date, we have observed that those patients on 3 mg and lower doses that do experience GI side effects generally report mild to moderate effects that resolve on treatment and do not lead to discontinuation of the drug.

Aldafermin Engineered to Create a Non-tumorigenic Form of FGF19

Human FGF19 is only about 50% identical to its mouse ortholog, known as FGF15. In vivo studies have shown that transgenic mice expressing the human FGF19 hormone at greater levels than levels expressed in healthy humans develop hepatocellular carcinoma (“HCC”). Aldafermin is a variant of FGF19, engineered to remove the tumorigenic properties of human FGF19 in mice while retaining its beneficial effects. Prior to designating aldafermin for development, we carried out an extensive in vivo analysis of the structure-function relationship to define the domains in FGF19 responsible for its various activities. Our goal was to identify a variant of human FGF19 that was non-tumorigenic in mice but that retained maximal activity against both the FGFR1c/KLB and FGFR4/KLB receptor complexes so that full metabolic and bile acid effects would be maintained. We designed and evaluated over 150 FGF19 variants to identify compounds with the desired profile. Aldafermin is approximately 95% identical to the naturally-occurring human FGF19, with three amino acid substitutions and a five-amino acid deletion from the amino terminus.

Aldafermin retains the metabolic activity of FGF19 through the FGFR1c/KLB receptor complex and the bile acid activity of FGF19 through the FGFR4/KLB receptor complex. Importantly, aldafermin is a biased ligand of FGFR4, meaning that it selectively activates signaling through the FGFR4/KLB receptor complex in a manner that retains beneficial activity on bile acid production but does not cause HCC in mice, as shown in three different models of oncogenic potential. Furthermore, co-administration of aldafermin and FGF19 via gene delivery in a db/db mouse model eliminated the expected FGF19-driven HCC, suggesting that aldafermin blocked the ability of FGF19 to occupy the relevant receptor and signal in such a way as to cause HCC. We have also explored the biological mechanism that drives the FGF19 oncogenic signal in mice and have determined that the interleukin-6 (“IL‑6”)/STAT3 axis is essential for the activity. The elements of the IL-6/STAT3 axis that drive the FGF19 oncogenic signal in mice are not activated with aldafermin.

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NGM313: An Insulin Sensitizer for the Treatment of Type 2 Diabetes and NASH

NGM313, also known as MK-3655, is a proprietary, agonistic antibody selectively activating FGFR1c/KLB that we believe has the potential to be a once-monthly injectable insulin sensitizer for the treatment of NASH and type 2 diabetes. In November 2018, Merck exercised its option for a license to further research, develop and commercialize NGM313 and other FGFR1c/KLB agonists pursuant to our Collaboration Agreement. In Phase 1 clinical testing, NGM313 has demonstrated favorable tolerability and preliminary data has shown the agent is capable of reducing LFC and improving metabolic biomarkers in obese insulin resistant subjects with NAFLD after a single dose. We believe that NGM313 has the potential to be a treatment for those patients with NASH with early to moderate fibrosis with or without type 2 diabetes.

Type 2 Diabetes

Type 2 diabetes is a common co-morbidity of obesity and NAFLD, and a disease in which the concentration of blood sugar is elevated due to an imbalance of insulin production from insulin secreting beta cells in the pancreas and insulin action at the tissue level, known as insulin resistance, causing damage to small and large blood vessels and, potentially, leading to blindness, amputation and kidney disease along with an increased risk of heart attack, stroke and premature death. In type 2 diabetes, the body’s tissues become resistant to the effects of insulin over time, requiring the pancreas to produce an unsustainably large amount of insulin to compensate. The growing epidemic of obesity is driving an increasing number of diabetes sufferers, as there is a close relationship between increasing BMI and the relative risk of developing type 2 diabetes.

According to the Centers for Disease Control and Prevention in 2015, an estimated 30 million people in the United States had diabetes, with 1.5 million new cases being added every year. Over 80 million people in the United States are pre-diabetic, the majority of whom are expected to become diabetic in the next ten years. The medical costs of treating the diabetic patient population in the United States alone are believed to have been $327 billion in 2017. Given the large patient population and high unmet need, pharmaceutical companies have developed multiple classes of therapies. The most recent classes include GLP-1 analogs, sodium-glucose cotransporter 2 (“SGLT2”) inhibitors and dipeptidyl peptidase IV (“DPP-IV”) inhibitors.

The currently available types of treatments include:

The majority of patients with type 2 diabetes are insulin resistant and have associated metabolic dysregulation caused by lipid abnormalities, fatty liver, hypertension and chronic vascular inflammation. Insulin resistance and beta cell dysfunction are interrelated pathogenic states that lead to persistent hyperglycemia and development of type 2 diabetes. Insulin resistance results from defective insulin signaling in glucose recipient tissues and the persistent elevation of glucose concentrations above the physiological range, leading to increased insulin demand. Beta cell dysfunction, resulting from inadequate glucose sensing to stimulate insulin secretion, is compounded by insulin resistance and also induces hyperglycemia in patients with type 2 diabetes. Preserving beta cell function and insulin signaling in type 2 diabetes patients remain an unmet medical need as persistent hyperglycemia leads to continued progression of diabetes. Even with the multiple classes of diabetes drugs available, only about one-half of patients with diabetes achieve their glycemic goal.

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Insulin Sensitizers for the Treatment of Type 2 Diabetes

Insulin resistant patients that remain inadequately controlled often have NAFLD, low HDL cholesterol level and increased waist circumference, and are likely the best candidates for treatment with insulin sensitizers. TZDs, such as pioglitazone and rosiglitazone, are a notable class of drugs that function as insulin sensitizers to potentiate the effect of insulin, improving glycemic control and dyslipidemia and, therefore, providing a valuable addition to diabetes therapy. As a monotherapy, pioglitazone improves the sensitivity of hepatic and peripheral tissue to insulin, increases insulin-dependent glucose disposal, enhances cellular responsiveness to insulin and, thus, improves dysfunction in glucose homeostasis. This decreased insulin resistance results in a durable lowering of blood glucose, insulin and hemoglobin A1c (“HbA1c”) levels. However, the clinical use of TZDs has been limited by the risk of adverse events, including congestive heart failure, for which there is a FDA boxed warning, weight gain, peripheral edema/fluid retention, bone fractures and, for pioglitazone, an association with bladder cancer.

We believe the introduction of an insulin sensitizer without the adverse effects and safety profile of the TZDs would provide a meaningful addition as combination therapy with incretins, with the goal of normalizing glucose levels in patients with type 2 diabetes. While numerous new drug classes are available, none target insulin resistance nor have the potential to resolve persistent hyperglycemia when used in combination with other available diabetes treatments.

Insulin Sensitizers for the Treatment of NASH

Insulin resistance has been implicated as a key condition leading to hepatic steatosis and, subsequently, NASH. Activation of the immune system contributes to the development of insulin resistant adipocytes that release excessive amounts of free fatty acids and cause insulin resistance and lipoapoptosis in peripheral tissues, including the liver, muscle and pancreatic beta cells. Increased hepatic triglyceride synthesis and accumulation of triglyceride-derived toxic lipid metabolites activates intracellular inflammatory pathways within hepatocytes, Kupffer and other immune cells. The subsequent activation of hepatic stellate cells leads to collagen deposition, fibrosis development and, eventually, cirrhosis of the liver. Treatments that can rescue the liver from lipotoxicity, in particular the effects of free fatty acids, by restoring peripheral tissue insulin sensitivity and/or preventing activation of inflammatory pathways and oxidative stress, hold promise for the treatment of NASH.

An estimated 65% of type 2 diabetes patients have NASH. The presence of diabetes is associated with worse liver disease and, in patients with NAFLD and NASH, type 2 diabetes is associated with more severe hepatic and adipose tissue insulin resistance, and more advanced liver steatosis, inflammation and fibrosis by liver histology. In addition, administration of insulin may increase steatosis, making the treatment of patients with type 2 diabetes and NASH challenging.

The role of insulin resistance and hyperglycemia in the pathogenesis of NAFLD suggests that improving insulin sensitivity and normalizing glucose levels could prevent the development of NASH and progression of disease. It is inconclusive whether current drugs for the treatment of diabetes, such as metformin, DPP-IV inhibitors, SGLT2 inhibitors and GLP-1 agonists, are effective for the treatment of NASH and, for some, if histological benefit is observed, it is unclear whether the effect is related to the concomitant weight loss with treatment. Proof-of-concept studies with an insulin sensitizer, pioglitazone, whose main target at the molecular level is PPAR-gamma in adipose tissue, have shown that treatment after six months, as compared to placebo, resulted in statistically significant improvements in histological findings associated with NASH, with reductions in steatosis, hepatocellular ballooning and lobular inflammation. Fibrosis scores improved significantly relative to baseline in the pioglitazone group, however, the change from baseline did not differ significantly between the placebo and pioglitazone groups after six months of treatment. Pioglitazone treatment increased hepatic insulin sensitivity and glucose clearance, which led to significant reductions in plasma free fatty acids, glucose and insulin levels in NASH patients.

With approximately 17.5 million patients in the United States with type 2 diabetes and NASH, there exists a substantial unmet medical need for a single treatment that addresses pathophysiological states common to both diseases, including insulin resistance, lipid metabolism dysfunction and increased lipotoxicity at the level of the liver. To date, of the FDA approved anti-diabetes drugs on the market, only pioglitazone and liraglutide have demonstrated a benefit on components of the NAS in controlled studies on patients with NASH. We believe NGM313 has the potential as an insulin sensitizer for use as monotherapy or in combination with other drug classes, like GLP-1 analogs, to halt the progression of, and potentially reverse, diabetes and NASH.

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NGM313 Mechanism of Action

NGM313 is a humanized monoclonal agonistic antibody, with the potential for once-monthly dosing, that binds to a unique epitope of KLB, resulting in the selective activation of FGFR1c and signaling through the metabolic pathway utilized by FGF21-based ligand therapies. FGF21 is a protein hormone that is secreted by the liver, adipocytes, pancreas and skeletal muscle. In animal testing, FGF21 plays a role in fasting and starvation by acting on adipose, or fat, cells to increase energy expenditure by stimulating glucose uptake. Notably, the effect of FGF21 on glucose uptake is additive to, but not synergistic with, insulin. Unlike insulin, the response of fat cells to FGF21 requires prolonged exposure to this hormone. Moreover, FGF21 acts to lower plasma triglyceride levels over an extended period. FGF21 also protects animals from diet-induced obesity when overexpressed in transgenic mice and lowers blood glucose and triglyceride levels when administered to diabetic rodents.

FGF21 exerts its effects on metabolic processes by signaling through the receptors known as FGFR1c, FGFR2c and FGFR3c, but not the receptor known as FGFR4. KLB functions as a co-receptor to enhance the binding of these receptors and is essential for mediating FGF21 activity. FGF receptors are expressed on cells in many tissue types, but KLB is mainly expressed in fat cells and other tissues, such as the pancreas and liver.

FGF21-based therapeutics have generated interest in the pharmaceutical research and development community because they represent a novel approach to treating multiple aspects of the metabolic syndrome; however, attempts by other companies to translate FGF21 into a product with clinical application have had limited success. While native FGF21 is thought to have limitations for drug development, including potential effects on cortisol, bone and blood pressure, various animal studies have demonstrated that modified FGF21 ligands simultaneously regulate insulin sensitivity and blood glucose and increase energy expenditure, fat utilization and lipid excretion. Multiple pharmaceutical companies have conducted human testing of therapeutics regulating the FGF21 pathway. Administration of modified FGF21 ligands to humans results in variable improvement in insulin sensitivity, reduction in LFC and improvement in lipid profile and body weight loss, suggesting potential utility in treating obesity, type 2 diabetes, dyslipidemia and NASH. However, the blood glucose reductions observed in humans following dosing with modified FGF21 ligands, to date, have not been meaningful. It is thought that these FGF21-based protein therapeutics have produced inadequate glucose reductions due to a shorter than optimal half-life or counter-regulatory mechanisms triggered from activity across multiple receptor types. It has been postulated that a therapeutic regulating the FGF21 pathway with an extended half-life might improve its efficacy profile for type 2 diabetes. Furthermore, while an FGF21-based agent has demonstrated significant reductions in liver steatosis and non-invasive markers of disease in NASH subjects, the effect of FGF21 on liver histology in NASH patients has not been assessed to date.

NGM313, an Agonistic Antibody of the FGFR1c/KLB Receptor Complex

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We believe that developing a specific, agonistic antibody that selectively activates the FGFR1c/KLB pathway would obviate the risks associated with therapeutics based on the native FGF21 ligand. The development candidate, NGM313, exhibits highly specific binding with KLB, resulting exclusively in the activation of FGFR1c-mediated signaling; it does not trigger signaling through other FGF receptors, such as FGFR2c, FGFR3c or FGFR4. Moreover, as NGM313 recognizes an epitope on KLB that is distinct from the FGF19 or FGF21 binding sites, it does not compete with these natural ligands for binding with the FGFR1c/KLB complex. We believe that this non-overlapping binding site reduces the potential for side effects resulting from NGM313 inhibition of endogenous FGF19 and FGF21 hormone activity.

NGM313 Phase 1b Early Proof-of-Concept Clinical Trial

We conducted a Phase 1b randomized, open-label, parallel group trial to evaluate the safety, tolerability, pharmacokinetics and pharmacodynamics of a single NGM313 dose or daily oral pioglitazone in 25 obese insulin resistant subjects with NAFLD. The Phase 1b clinical trial evaluated the ability of NGM313 to decrease LFC to support the clinical development of NGM313 in NASH, as well as its effect on glucose disposal to assess the potential of NGM313 in the treatment of patients with type 2 diabetes. A single subcutaneous dose of 240 mg NGM313 was selected based on the clinical pharmacokinetic and pharmacodynamic data, and the tolerability profile from the Phase 1 SAD/MAD trial described below. Pioglitazone was chosen as a positive control in this study as it is the only agent approved for clinical use as an insulin sensitizer for the treatment of type 2 diabetes and also has demonstrated beneficial activity in NASH patients. The highest approved daily oral dose of 45 mg pioglitazone was used in this study to provide the opportunity for maximal efficacy as a comparator in a trial with a short treatment duration of five weeks.

The primary objectives of the study were to evaluate changes from baseline in LFC as measured by MRI-PDFF at day 36 and changes from baseline in whole body insulin sensitivity at day 29 in subjects treated with NGM313 as compared to pioglitazone. A single dose of NGM313 resulted in a statistically significant least squares mean change from baseline to day 36 of -6.3% and -37% in absolute and relative LFC, respectively (p<0.0001), while daily dosing of 45 mg pioglitazone resulted in a statistically significant least squares mean change from baseline to day 36 of -4.0% and -25%, respectively (p<0.001). The change from baseline with NGM313 treatment was not significantly different relative to that observed with pioglitazone (p=0.08), however, the study was not powered to demonstrate statistical significance between groups. Historically, a relative reduction of LFC of 29%, as measured by MRI-PDFF, was associated with a histological response of a NAS improvement of two stages or greater. In addition, preliminary results indicated that a single dose of NGM313 resulted in a statistically significant mean decrease from baseline of 0.24% in HbA1c at day 36 (p<0.0001), as compared to a decrease of 0.11% with a daily dose of 45 mg of pioglitazone, without hypoglycemia. A reduction in HbA1c of the magnitude observed in this study’s insulin resistant, non-diabetic patient population in this time frame supports the promise of NGM313 to potentially improve glucose control in type 2 diabetes patients. This was accompanied by statistically significant reductions from baseline in HOMA-IR (a measure of insulin resistance), serum concentrations of fasting glucose, ALT, AST, triglycerides and LDL cholesterol, and a statistically significant increase in HDL cholesterol levels at day 28 (all p<0.05), as summarized in the table below. PRO-C3 was also significantly reduced with NGM313 treatment but not with pioglitazone (p<0.01).

NGM313-treated patients had a least squares mean increase from baseline in body weight of 1.6 kg at day 36, as compared to 2.4 kg with pioglitazone. This study indicated that NGM313 was well tolerated, with no serious adverse events and no adverse event leading to study discontinuation. All adverse events observed during the course of the study were deemed mild, with increased appetite (12%) being the only adverse event reported in at least 10% of NGM313-treated subjects.

Data from the Phase 1b clinical trial, in addition to the data described below from the Phase 1 SAD/MAD clinical trial, support the potential for NGM313 to be the first insulin sensitizer for the treatment of NASH and type 2 diabetes, without the safety concerns that plague currently available agents targeting insulin resistance, such as edema, fluid retention, heart failure and bone fractures. Given that the metabolic changes of NGM313 were seen after only a single dose, it is likely that a more substantial improvement would be observed after longer duration of treatment. We expect Merck to initiate a Phase 2b histology study of NGM313 in NASH subjects in the second half of 2020.

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NGM313 Phase 1 SAD/MAD Clinical Trial

Our first-in-human Phase 1 clinical trial was a blinded, placebo-controlled study in overweight or obese but otherwise healthy adults in which single and multiple once-monthly subcutaneous injections of NGM313 or placebo were tested to evaluate the safety, tolerability and pharmacokinetics of NGM313. NGM313 was well tolerated, with signs of biological activity indicative of insulin sensitization, after a single dose.

In the MAD portion of the study, three once-monthly doses ranging from 10 mg to 240 mg of NGM313 were administered and, after 12 weeks, mean decreases from baseline in HbA1c, fasting glucose, fasting insulin and HOMA-IR were observed at the higher doses relative to placebo. Similar to the SAD portion of the study, a favorable lipid profile was demonstrated at the end of treatment on day 85, as shown in the table below. An increase in placebo-subtracted body weight at end of treatment of 1.6 kg and 2.4 kg was noted in patients from the SAD and MAD cohorts, respectively, that received the highest dose level of NGM313. This trend in body weight increase is consistent with the degree of insulin sensitization effects observed at these doses, and there was no evidence of edema, fluid retention or hemodilution associated with NGM313 treatment. Despite the change in weight, there was no statistically significant increase in the waist circumference in these cohorts of subjects receiving NGM313. The beneficial changes in glucose metabolism, lipid levels and biomarkers of insulin sensitization supported further evaluation of NGM313 in patients with fatty liver and insulin resistance.

NGM313 Improves Key Glucoregulatory and Lipid Parameters

In both the SAD and MAD cohorts, NGM313 was well tolerated. There were three serious adverse events reported (adjustment disorder in the placebo group; lower GI hemorrhage and cholecystitis in the NGM313 groups), and they were considered to be unrelated to study drug. The majority of adverse events were mild to moderate in severity, and treatment-related events with the greatest proportion of subjects were GI disorders, injection site reactions, upper respiratory tract infections, headache and increased appetite. In contrast to pioglitazone, where an increased risk of bone fractures in women has been described, there were no changes in bone mineral density and bone formation and resorption markers observed in the MAD trial among subjects treated with NGM313. No symptomatic hypoglycemia was observed with NGM313 treatment. The pharmacokinetic profile suggests that NGM313 displays nonlinear kinetics following a single dose, which is anticipated for an antibody that displays target-mediated clearance. There was some presence of anti-drug antibodies observed, but it did not appear to affect the pharmacokinetics or tolerability profile of NGM313.

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NGM395: Engineered Variant of GDF15 for the Potential Treatment of Metabolic Disease

NGM395 is a proprietary, engineered variant of the hormone GDF15 that has the potential to be a once-weekly or less frequent subcutaneous injection for the treatment of metabolic syndrome. We first discovered that the metabolic activity of GDF15 is mediated by GFRAL, the exclusive, brain stem-restricted receptor for GDF15, in 2013. In 2015, under the Collaboration Agreement, we granted Merck a worldwide license to further research, develop and commercialize our GDF15 receptor agonist program, which includes NGM395 as well as other GDF15 receptor agonists, including a product candidate referred to as NGM386. Merck initiated first-in-human studies of NGM386 in 2016 and completed a Phase 1 MAD clinical trial in 2018. Preliminary data from the study indicated that daily NGM386 treatment for 28 days was generally well tolerated, but did not result in significant body weight loss in obese subjects in this safety study of limited duration. Effective May 31, 2019, Merck terminated its license to the GDF15 receptor agonist program and, upon termination, we regained full rights to the GDF15 receptor agonist program, including both NGM395 and NGM386. Following our assessment of the NGM395 Phase 1 study results, given both the demonstrated tolerability of NGM386 and the more optimal pharmacokinetic properties of NGM395, we chose to suspend development of NGM386 and move NGM395 into clinical development. In the first quarter of 2020, we initiated a Phase 1 SAD clinical trial to determine the safety, tolerability and pharmacokinetics of NGM395 in obese but otherwise healthy adults.

Overview of GDF15 Pathway and Our Discovery of the GDF15 Receptor, GFRAL

GDF15, also known as MIC-1 and NAG-1, is expressed in peripheral tissues relevant to metabolic function. We identified GDF15 in an unbiased screen of putative secretory factors using our rAAV gene delivery approach in diet-induced obese (“DIO”) mice. In this screen, GDF15 produced one of the most potent and efficacious metabolic responses we have observed, effectively normalizing blood glucose and significantly reducing body weight. The effects of GDF15 on food intake, energy expenditure and body weight were known. We discovered that GDF15 causes peripheral lipolysis, which is the burning of fats to create free fatty acids as a source of energy, through the sympathetic nervous system. However, the pharmaceutical industry’s GDF15 drug discovery efforts had been significantly impeded by the lack of understanding regarding the identity of its cognate receptor and signaling pathways. We identified GFRAL as the exclusive, brain stem-restricted receptor for GDF15 in 2013 and, in 2017, published a landmark paper in the journal Nature describing its discovery and the elucidation of its crystal structure by our scientists.

Our research suggests that GDF15 is elevated in peripheral tissues following cellular insults, such as oxidative, metabolic or hypoxic stress, and may serve as a messenger hormone to communicate with the brain stem and orchestrate adaptive metabolic changes to cope with the energy demand of cells under various stress conditions. Among these adaptations are reduced food intake and a change in the fuel flux that favors the burning of free fatty acids through lipolysis, instead of burning carbohydrates. We discovered that GDF15 acts directly on GFRAL, a receptor located exclusively in the area postrema (“AP”) and nucleus tractus solitarius of the brain stem. The AP is a circumventricular organ that is outside the blood-brain barrier, which means that it can readily sense any changes in the bloodstream. This discovery provided a mechanistic basis for the regulation by GDF15 of whole body metabolism through a distinct neural circuitry.

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Elucidating the Biology of GDF15 and GFRAL

We have generated the following results supporting the biological role of GDF15 and its receptor, GFRAL:

In addition to the evidence generated in our labs, independent research has reported that GDF15 gene knockout mice weigh more and have increased obesity due to increased spontaneous food intake. Infusion of human recombinant GDF15 that raised serum levels of GDF15 knockout mice to within the normal human range led to reduced body weight and food intake in a dose-dependent fashion.

Engineered Protein Variants of GDF15

We discovered in 2013 that GFRAL was the cognate receptor for GDF15, several years before other pharmaceutical companies became aware of the receptor identity. During this multi-year period we developed novel insights into the mechanism of action of GDF15 and the structure and function of the GDF15/GFRAL interaction. Through high-resolution X-ray crystallography, we discovered that GDF15 crystal structure revealed a hydrophobic region on the protein surface that we believe impairs the solubility and, therefore, the manufacturability of the native hormone. Armed with this structural information and functional assays that we were able to develop through the elucidation of the GDF15 signaling pathway, we conducted a systematic “structure-activity relationship” analysis of GDF15 and GFRAL to identify the critical functional domains of both the hormone and its receptor. With this data, we generated NGM395 and NGM386 as optimized GDF15 variants that exhibit significantly improved pharmaceutical properties. Between 2015 and 2019, Merck was responsible for the development and manufacturing of NGM395 and NGM386.

NGM395 is a long-acting fusion protein variant of GDF15 that has a pharmacokinetic profile suitable for weekly dosing. Three-month studies of NGM395 in two species were completed with no observation of treatment-related changes in organ weight, cell morphology, neurobehavior or clinical pathology that were not attributable to body weight loss.

NGM120: An Antagonistic Antibody Binding GFRAL for the Potential Treatment of CACS

NGM120 is a proprietary, inhibitory antibody binding GFRAL that is designed to block the effects of elevated GDF15 levels, initially in cancer patients. GDF15 is believed to contribute to uncontrolled weight loss in these patients, also known as CACS, and possibly to the cancer. NGM120 has completed a Phase 1 SAD and MAD clinical trial to assess safety, tolerability and pharmacokinetics in healthy adult subjects and was found to be well tolerated. In the first quarter of 2020, we initiated a multicenter, Phase 1a/1b study that includes two parallel cohorts to evaluate the safety, tolerability and pharmacokinetics, and to obtain preliminary evidence of anti-tumor and anti-CACS activity, of NGM120 in patients with select advanced solid tumors.

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CACS—Cancer Anorexia/Cachexia Syndrome

CACS is a common co-morbidity of cancer and is associated with increased hospitalization and shortened survival compared to cancer patients that do not exhibit cachexia. While cachexia can occur in all types of cancer, particularly high incidence rates are observed in pancreatic, non-small cell lung and gastric cancers, at 54%, 36% and 67% of patients, respectively. Studies have shown that cancer patients that do not experience body weight loss have an improved prognosis. Current therapies targeting CACS are directed towards increasing appetite only; however, there is a lack of approved treatments that also address other aspects of the disease, including muscle mass loss and altered energy metabolism. A direct relationship has been established between GDF15 serum levels and cancer-associated weight loss in humans with certain cancers.

Antagonists to the GDF15/GFRAL Pathway

We believe that inhibitory antibodies blocking the interaction between GFRAL and GDF15 could provide a novel approach to developing treatments for anorexia, CACS and, potentially, cancer. Mice grafted with human tumors overexpressing GDF15 became cachectic, and this weight loss was found to be reversible by treatment with monoclonal antibodies to GDF15. In addition, in a study where Lewis Lung Carcinoma cells engineered to express human GDF15 were injected into wild-type and GFRAL knockout mice, tumor-derived GDF15 appears to impact survival in mice in which the GFRAL signaling pathway is intact, whereas mice lacking GFRAL are resistant to the effects of elevated GDF15 levels. This indicates the potential for anti-GFRAL antibodies to improve patient survival in certain tumor types that express high levels of GDF15, in addition to preserving body mass and preventing development of CACS.

Impact of GDF15 on Survival in Mice Implanted with Lewis Lung Carcinoma Cells

We believe that antibodies against GFRAL will be superior to antibodies against GDF15 because expression levels of GDF15 can rise dramatically in response to infection and other conditions involving cellular insult, meaning that high blood levels of antibodies antagonizing GDF15 will be required to achieve a therapeutic effect. By contrast, GFRAL is expressed at low levels in very specific regions of the brain stem, meaning that a relatively lower blood level of antibodies antagonizing GFRAL will be required to achieve a therapeutic effect.

We believe we have comprehensively characterized the receptor pathway and the structure-function relationship of GDF15 together with its cognate receptor, GFRAL. This understanding facilitated large-scale hybridoma campaigns that generated antibodies targeting key epitopes of the receptor complexes. We have generated and characterized multiple antagonistic antibodies against GFRAL and, from this portfolio, we chose to advance NGM120 as our development candidate.

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NGM120, Antagonistic Antibody Against GFRAL

We designed NGM120 as a potent, humanized monoclonal antibody inhibitor of GFRAL with the potential for once-monthly or less frequent dosing. In numerous preclinical pharmacology models, NGM120 reverses and inhibits GDF15-mediated body weight loss and increases in energy expenditure. For example, treatment of mice with cisplatin, a chemotherapy commonly used to treat various cancers, resulted in body weight loss of approximately 15% after 30 days. However, treatment with an anti-GFRAL antibody prevented substantial body weight loss in this model, as shown below:

Preclinical Studies and ongoing Clinical Trials

In extensive preclinical testing, including three-month safety and toxicology studies in non-human primates and rats, NGM120 was well tolerated. NGM120 completed a Phase 1 clinical trial to assess safety, tolerability and pharmacokinetics in healthy adult subjects in 2019. This study demonstrated NGM120 was well tolerated without any identified safety signals and had an expected pharmacokinetic profile.

In the first quarter of 2020, we initiated a multicenter, Phase 1a/1b study to evaluate the safety, tolerability and pharmacokinetics of NGM120 as a monotherapy in patients with select advanced solid tumors (cohort 1) and of NGM120 in combination with gemcitabine and Abraxane® in patients with metastatic pancreatic cancer (cohort 2). Each cohort will consist of an open-label dose-escalation portion followed by a dose-expansion portion. Approximately 90 patients with elevated serum levels of GDF15 are expected to be enrolled in the concurrently run cohorts. Preliminary evidence of anti-tumor and anti-cachexia activity will be assessed by measuring tumor response rates, body mass and composition, patient reported outcomes and functional status. Antagonistic antibodies targeting the GDF15 receptor pathway were not included in the original Merck license to GDF15 analogs, including NGM395 and NGM386, and are subject to Merck’s future option upon completion of a human proof-of-concept study.

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NGM217: A Potential Treatment for Diabetes

NGM217 is a humanized inhibitory monoclonal antibody against an undisclosed target that has the potential to increase the production of insulin in the pancreas of diabetics by improving effective beta cell function. This improvement is likely to lead to a substantial reduction in glycemic variability, which manifests as hyperglycemia or hypoglycemia in diabetics. We have initiated a Phase 1 clinical trial evaluating the safety and tolerability of NGM217 in patients with diabetes.

Impaired beta cell function leads to the progressive failure of islet cells to secrete sufficient amounts of insulin to overcome peripheral insulin resistance, resulting in failure to maintain normal glucose homeostasis over time. The ability to increase effective beta cell function could be beneficial in three diabetes patient populations: patients with type 1 diabetes; patients with latent autoimmune diabetes in adults (“LADA”); and patients with type 2 diabetes that are inadequately controlled with insulin treatment. In the United States, there are approximately 1.5 million adults with type 1 diabetes, and their functional beta cell mass is unable to produce adequate insulin. LADA is characterized by the slow, progressive autoimmune destruction of beta cells and approximately 10% of patients ages 40 to 75 in the United States with type 2 diabetes have LADA. These patients often become unresponsive to oral type 2 diabetes and GLP-1 therapies, and usually require early use of insulin in order to preserve the remaining pancreatic beta cell function. For these patients, the ability to increase beta cell function closer to onset of disease would provide an additional treatment option beyond insulin. Given the significant unmet medical need among these diabetes patient populations, we believe that NGM217 has the potential to provide a desirable treatment alternative that increases the effective function of beta islet cells while slowing the rate of disease progression.

Preclinical Studies and Ongoing Phase 1 Clinical Trial

Preclinical studies assessing the safety of NGM217 demonstrated desirable pharmacokinetics. NGM217 was well tolerated at doses that substantially exceeded the doses to be tested in humans. We have commenced a Phase 1 clinical trial to obtain safety and tolerability data, including rate of hypoglycemia, as well as to select the proper dose for future clinical studies. Based on those results, we plan to commence a Phase 1b/2a proof-of-concept clinical trial in the second half of 2020 to investigate the ability of NGM217 to increase stimulated C-peptide, a marker of insulin production, as well as to reduce insulin requirements and improve glycemic control with no worsening of hypoglycemia.

NGM621: A Potential Treatment for Dry AMD

NGM621 is a humanized inhibitory monoclonal antibody that binds with high affinity to complement C3 and potently blocks complement activation. Human genetics data strongly suggest that dysregulated activation of the complement pathway contributes to AMD and, consequently, that inhibition of complement activation could effectively slow the progression of photoreceptor loss. AMD is the leading cause of vision loss and blindness in people 65 years of age and over in the United States; it is estimated that approximately 3 million people will be affected by AMD in the United States in 2020. AMD is a progressive disease that involves the damage of retina tissue that leads to the development of wet and/or dry AMD, also known as GA. Although treatments for wet AMD are available, no approved treatment is available for dry AMD, which remains a high unmet medical need.

Pathological activation of the complement system has been linked to development and progression of GA by multiple human genetics and animal model studies. A central component of the mammalian immune system, complement can be activated by three main pathways, classical, lectin and alternative, that converge on C3, a master regulator of the complement cascade. Inhibiting complement activation at the level of C3 affords the opportunity to block an array of potentially detrimental downstream effects, including inflammation, cell lysis and opsonization/phagocytosis of photoreceptor cells.

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NGM621 binds with high affinity to intact human C3 (K_D=0.34 nM), but shows significantly lower affinity (>100-fold) to C3 cleavage fragments C3a, C3b, C3c, and C3d. This unique binding profile, characterized by high affinity and specificity for intact C3, translated into potent NGM621-mediated inhibition of complement activation via both the alternative (IC₅₀ =37 nM) and classical (IC₅₀=74 nM) pathways in in vitro hemolytic assays. Furthermore, NGM621 demonstrated in vivo activity in an ocular complement activation model in cynomolgus monkeys.

Multiple modalities and classes of complement inhibition therapies are under clinical evaluation in GA patients, although to date, no investigative treatment for GA has shown efficacy in Phase 3. For example, Roche announced in 2017 that lampalizumab, an inhibitor of the alternative complement activation pathway, failed to meet the primary endpoint in two Phase 3 trials in GA.  APL-2 (Apellis Pharmaceuticals), a PEGylated peptide inhibitor of C3, only recently entered Phase 3 clinical trials and Zimura^® (IVERIC bio), a PEGylated aptamer inhibitor of complement C5, recently completed Phase 2b clinical studies. While APL-2 and Zimura^® demonstrated significant reduction in the growth rate of GA lesions in their respective Phase 2 studies, both agents also demonstrated significant increases in the incidence of new onset wet AMD in the eyes being studied. The findings in these clinical trials potentially implicate contributions from complement inhibition and/or polyethylene glycol (“PEG”) modification to the undesirable development of wet AMD in GA patients. However, clinical evidence from several GA trials with complement inhibitors, including lampalizumab, together with large number of studies in nonclinical AMD models, argue against a causative role for complement inhibition in promoting development of wet AMD. In fact, C3 inhibition in a nonclinical model of wet AMD results in a significant reduction of exudation, whereas, in the same model, intravitreal injection of PEG leads directly to an exacerbation of wet AMD. These results are consistent with a potential role of the PEG moiety in the vascular exudation observed in the APL-2 and Zimura^® clinical trials.

The evaluation of NGM621, an antibody-based therapeutic, in GA patients will provide an opportunity to test the effects of complement inhibition on disease progression using an agent that lacks PEG modification. Given the significant unmet medical need and the importance of dosing convenience for GA patients, NGM621 has the potential to provide a desirable treatment option with an improved efficacy and safety profile, acting to slow the rate of disease progression with less frequent dosing.

Preclinical Studies and Clinical Trials

IND-enabling preclinical studies for NGM621 were completed in the first half of 2019 and we initiated a Phase 1 SAD and multiple dose clinical trial in the third quarter of 2019 to evaluate the safety, tolerability and pharmacokinetic profile of single and multiple intravitreal injection(s) of NGM621 in GA patients. We also plan to initiate a Phase 2 proof-of-concept clinical trial in the second half of 2020.

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Our Collaboration with Merck

Overview and Benefits

In 2015, we entered into a broad, strategic collaboration with Merck in order to advance novel biologic therapeutics for the treatment of highly prevalent diseases with significant unmet medical needs. The collaboration is complementary to our drug development model, and is designed to follow certain approaches used in historically successful collaboration agreements between large pharmaceutical companies and emerging biotechnology companies. The collaboration has provided us with the financial support to broaden and accelerate our existing research efforts, access to mid- and late-stage development expertise and, in the future, would provide us the resources to enable large global trials and the global commercial and distribution capabilities that we believe our products will require. Importantly, this collaboration structure preserves our research independence and allows us to retain meaningful economic rights in our product candidates. In addition, we excluded the aldafermin program from the agreement and it remains wholly owned and controlled by us.

The collaboration included an exclusive worldwide license to our GDF15 receptor agonist program. Effective May 31, 2019, Merck terminated its license to the GDF15 receptor agonist program, returning the NGM395 and NGM386 product candidates to us. Under the agreement, we also granted Merck options to take exclusive, worldwide licenses, on a program-by-program basis, for the programs in our research and development pipeline. Merck generally has a one-time right to exercise its option at the point at which a program completes a human proof-of-concept trial. In November 2018, Merck exercised its option to license our NGM313 program. In March 2019, Merck exercised its option to extend our research collaboration, and thereby preserve its option to license programs in our research and development pipeline, through March 17, 2022. Merck has the right to extend the research collaboration again through March 17, 2024, and is required to inform us of its intent to extend by March 17, 2021.

The strategic value of our agreement with Merck can be summarized as follows:

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We believe our pipeline of therapies for the treatment of major diseases, like type 2 diabetes, obesity and NASH, is unusual among emerging biopharmaceutical companies, the uniqueness of which is further evidenced by the broad support provided by our collaboration with Merck. This collaboration provides us with a competitive advantage by enabling us to advance a portfolio of drug candidates in the cardio-metabolic, liver, ophthalmic and oncology areas while still retaining significant economic ownership of the programs.

Summary of the Merck Collaboration Agreement

In 2015, we entered into the Collaboration Agreement with Merck, covering the discovery, development and commercialization of novel therapies across a range of therapeutic areas. In March 2019, Merck exercised its option to extend the collaboration for two additional years, from March 2020 to March 2022. The collaboration included an exclusive worldwide license to our GDF15 program, comprising NGM395 and NGM386 and other GDF15 analogs. Effective March 31, 2019, Merck terminated its license to the program and we regained full rights to the GDF15 receptor agonist program, which includes NGM395 which we are evaluating for the treatment of obesity. The collaboration also includes a broad, multi-year drug discovery and early development program financially supported by Merck but scientifically directed by us with input from Merck. For those compounds resulting from this research and development program that progress through proof-of-concept studies, Merck has an exclusive option, at a cost of $20.0 million for each compound, to obtain an exclusive, worldwide license. If Merck exercises its option with respect to such a compound, we in turn have the right, at the start of the first Phase 3 clinical trial for that compound, to elect to participate in a worldwide cost and profit sharing arrangement with Merck, as well as the option to co-detail the compound in the United States, or we can elect instead to receive milestones and royalties from Merck based on its further development and commercialization of the compound. If we elect to participate in the cost and profit sharing arrangement, subject to certain limitations, Merck will provide us financial assistance in the form of advances of our share of the overall development costs, which it will recoup from our share of any profit ultimately resulting from sales of the compound or, if unsuccessful, other compounds that reach such stage. If the Company does not opt in to the cost and profit sharing option, then the Company is eligible to receive milestone payments upon the achievement of specific clinical development or regulatory events with respect to the licensed compound indications in the United States, EU and Japan of up to an aggregate of $449.0 million.

Research and Early Development Program

Under the agreement, we are conducting an extensive research and early development program, the goal of which is the identification, research and development, through human proof-of-concept studies, of multiple product candidates for various therapeutic areas. Included in this program are all NGM research and development programs that existed when we entered into the agreement with Merck, with the exception of the following: aldafermin, any other compounds that target FGFR4 and inhibit CYP7A1 expression (including variants or derivatives of FGF19) and any compounds that are covered by or within the scope of third party license or option rights. We determine the scientific direction and areas of therapeutic interest, with input from Merck, and we are primarily responsible for the conduct of all research, preclinical and early clinical development activities, through human proof of concept. We make the final determinations as to which compounds to advance into and through initial clinical studies, which to progress into proof-of-concept studies, and the design of any proof-of-concept studies, with input from Merck through various governance committees.

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The research and early development program has an initial term of five years, until March 17, 2020. In March 2019, Merck exercised its option to extend the collaboration through March 17, 2022, and has the option to extend it again until March 17, 2024. We refer to this five, seven or, if applicable, nine-year period as the research phase of the collaboration.

Under the agreement, Merck reimbursed the internal and external costs of our research and early development activities in an amount up to $50.0 million per year during the initial five-year term, based on an estimated annual budget. If we exceeded this budget in a particular year, and if we were performing IND-enabling studies at that time, Merck was required to elect either to reimburse up to an additional $25.0 million for use in funding IND-enabling or later-staged activities or to provide us with the equivalent value in in-kind services for preclinical and clinical development activities. Therefore, the total Merck reimbursement for our research and development activities could have reached $75 million per year through the first five years of the research phase, although it only did so for the fiscal year ended December 31, 2019 due to increase in research and development expenses for our ongoing programs. In connection with Merck’s exercise of its option to extend our research collaboration in March 2019, Merck agreed to continue to fund our research and development efforts at the same levels during the two-year extension period and, in lieu of a $20.0 million extension fee payable to us, during such two-year extension period Merck will make additional payments totaling up to $20.0 million in support of our research and development activities across 2021 and the first quarter of 2022. From inception of the collaboration through December 31, 2019, Merck has paid us $300.5 million of research and development reimbursement. If Merck elects to extend the research phase for an additional two years, the level of funding that Merck will provide to us during such extension will be negotiated at the time of the extension, subject to certain minimum and maximum funding limits based on a percentage of the then-existing funding. With two exceptions, Merck may not terminate its annual funding of the research and early development program prior to the end of the research phase of the collaboration. Those two exceptions are: (i) if we are acquired by a third party; or (ii) if we are in material uncured breach of our obligations under the research and early development program.

At the end of the research phase, Merck has the right to either require us to continue to conduct research and development activities with respect to certain of the then-existing programs for up to three years, which we call the tail period, by agreeing to pay all our internal and external costs for related work, or to take over such selected programs and conduct such research and development activities itself, at its own cost.

Merck Option to License NGM Programs

During the research phase, or during the tail period, if there is one, following completion of a proof-of-concept study for a particular compound, regardless of the results of such study, Merck has the one-time option to obtain an exclusive, worldwide license, on specified terms, to that compound, as well as to all other molecules that are directed against the same target and that result in the same effect on such target (“Optioned Program”). If Merck exercises its license option, Merck will be responsible, at its own cost, for the further development and any commercialization activities for compounds within that Optioned Program, subject to our options to cost and profit share worldwide, and to co-detail those compounds in the United States, as further described below.

If Merck does not exercise its license option with respect to a particular compound within a limited period of time, we will retain all rights to research, develop and commercialize that compound and its related molecules on a worldwide basis, either alone or in partnership with a third party, subject to the payment to Merck of certain royalties on any commercial sales of any resulting products. If, however, Merck does not exercise its license option because it determined further development of the compound was not warranted for technical, safety or efficacy reasons, and if later in the research phase we again complete a proof-of-concept study with the compound or a related compound, Merck’s option rights would nonetheless apply to the compound for a limited period of time. Unless Merck has elected to conduct research and development activities itself, we also retain all rights to programs that have not completed proof-of-concept studies by the end of the research phase, or the tail period, if there is one.

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NGM Option to Elect Cost and Profit Share and Merck Financial Assistance

If Merck exercises its license option, then, at the point at which it has advanced the licensed compound to its first Phase 3 clinical trial, we have the option for a limited period of time to participate in a cost and profit sharing arrangement with Merck on that compound. Where we exercise such an option, we call such compounds NGM Optioned Products. As part of our election to exercise our option to cost and profit share, we also select the percentage share—up to 50%—that we desire to fund of the total global costs of developing and, if approved, commercializing that NGM Optioned Product. The percentage of any profits we will receive from sales of the NGM Optioned Product will be the same as the percentage share we elect to contribute to funding costs. Our right to participate in cost and profit sharing under the agreement is subject to the following limitation: if at the point in time when we are exercising our option for a licensed compound the actual costs we have incurred across all NGM Optioned Products, plus the prospective costs allocated to us across all NGM Optioned Products, plus the costs we are electing to incur if we were to exercise our option for the compound, reaches $1.4 billion (if the research phase ends in 2022) or $1.8 billion (if the research phase is extended to 2024), then the Company will not be able to exercise its option on any further licensed compounds that Merck takes forward.

Our agreement also provides that, following our election to cost and profit share on an NGM Optioned Product, Merck will advance to us and/or assume a specified portion of the expected global costs for that NGM Optioned Product. These advances/assumed costs are subject to an aggregate cap across all NGM Optioned Products over the course of the collaboration. We refer to the amount Merck advances/assumes as the Advanced Amount. All Advanced Amounts are treated as an accumulated but deferred cost that we owe to Merck, accrue interest and are recouped by Merck in full out of our share of any profits resulting from sales of that NGM Optioned Product before we receive any of those profits. If an NGM Optioned Product fails to generate profit sufficient to repay the balance of the Advanced Amount, the balance will be carried forward and recouped out of profits resulting from sales of any subsequent NGM Optioned Product(s), even if we did not obtain any advances from Merck on our share of costs for such subsequent NGM Optioned Product. We are responsible for directly funding all global development and commercialization costs of an NGM Optioned Product that are over and above any Advanced Amount.

Co-Detailing Rights in the United States

For each NGM Optioned Product, we also have the option to participate in a portion of the commercial promotion, which we refer to as co-detailing, to provide up to 25% of the total requisite details in the United States of that NGM Optioned Product by fielding our own commercial sales force. We are required to make this election prior to receiving regulatory approval in the United States for the NGM Optioned Product. The specifics of our participation in co-detailing will be determined by the parties according to guidelines set out in the agreement. If we elect to co-detail with Merck, our costs are included in the overall shared commercialization costs, but we do not share in any greater portion of the profits than we otherwise would be entitled to for that NGM Optioned Product.

Small Molecule Research and Development

Under our agreement we also granted Merck a worldwide, exclusive right to conduct research and development on, and to manufacture, use and commercialize, small molecule compounds identified or developed by Merck that have specified activity against any target that we are researching or developing under the research and early development program and that, but for use of our confidential and proprietary information, Merck would not have discovered. If Merck ultimately does not exercise its license option to the compound we have taken through a proof-of-concept study that is directed to any such target, Merck’s research license for its own small molecule program with respect to such target will become non-exclusive, but it will retain an exclusive license to any small molecule compounds that it has as of that time identified and developed. Merck has sole responsibility for research and development of any of these small molecule compounds, at its own cost. We are eligible to receive milestone and royalty payments on small molecule compounds that are developed by Merck under our license, in some cases at the same rates as those we are eligible to receive from Merck for a licensed program originating from our own research and development efforts, provided that, but for use of our confidential and proprietary information, Merck would not have discovered such small molecule compounds. However, we do not have the option to cost and profit share or the option to co-detail those small molecule products.

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Collaboration Governance

Our collaboration with Merck is managed by a set of joint committees composed of equal numbers of representatives from each of us and Merck. A joint research committee has been established to review and discuss the preclinical work that we are conducting and to solicit Merck’s input on our research activities. Once we nominate a clinical candidate, a joint early development committee oversees and facilitates the conduct of preclinical and early development activities. For NGM313 and any other Optioned Program, a joint late development committee oversees and coordinates development. A joint commercialization committee will oversee the commercialization of any compound arising from an Optioned Program as to which we elect to cost and profit share. Decision making in these committees generally requires the agreement of both Merck’s and our representatives, with unresolved issues escalating through to certain executive officers, and with us having the final say with respect to research and early development program matters and Merck having final say with respect to Optioned Program matters and late development and commercialization matters following the exercise of its option for a particular program.

Diligence

We and Merck must each use commercially reasonable efforts to perform all of our respective activities under the collaboration.

Exclusivity

During the research phase, we may not directly or indirectly research, develop, manufacture or commercialize, outside of the collaboration, any product with specified activity against any target that we are researching or developing under the collaboration. After the research phase, if Merck exercises its license option for a program, we may not directly or indirectly research, develop, manufacture or commercialize any product with specified activity against the target that is the subject of that licensed program for so long as Merck’s license to that program remains in effect.

Financial Terms

In exchange for these various rights and access to our drug discovery approach, Merck paid us an upfront cash fee of $94.0 million and purchased approximately $106.0 million of our Series E convertible preferred stock. In connection with Merck’s exercise of its option to extend our research collaboration in March 2019, Merck agreed to continue to fund our research and development efforts at the same levels during the two-year extension period and, in lieu of a $20.0 million extension fee payable to us, during such two-year extension period Merck will make additional payments totaling up to $20.0 million in support of our research and development activities across 2021 and the first quarter of 2022. We are entitled to receive an extension payment of $20.0 million from Merck if it chooses to further extend the extended research phase until March 17, 2024.

If Merck exercises its license option following completion of a human proof-of-concept study, Merck is required to pay us an option fee of $20.0 million for each licensed program. In December 2018, we received a $20.0 million payment from Merck in connection with the exercise of its license option for the NGM313 program.

If we do not elect to enter into a cost and profit sharing arrangement for a compound we have licensed to Merck including NGM313, we are eligible to receive an aggregate of $449.0 million in milestone payments, of which $77.7 million relates to the potential achievement of specific clinical development events and $371.3 million relates to the potential achievement of certain regulatory events with respect to the licensed compounds for the first three indications in the United States, EU and Japan.

A breakout of the milestone payments in connection with the potential achievement of certain clinical development events is as follows (in thousands):

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A breakout of the milestone payments in connection with the potential achievement of various regulatory events for each of the three indications, for each of the three geographic areas, is as follows (in thousands):

We are also eligible to receive commercial milestone payments of up to $125.0 million payable for such licensed product. We are also eligible to receive royalties at ascending low double digit to mid-teen percentage rates, depending on the level of net sales Merck achieves worldwide for each licensed compound.

If Merck does not exercise its license option to a compound and we commercialize that compound or its related molecules, we will owe Merck royalties at low single digit rates. If Merck exercises its license option but then terminates its license to a program, such as the GDF15 receptor agonist program, and we take compounds in that program forward, we also owe Merck royalties on sales of those compounds, at low single digit rates.

Termination

After the research phase, Merck may terminate the overall agreement for convenience upon written notice. Subject to certain limitations, Merck may partially terminate the agreement for convenience as it relates to any Optioned Program, such as NGM313, on written notice. It may also terminate the agreement as it relates to its rights to research and develop small molecule compounds.

Either we or Merck may terminate the agreement with respect to a specific Optioned Program if the other party is in material breach of its obligations regarding that specific program and fails to cure the breach within the specified cure period. If Merck terminates a program as a result of our uncured material breach, then we would lose our option to participate in global cost and profit sharing if not yet exercised as of the time of termination, and lose our co-detailing option (whether or not exercised as of that time) for compounds arising from the relevant Optioned Program and if Merck terminates for our breach with respect to an Optioned Program and there are no other Optioned Programs at such time, then we would also be required to commence repaying any Advanced Amounts outstanding with respect to such Optioned Products. If we had exercised our option to participate in global cost and profit sharing of one or more licensed compounds arising from the program as of the time of termination, the option would remain in effect.

If we terminate an Optioned Program for uncured breach by Merck, or if Merck terminates a program for convenience, all licenses granted to Merck with respect to such program will terminate and Merck will grant to us an exclusive license under Merck’s intellectual property related to the terminated program for use in the further development and commercialization of products arising under the terminated program, subject to the payment of a modest royalty back to Merck, assign to us all related regulatory filings and approvals, and provide certain other transition assistance to us.

Merck also has the right to terminate the agreement for convenience, and for uncured material breach by us, on written notice as it relates to its license to any particular licensed small molecule compound. We in turn have the right to terminate if Merck has failed to cure any material breach as it relates to any licensed small molecule compound. If Merck terminates for convenience, or we terminate for such breach by Merck, all licenses to Merck with respect to the relevant small molecule compound terminate, but Merck retains all interest in and to the actual small molecule compound it had developed. If Merck terminates for our uncured material breach, we would continue to receive the full amount of milestones and royalties we were otherwise eligible for with respect to the relevant compounds, but we would lose our rights to participate in the various governance committees as they relate to those small molecule program compounds.

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Effect of our Change in Control and Certain Competitive Acquisitions

If we undergo any change in control, which includes the acquisition of us by any third party, or the sale of all or substantially all of our assets relating to the Merck agreement to a third party, or the sale of more than 50% of our voting stock to a third party, Merck has the right to terminate our research and early development program, in its entirety, or only with respect to certain of the programs then being pursued. If it does so, all funding for the terminated programs would cease, and we would transition, at Merck’s expense, to Merck any clinical studies then being conducted by us, if directed by Merck. If Merck takes over the studies, it would continue to have the option to license a particular program upon completion of the first proof-of-concept study, but if Merck ceases development of the compounds prior to such proof-of-concept study, the program would revert back to us and Merck would have no further rights.

If our change in control involves another pharmaceutical company with significant annual sales of pharmaceutical products, which we refer to as a Pharma Acquisition, Merck would have certain additional rights which could only be exercised within the first year following the Pharma Acquisition. These include: limiting our right to cost and profit share; Merck ceasing to provide any additional Advanced Amounts with respect to one or more Optioned Programs; and requiring us to repay any or all then-outstanding Advanced Amounts, plus interest, in installments; and termination of our co-detailing rights. Merck would also have the right following any Pharma Acquisition to terminate or restrict our participation on our various governance committees, and to limit the information it provides to us to higher level summaries.

If our acquirer in the event of a change in control is at that time pursuing research, development, commercialization, manufacturing or otherwise has any rights to any compounds that modulate a target that is the subject of an Optioned Program, which we refer to as a Competing Mature Program, Merck also has certain rights, unless our acquirer elects to cease those research, development and commercialization activities. These rights include: Merck ceasing to provide any additional Advanced Amounts with respect to any compounds arising from the Optioned Program that have the same target as the Competing Mature Program, and requiring us to repay any or all then-outstanding Advanced Amounts, plus interest, in installments, with respect to any compounds arising from that Optioned Program, and termination of our co-detailing rights with respect to the relevant compounds, termination of our participation in governance committees with respect to those compounds, and restrictions on the information we receive from Merck with respect to the compounds. However, our rights to share in costs/profits with respect to any such compounds, if exercised, would remain in effect, as would any milestone or royalty payment obligations of Merck with respect to the compounds.

In addition, if our acquirer in the event of a change in control is at that time researching, developing, manufacturing or otherwise has rights to any compounds that modulate a target that is also being actively pursued under our research and early development program, and which has not reached the proof-of-concept study stage but is ready for preclinical development, which we refer to as a Competing Early Program, Merck has the right to require us to select either to provide information demonstrating that the Competing Early Program does not actually modulate the relevant target in the same manner as our candidate, or to contribute the Competing Early Program to our collaboration with Merck as though it had originated under our research and early development program, or to divest the Competing Early Program. If we contribute the Competing Early Program to our collaboration with Merck, all the same financial obligations of Merck would apply, and we would retain all of our option rights with respect to the relevant compounds if Merck exercises its license option when the first compound arising under the program completes the first proof-of-concept study.

Equity Investments by Merck

Concurrently with the execution of our collaboration with Merck, we entered into a stock purchase agreement with Merck for the purchase of 8,833,333 shares of our Series E convertible preferred stock, for an aggregate purchase price of approximately $106.0 million. In addition, concurrent to the closing of our initial public offering (“IPO”) in April 2019, we issued 4,121,683 shares of our common stock to Merck in a private placement at a price of $16.00 per share for proceeds of $65.9 million, which resulted in Merck owning approximately 19.9% of our outstanding shares. If Merck elects to further extend the research phase of our collaboration until March 17, 2024, it has the option to purchase an additional $5.0 million of our common stock at a price per share equal to the last closing price of our shares on the date it notifies us of its desire to exercise such option, with such option subject to an overall cap on Merck’s ownership interest of 19.9%.

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Government Regulation and Product Approval

The FDA and other regulatory authorities at federal, state and local levels, as well as in foreign countries, extensively regulate, among other things, the research, development, testing, manufacture, quality control, import, export, safety, effectiveness, labeling, packaging, storage, distribution, record keeping, approval, advertising, promotion, marketing, post-approval monitoring and post-approval reporting of biologics, such as those we are developing. We, along with third-party contractors, will be required to navigate the various preclinical, clinical and commercial approval requirements of the governing regulatory agencies of the countries in which we wish to conduct studies or seek approval or licensure of our product candidates.

The process required by the FDA before biologic product candidates may be marketed in the United States generally involves the following:

Preclinical and Clinical Development

Prior to beginning the first clinical trial with a product candidate, an IND sponsor must submit an IND to the FDA. An IND is a request for authorization from the FDA to administer an IND product to humans. The central focus of an IND submission is on the general investigational plan and the protocol(s) for clinical studies. The IND also includes results of animal and in vitro studies assessing the toxicology, pharmacokinetics, pharmacology, and pharmacodynamic characteristics of the product; chemistry, manufacturing, and controls information; and any available human data or literature to support the use of the investigational product. An IND must become effective before human clinical trials may begin. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises safety concerns or questions about the proposed clinical trial. In such a case, the IND may be placed on clinical hold and the IND sponsor and the FDA must resolve any outstanding concerns or questions before the clinical trial can begin. Submission of an IND therefore may or may not result in FDA authorization to begin a clinical trial.

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Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators in accordance with cGCPs, which include the requirement that all research subjects provide their informed consent for their participation in any clinical study. Clinical trials are conducted under protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A separate submission to the existing IND must be made for each successive clinical trial conducted during product development and for any subsequent protocol amendments. Furthermore, an independent IRB for each site proposing to conduct the clinical trial must review and approve the plan for any clinical trial and its informed consent form before the clinical trial begins at that site, and must monitor the study until completed. Regulatory authorities, the IRB or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk or that the trial is unlikely to meet its stated objectives. Some studies also include oversight by an independent group of qualified experts organized by the clinical study sponsor, known as a data safety monitoring board, which provides authorization for whether or not a study may move forward at designated check points based on access to certain data from the study and may halt the clinical trial if it determines that there is an unacceptable safety risk for subjects or other grounds, such as no demonstration of efficacy. There are also requirements governing the reporting of ongoing clinical studies and clinical study results to public registries.

For purposes of BLA approval, human clinical trials are typically conducted in three sequential phases that may overlap.

In some cases, the FDA may require, or companies may voluntarily pursue, additional clinical trials after a product is approved to gain more information about the product. These are called Phase 4 studies and may be made a condition to approval of the BLA. Concurrent with clinical trials, companies may complete additional animal studies and develop additional information about the biological characteristics of the product candidate, and must finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, for biologics, must develop methods for testing the identity, strength, quality, purity and potency of the product. 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 shelf life.

BLA Submission and Review

Assuming successful completion of all required testing in accordance with all applicable regulatory requirements, the results of product development, nonclinical studies and clinical trials are submitted to the FDA as part of a BLA requesting approval to market the product for one or more indications. The BLA must include all relevant data available from pertinent preclinical and clinical studies, including negative or ambiguous results as well as positive findings, together with detailed information relating to the product’s chemistry, manufacturing, controls, and proposed labeling, among other things. The submission of a BLA requires payment of a substantial application user fee to FDA, unless a waiver or exemption applies.

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Once a BLA has been submitted, the FDA generally makes a decision on the acceptance of the application for filing within 60 days of receipt. The FDA’s goal is to review standard applications within ten months after it accepts the application for filing, or, if the application qualifies for priority review, six months after the FDA accepts the application for filing. In both standard and priority reviews, the review process is often significantly extended by FDA requests for additional information or clarification. The FDA reviews a BLA to determine, among other things, whether a product is safe, pure and potent and the facility in which it is manufactured, processed, packed or held meets standards designed to assure the product’s continued safety, purity and potency. The FDA may convene an advisory committee to provide clinical insight on application review questions. Before approving a BLA, the FDA will typically inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving a BLA, the FDA will typically inspect one or more clinical sites to assure compliance with cGCP. If the FDA determines that the application, manufacturing process or manufacturing facilities are not acceptable, it will outline the deficiencies in the submission and often will request additional testing or information. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.

After the FDA evaluates a BLA and conducts inspections of manufacturing facilities where the investigational product and/or its drug substance will be produced, the FDA may issue an approval letter or a Complete Response letter. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. A Complete Response letter will describe all of the deficiencies that the FDA has identified in the BLA, except that where the FDA determines that the data supporting the application are inadequate to support approval, the FDA may issue the Complete Response letter without first conducting required inspections, testing submitted product lots and/or reviewing proposed labeling. In issuing the Complete Response letter, the FDA may recommend actions that the applicant might take to place the BLA in condition for approval, including requests for additional information or clarification. The FDA may delay or refuse approval of a BLA if applicable regulatory criteria are not satisfied, require additional testing or information and/or require post-marketing testing and surveillance to monitor safety or efficacy of a product.

If regulatory approval of a product is granted, such approval will be granted for particular indications and may entail limitations on the indicated uses for which such product may be marketed. For example, the FDA may approve the BLA with a Risk Evaluation and Mitigation Strategy (“REMS”) to ensure the benefits of the product outweigh its risks. A REMS is a safety strategy to manage a known or potential serious risk associated with a product and to enable patients to have continued access to such medicines by managing their safe use, and could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling or the development of adequate controls and specifications. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing requirements is not maintained or if problems occur after the product reaches the marketplace. The FDA may require one or more Phase 4 post-marketing studies and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization, and may limit further marketing of the product based on the results of these post-marketing studies.

Accelerated Approval Program

Any marketing application for a biologic submitted to the FDA for approval may be eligible for FDA programs intended to expedite the FDA review and approval process, such as priority review and accelerated approval. A product is eligible for priority review if it has the potential to provide a significant improvement in the treatment, diagnosis or prevention of a serious disease or condition compared to marketed products. For products containing new molecular entities, priority review designation means the FDA’s goal is to take action on the marketing application within six months of the 60-day filing date (compared with ten months under standard review).

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Additionally, products studied for their safety and effectiveness in treating serious or life-threatening diseases or conditions may receive accelerated approval (Subpart H and E regulations) upon a determination that the product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. As a condition of accelerated approval, the FDA will generally require the sponsor to perform adequate and well-controlled post-marketing clinical studies to verify and describe the anticipated effect on irreversible morbidity or mortality or other clinical benefit. In addition, the FDA currently requires, as a condition for accelerated approval, pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product.

Priority review and accelerated approval do not change the standards for approval but may expedite the development or approval process.

Orphan Drug Designation

Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition, which is a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States for which there is no reasonable expectation that the cost of developing and making available in the United States a drug or biologic for this type of disease or condition will be recovered from sales in the United States for that drug or biologic. Orphan drug designation must be requested before submitting a BLA. After the FDA grants orphan drug designation, the generic identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. The orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review or approval process.

If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan drug exclusive approval (or exclusivity), which means that the FDA may not approve any other applications, including a full BLA, to market the same biologic for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity. Orphan drug exclusivity does not prevent FDA from approving a different drug or biologic for the same disease or condition, or the same drug or biologic for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the BLA application fee.

A designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition.

Post-Approval Requirements

Any products manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to record-keeping, reporting of adverse experiences, periodic reporting, product sampling and distribution, and advertising and promotion of the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject to prior FDA review and approval. There also are continuing user fee requirements, under which FDA assesses an annual program fee for each product identified in an approved BLA. Biologic manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP, which impose certain procedural and documentation requirements upon sponsors and their third-party manufacturers. Changes to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting requirements upon sponsors and their third-party manufacturers that we may decide to use. 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.

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The FDA may withdraw approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical studies to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMS program. Other potential consequences include, among other things:

The FDA closely regulates the marketing, labeling, advertising and promotion of biologics. A company can make only those claims relating to safety and efficacy, purity and potency that are approved by the FDA and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. Failure to comply with these requirements can result in, among other things, adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties. Physicians may prescribe legally available products for uses that are not described in the product’s labeling and that differ from those tested and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, restrict manufacturer’s communications on the subject of off-label use of their products.

Biosimilars and Reference Product Exclusivity

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “ACA”), signed into law in 2010, includes a subtitle called the Biologics Price Competition and Innovation Act of 2009 (“BPCIA”), which created an abbreviated approval pathway for biological products that are biosimilar to or interchangeable with an FDA-approved reference biological product.

Biosimilarity, which requires that there be no clinically meaningful differences between the biological product and the reference product in terms of safety, purity and potency, can be shown through analytical studies, animal studies and a clinical study or studies. Interchangeability requires that a product is biosimilar to the reference product and the product must demonstrate that it can be expected to produce the same clinical results as the reference product in any given patient and, for products that are administered multiple times to an individual, the biologic and the reference biologic may be alternated or switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic.

Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the date that the reference product was first licensed by the FDA. In addition, the approval of a biosimilar product may not be made effective by the FDA until 12 years from the date on which the reference product was first licensed. During this 12-year period of exclusivity, another company may still market a competing version of the reference product if the FDA approves a full BLA for the competing product containing that applicant’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity and potency of its product. The BPCIA also created certain exclusivity periods for biosimilars approved as interchangeable products.

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The BPCIA is complex and continues to be interpreted and implemented by the FDA. In addition, recent government proposals have sought to reduce the 12-year reference product exclusivity period. Other aspects of the BPCIA, some of which may impact the BPCIA exclusivity provisions, have also been the subject of recent litigation. As a result, the ultimate impact and implementation of the BPCIA is subject to significant uncertainty.

Other U.S. Healthcare Laws and Compliance Requirements

In the United States, our current and future operations are subject to regulation by various federal, state and local authorities in addition to the FDA, including but not limited to, the Centers for Medicare and Medicaid Services (“CMS”), other divisions of the United States Department of Health and Human Services (“HHS”) (such as the Office of Inspector General, Office for Civil Rights and the Health Resources and Service Administration), the U.S. Department of Justice (“DOJ”), and individual U.S. Attorney offices within the DOJ, and state and local governments. For example, our clinical research, sales, marketing and scientific/educational grant programs may have to comply with the anti-fraud and abuse provisions of the Social Security Act, the false claims laws, the privacy and security provisions of the Health Insurance Portability and Accountability Act (“HIPAA”) and similar state laws, each as amended, as applicable.

The federal Anti-Kickback Statute prohibits, among other things, any person or entity, from knowingly and willfully offering, paying, soliciting or receiving any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federal healthcare programs. The term remuneration has been interpreted broadly to include anything of value. The Anti-Kickback Statute has been interpreted to apply to arrangements between therapeutic product manufacturers on one hand and prescribers, purchasers and formulary managers on the other. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution. The exceptions and safe harbors are drawn narrowly and practices that involve remuneration that may be alleged to be intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and circumstances. Our practices may not in all cases meet all of the criteria for protection under a statutory exception or regulatory safe harbor.

Additionally, the intent standard under the Anti-Kickback Statute was amended by the ACA to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the ACA codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act (“FCA”).

The federal false claims and civil monetary penalty laws, including the FCA, which imposes significant penalties and can be enforced by private citizens through civil qui tam actions, prohibit any person or entity from, among other things, knowingly presenting, or causing to be presented, a false or fraudulent claim for payment to, or approval by, the federal government, including federal healthcare programs, such as Medicare and Medicaid, knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government, or knowingly making a false statement to improperly avoid, decrease or conceal an obligation to pay money to the federal government. A claim includes “any request or demand” for money or property presented to the U.S. government. For instance, historically, pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing of the product for unapproved, off-label, and thus generally non-reimbursable, uses.

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HIPAA created additional federal criminal statutes that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud or to obtain, by means of false or fraudulent pretenses, representations or promises, any money or property owned by, or under the control or custody of, any healthcare benefit program, including private third-party payors, willfully obstructing a criminal investigation of a healthcare offense and knowingly and willfully falsifying, concealing or covering up by trick, scheme or device, a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Like the Anti-Kickback Statute, the ACA amended the intent standard for certain healthcare fraud statutes under HIPAA such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

Also, many states have similar, and typically more prohibitive, fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.

We may be subject to data privacy and security regulations by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH’), and its implementing regulations, imposes requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to business associates, independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce HIPAA and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, many state laws govern the privacy and security of health information in specified circumstances, many of which differ from each other in significant ways, are often not pre-empted by HIPAA, and may have a more prohibitive effect than HIPAA, thus complicating compliance efforts.

We may develop products that, once approved, may be administered by a physician. Under currently applicable U.S. law, certain products not usually self-administered (including injectable drugs) may be eligible for coverage under Medicare through Medicare Part B. Medicare Part B is part of original Medicare, the federal health care program that provides health care benefits to the aged and disabled, and covers outpatient services and supplies, including certain pharmaceutical products, that are medically necessary to treat a beneficiary’s health condition. As a condition of receiving Medicare Part B reimbursement for a manufacturer’s eligible drugs, the manufacturer is required to participate in other government healthcare programs, including the Medicaid Drug Rebate Program and the 340B Drug Pricing Program. The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the Secretary of HHS as a condition for states to receive federal matching funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. Under the 340B Drug Pricing Program, the manufacturer must extend discounts to entities that participate in the program.

In addition, many pharmaceutical manufacturers must calculate and report certain price reporting metrics to the government, such as average sales price and best price. Penalties may apply in some cases when such metrics are not submitted accurately and timely. Further, these prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. It is difficult to predict how Medicare coverage and reimbursement policies will be applied to our products in the future and coverage and reimbursement under different federal healthcare programs are not always consistent. Medicare reimbursement rates may also reflect budgetary constraints placed on the Medicare program.

Additionally, the federal Physician Payments Sunshine Act (the “Sunshine Act”), within the ACA, and its implementing regulations, require that certain manufacturers of drugs, devices, biological and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) report annually to CMS information related to certain payments or other transfers of value made or distributed to physicians and teaching hospitals, or to entities or individuals at the request of, or designated on behalf of, the physicians and teaching hospitals and to report annually certain ownership and investment interests held by physicians and their immediate family members. Failure to report accurately could result in penalties.

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In addition, many states also govern the reporting of such payments or other transfers of value, many of which differ from each other in significant ways, are often not pre-empted and may have a more prohibitive effect than the Sunshine Act, thus further complicating compliance efforts.

In order to distribute products commercially, we must comply with state laws that require the registration of manufacturers and wholesale distributors of drug and biological products in a state, including, in certain states, manufacturers and distributors who ship products into the state even if such manufacturers or distributors have no place of business within the state. Some states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain. Several states have enacted legislation requiring pharmaceutical and biotechnology companies to establish marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities and/or register their sales representatives, as well as to prohibit pharmacies and other healthcare entities from providing certain physician prescribing data to pharmaceutical and biotechnology companies for use in sales and marketing, and to prohibit certain other sales and marketing practices. All of our activities are potentially subject to federal and state consumer protection and unfair competition laws.

Ensuring business arrangements with third parties comply with applicable healthcare laws and regulations is a costly endeavor. If our operations are found to be in violation of any of the federal and state healthcare laws described above or any other current or future governmental regulations that apply to us, we may be subject to penalties, including without limitation, civil, criminal and/or administrative penalties, damages, fines, disgorgement, individual imprisonment, exclusion from participation in government programs, such as Medicare and Medicaid, injunctions, private qui tam actions brought by individual whistleblowers in the name of the government, or refusal to allow us to enter into government contracts, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, additional reporting obligations and oversight if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

Coverage, Pricing and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we may obtain regulatory approval. In the United States and in foreign markets, sales of any products for which we receive regulatory approval for commercial sale will depend, in part, on the extent to which third-party payors provide coverage and establish adequate reimbursement levels for such products. In the United States, third-party payors include federal and state healthcare programs, private managed care providers, health insurers and other organizations. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid in the United States, and commercial payors are critical to new product acceptance.

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

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

Third-party payors are increasingly challenging the price, examining the medical necessity and reviewing the cost-effectiveness of medical products, therapies and services, in addition to questioning their safety and efficacy. Obtaining reimbursement for our products may be particularly difficult because of the higher prices often associated with branded drugs and drugs administered under the supervision of a physician. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of our products, in addition to the costs required to obtain FDA approvals. Our product candidates may not be considered medically necessary or cost-effective. Obtaining coverage and reimbursement approval of a product from a government or other third-party payor is a time-consuming and costly process that could require us to provide to each payor supporting scientific, clinical and cost-effectiveness data for the use of our product on a payor-by-payor basis, with no assurance that coverage and adequate reimbursement will be obtained. A payor’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage for the product. 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. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize any product candidate that we successfully develop.

Different pricing and reimbursement schemes exist in other countries. In the EU, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund a large part of the cost of those products to consumers. Some jurisdictions operate positive and negative list systems under which products may only be marketed once a reimbursement price has been agreed. To obtain reimbursement or pricing approval, some of these countries may require the completion of clinical trials that compare the cost effectiveness of a particular product candidate to currently available therapies. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure on health care costs has become intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country.

The marketability of any product candidates 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. In addition, emphasis on managed care, the increasing influence of health maintenance organizations and additional legislative changes in the United States have increased, and we expect will continue to increase, the pressure on healthcare pricing. The downward pressure on the rise in healthcare costs in general, particularly prescription medicines, medical devices and surgical procedures and other treatments, has become very intense. 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.

Healthcare Reform

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

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For example, the ACA has substantially changed healthcare financing and delivery by both governmental and private insurers. Among the ACA provisions of importance to the pharmaceutical and biotechnology industries are the following:

There have been legal and political challenges to certain aspects of the ACA. Since January 2017, President Trump has signed two executive orders and other directives designed to delay, circumvent or loosen certain requirements mandated by the ACA. The ultimate content, timing or effect of any healthcare reform legislation on the U.S. healthcare industry is unclear.

We anticipate that the ACA, if substantially maintained in its current form, will continue to result in additional downward pressure on coverage and the price that we receive for any approved product, and could seriously harm our business. Any reduction in reimbursement from Medicare and other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our products. Such reforms could have an adverse effect on anticipated revenue from product 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 product candidates.

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Further legislation or regulation could be passed that could harm our business, financial condition and results of operations. Other legislative changes have been proposed and adopted since the ACA was enacted. Aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect beginning on April 1, 2013, will stay in effect through 2027 unless additional Congressional action is taken.

Additionally, there has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices. Specifically, there have been several recent U.S. Congressional inquiries and proposed federal legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. The Trump administration released a “Blueprint”, or plan, to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase drug manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products, and reduce the out of pocket costs of drug products paid by consumers. The HHS has already started the process of soliciting feedback on some of these measures and, at the same time, is immediately implementing others under its existing authority. While some proposed measures will require authorization through additional legislation to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. Individual states in the United States have also become increasingly active in passing legislation and implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

The Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act (“FCPA”), prohibits any U.S. individual or business from paying, offering or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring us to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations.

Environmental Regulation

In addition to the foregoing, state and federal laws regarding safe working conditions, environmental protection and hazardous substances, including the Occupational Safety and Health Act, the Resource Conservancy and Recovery Act and the Toxic Substances Control Act, affect our business. These and other laws govern our use, handling and disposal of various biological, chemical and radioactive substances used in, and wastes generated by, our operations. We may incur significant costs to comply with such laws and regulations now or in the future. If our operations result in contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and governmental fines. We believe that we are in material compliance with applicable environmental laws and that continued compliance therewith will not have a material adverse effect on our business. We cannot predict, however, how changes in these laws may affect our future operations.

Competition

The biopharmaceutical industry is characterized by intense competition and rapid innovation. Although we believe that we hold a strong position in research in certain areas of cardio-metabolic disease, NASH, ophthalmology and cancer, our competitors may be able to develop other compounds or drugs that are able to achieve similar or better results. Our competitors include multinational pharmaceutical companies, specialized biotechnology companies and universities and other research institutions. Smaller or earlier-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. We believe the key competitive factors that will affect the development and commercial success of our product candidates are their efficacy, safety and tolerability profile, reliability, convenience of dosing, pricing, the level of generic competition and reimbursement.

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There are many pharmaceutical companies, biotechnology companies, public and private universities and research organizations actively engaged in the research and development of products that may be competitive to our products. A number of pharmaceutical companies, including AbbVie, Allergan, AstraZeneca, Bayer, Boehringer Ingelheim, Bristol-Myers Squibb, Eisai, Eli Lilly, GlaxoSmithKline, Johnson & Johnson, Merck, Novartis, Novo Nordisk, Pfizer, Roche, Sanofi and Takeda, as well as large and small biotechnology companies such as 89Bio, Akero, Albireo, Alentis, Amgen, Apellis, Ascletis, Axcella, Bird Rock, Can-Fite, Cirius, Enanta, Galectin, Galmed, Genfit, Gilead, Glympse, Immuron, Intercept, Inventiva, Iveric, Madrigal, MannKind, MediciNova, Metacrine, Mirum, Nalpropion, North Sea, Promethera, Salix, Scholar Rock, Seal Rock, Terns, Tiziana, Viking and Vivus, are pursuing the development or marketing of pharmaceuticals that target the same diseases that we are targeting. It is probable that the number of companies seeking to develop products and therapies for the treatment of metabolic disorders, liver, oncologic and ophthalmic diseases will increase. For example, we are aware of other companies, including Enanta, Gilead, Intercept, Metacrine, Novartis and Terns that are seeking to develop FXR agonist drug candidates that modulate FGF19. Many of these and other existing or potential competitors have substantially greater financial, technical, human and other resources than we have and may be better equipped to develop, manufacture and market products. These companies may develop and introduce products and processes competitive with or superior to ours. In addition, other technologies or products may be developed that have an entirely different approach or means of accomplishing the intended purposes of our products, which might render our technology and products noncompetitive or obsolete.

There are currently no FDA-approved products for the treatment of NASH. If aldafermin or NGM313 are approved for the treatment of NASH, competition could arise from products currently in development, including: cenicriviroc, an immunomodulator that blocks CCR2 and CCR5 from Allergan; GS-0976, an ACC inhibitor, GS-9674, an FXR agonist, and selonsertib, an ASK1 inhibitor, from Gilead; OCA from Intercept; MGL-3196, a beta-thyroid hormone receptor agonist from Madrigal; pegbelfermin, a PEGylated FGF21, from Bristol-Myers Squibb; elobixibat, an IBAT-inhibitor from Albireo; a Galectin-3 inhibitor from Galectin; a synthetic conjugate of cholic acid and arachidic acid from Galmed; an FXR agonist from Metacrine; FXR agonists from Novartis; a mitochondrial pyruvate complex modulator from Cirius; and a PPAR alpha/delta agonist from Genfit. In addition, a NDA for OCA was filed with the FDA in September 2019 and the completion of their review is expected in June 2020. The foregoing competitive risks apply to aldafermin and NGM313 and any variants of aldafermin and NGM313 we may commercialize, including the second-generation, half-life extended version of FGF19 we are currently developing.

If NGM395 is approved for the treatment of obesity, it would face competition from currently approved and marketed products, including Saxenda (liraglutide), Contrave (bupropion and naltrexone), Qsymia (phentermine and topiramate extended-release), Belviq (lorcaserin HCL) and Xenical (orlistat). Further competition could arise from products currently in development, including Lilly’s tirzepatide (dual GLP-1/GIP receptor agonist). To the extent any of our product candidates are approved for cardio-metabolic indications, particularly obesity, the commercial success of our products will also depend on our ability to demonstrate benefits over the then-prevailing standard of care, including diet and exercise. Finally, morbidly obese patients sometimes undergo the gastric bypass procedure, with salutary effects on the many co-morbid conditions of obesity. Some of these programs have been advanced further in clinical development than our clinical programs or have already received regulatory approval.

If any of our product candidates is approved for the treatment of type 2 diabetes, these products would face competition from currently approved and marketed products, including: biguanides; sulfonylureas; TZDs; alpha-glucosidase inhibitors (AGIs); dipeptidyl peptidase 4 (DPP4) inhibitors; glucagon-like peptide-1 (GLP-1) analogues; SGLT2 inhibitors; oral GLP-1 mimetics; and insulins, including injectable and inhaled versions. Further competition could arise from products currently in development, including: 11 beta HSD (Incyte, Japan Tobacco, Roche); and GPR40 (Connexios, Takeda). Some of these programs have been advanced further in clinical development than our product candidates and could receive approval before our product candidates are approved, if they are approved at all.

Manufacturing

We currently use third-party manufacturers to manufacture clinical quantities of aldafermin, NGM120, NGM217, NGM621 and NGM395. As we advance our product candidates through clinical development and greater quantities of our biological molecules are required, we plan to continue to use third parties to manufacture our product candidates.

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We also plan to rely on third parties to manufacture commercial quantities of any products we successfully develop. Among the conditions for FDA approval of a pharmaceutical product is the requirement that the manufacturer’s quality control and manufacturing procedures conform to cGMP, which must be followed at all times. The FDA typically inspects manufacturing facilities every two years. In complying with cGMP regulations, pharmaceutical manufacturers must expend resources and time to ensure compliance with product specifications as well as production, record keeping, quality control, reporting and other requirements.

Sales and Marketing

We currently have no marketing, sales or distribution capabilities. In order to commercialize any products outside of our existing collaboration that are approved for commercial sale, we must either develop a sales and marketing infrastructure or collaborate with third parties that have sales and marketing experience.

We may elect to establish our own sales force to market and sell a product for which we obtain regulatory approval if we elect to exercise our co-detail option on a product candidate from our collaboration with Merck or if we expect that the geographic market for a product we develop on our own is limited or that the prescriptions for the product will be written principally by a relatively small number of physicians. If we decide to market and sell any products ourselves, we do not expect to establish direct sales capability until shortly before the products are approved for commercial sale, if they are approved at all.

We plan to seek third-party support from established pharmaceutical and biotechnology companies, such as Merck, for those products that would benefit from the promotional support of a large sales and marketing force. In these cases, we might seek to promote our products in collaboration with marketing partners or rely on relationships with one or more companies with large established sales forces and distribution systems.

Intellectual Property

Our success depends, in part, on our ability to obtain and maintain intellectual property protection for our product candidates, technology and know-how, to defend and enforce our intellectual property rights, in particular, our patent rights, to preserve the confidentiality of our trade secrets and to operate without infringing the proprietary rights of others. We seek to protect our biological molecules and technologies by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business, where patent protection is available. We also rely on trade secrets, know-how, continuing technological innovation and in-licensing of third-party intellectual property to develop and maintain our proprietary position. We, or Merck, which we sometimes refer to as our collaborator, file patent applications directed to our key product candidates in an effort to establish intellectual property positions regarding new biological molecules relating to our product candidates as well as uses of our product candidates and/or new biological molecules for the treatment of diseases.

Licensing Arrangements

Horizon License

In September 2019, we entered into a license agreement with Horizon Discovery Ltd. (“Horizon”), a United Kingdom-based company, in which we obtained a non-exclusive, non-transferable and non-sub-licensable license to use their proprietary GS knockout CHO K1 manufacturing cell line (“Horizon License”). The Horizon License will continue for ten years and allow us to manufacture and commercialize any current or future product candidates within the contractual term, including our product candidates that are currently subject to our collaboration with Merck.

Pursuant to the Horizon License, we paid Horizon a one-time, non-creditable and non-refundable license fee of $1.2 million, of which 50% of the license fee was reimbursed by Merck. We are also subject to a license fee of $0.2 million for each future strategic partner. We have the right to terminate the Horizon License upon written notice to Horizon and each party may also terminate the Horizon License in the event of the other party’s uncured material breach.

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Lonza License

In October 2014, we entered into a Multi-Product License Agreement (the “Lonza License”) with Lonza Sales AG (“Lonza”), under which we obtained a worldwide, non-exclusive license to use Lonza’s glutamine synthetase gene expression system, known as GS Xceed™, to manufacture and commercialize our proprietary products, including our product candidates that are currently subject to our collaboration with Merck.

Pursuant to the Lonza License, we paid Lonza an upfront fee of £250,000. Upon the initiation of the first phase 2 clinical trial, the first phase 3 clinical trial and the first commercial sale of any product manufactured using GS Xceed™, we are required to pay Lonza one-time milestone payments of £100,000, £100,000 and £150,000, respectively. We are also required to pay low single-digit royalties to Lonza based on net sales of any product manufactured using GS Xceed™. Our royalty obligation to Lonza continues on a product-by-product basis until the later of the expiration of the last-to-expire licensed patent or ten years after the first commercial sale of the product. We are also required to pay an annual license fee to Lonza of up to £300,000 per product if a party other than Lonza, we, our affiliates or our strategic partners (including Merck) manufactures the product for commercial activities. We are currently required to pay this fee for NGM313, NGM120, NGM217 and NGM395. In accordance with the Lonza License amendment, for any additional product candidates, we are required to pay an annual license fee to Lonza of £25,000 per product prior to the initiation of clinical development and £100,000, £150,000 and £300,000 per product, respectively, if such product is in a Phase 1, Phase 2 and Phase 3 clinical trial. We are currently required to pay this fee for NGM621 and any future product candidates utilizing this license.

The Lonza License continues until the expiration of the royalty term. We have the right to terminate the Lonza License upon written notice to Lonza. Each party may terminate the Lonza License for the other party’s uncured material breach or bankruptcy. In addition, Lonza may terminate the Lonza License if we participate in the opposition or challenge of any Lonza patent or patent application licensed to us under the Lonza License.

Patents and Other Proprietary Rights

As of January 31, 2020, we owned 37 issued U.S. patents and 38 pending U.S. patent applications (seven of which are provisional applications) along with 39 granted patents and approximately 203 corresponding patent applications in foreign jurisdictions (six of which are Patent Cooperation Treaty (“PCT”) applications), associated with, for example, the treatment of, cardio-metabolic, liver, ophthalmic and bile acid-related diseases. The issued patents and pending patent applications contain claims directed to various aspects of our work, including compositions of matter, methods of treatment, use of our product candidates in combination with certain other therapeutics and formulations.

Aldafermin Patent Portfolio

Our aldafermin product candidate, and related compositions-of-matter and methods of use, are covered by 21 U.S. patents, as well as issued patents in the following foreign countries: Australia, Japan, Malaysia, Mexico, New Zealand, Peru, Philippines, Russia, Ukraine, South Africa and various member states of the European Patent Office (“EPO”) including Germany, France, Italy, Spain and the United Kingdom; and are disclosed and claimed in other applications that are pending in the United States and the following foreign countries and regions: Australia, Brazil, Canada, Chile, China, Egypt, the EPO, Hong Kong, India, Indonesia, Israel, Japan, Republic of Korea, Mexico, New Zealand, Singapore, South Africa, United Arab Emirates and Vietnam. The earliest expected expiration date for these patents and any patents issuing from these patent applications is June 2032, exclusive of possible patent term extensions or adjustments. Any changes we make to the aldafermin molecule to cause it to have what we view as more advantageous properties may not be covered by our existing patents and patent applications, and we may be required to file new applications and/or seek other forms of protection for any such altered molecule. The patent landscape surrounding FGF19, the naturally occurring hormone upon which aldafermin is based, is crowded, and there can be no assurance that our pending patent applications will be issued with the claims we are seeking or that we would be able to secure patent protection that would adequately cover an alternative to our aldafermin molecule, including the half-life extended variant of FGF19 that we are developing, nor can there be any assurance that we will obtain sufficiently broad claims to be able to prevent others from selling competing products.

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NGM313 Patent Portfolio

Our NGM313 product candidate, and related compositions-of-matter and methods of use, are covered by two issued U.S. patents and issued patents in Colombia, Russia, and Ukraine; and are disclosed and claimed in other applications that are pending in the United States and the following foreign countries and regions: Australia, Brazil, Canada, Chile, China, the EPO, Hong Kong, India, Indonesia, Israel, Japan, Republic of Korea, Malaysia, Mexico, New Zealand, Peru, Philippines, Singapore, South Africa and Vietnam. The earliest expected expiration date for these patents and any patents issuing from these patent applications is January 2035, exclusive of possible patent term extensions or adjustments. Any changes we make to the NGM313 molecule to cause it to have what we view as more advantageous properties may not be covered by our existing patents and patent applications, and we may be required to file new applications and/or seek other forms of protection for any such altered molecule. The patent landscape surrounding antibodies to FGFR1c/KLB is crowded, and there can be no assurance that our pending patent applications will be issued with the claims we are seeking or that we would be able to secure patent protection that would adequately cover an alternative to our NGM313 molecule, nor can there be any assurance that we will obtain sufficiently broad claims to be able to prevent others from selling competing products.

NGM120 Patent Portfolio

Our NGM120 product candidate, and related compositions-of-matter and methods of use, are disclosed and claimed in one issued U.S. patent and in applications pending in the following foreign countries and regions: Australia, Brazil, Canada, Chile, China, Colombia, Egypt, the EPO, India, Indonesia, Israel, Japan, Republic of Korea, Malaysia, Mexico, New Zealand, Peru, Philippines, Russian Federation, Singapore, South Africa, Taiwan R.O.C., Ukraine and Vietnam. The earliest expected expiration date for this patent and any patents issuing from these patent applications is October 2037, exclusive of possible patent term extensions or adjustments. Any changes we make to the NGM120 molecule to cause it to have what we view as more advantageous properties may not be covered by our existing patent and patent applications, and we may be required to file new applications and/or seek other forms of protection for any such altered molecule. The patent landscape surrounding antibodies to GFRAL is crowded, and there can be no assurance that our pending patent applications will be issued with the claims we are seeking or that we would be able to secure patent protection that would adequately cover an alternative to our NGM120 molecule, nor can there be any assurance that we will obtain sufficiently broad claims to be able to prevent others from selling competing products.

NGM217 Patent Portfolio

We do not currently own or have a license to any issued patent that covers our NGM217 product candidate. However, our NGM217 product candidate, and related compositions-of matter and methods of use, are disclosed and claimed in pending United States and PCT applications and in applications pending in the following foreign countries and regions: Australia, Brazil, Canada, Chile, China, Colombia, the EPO, India, Indonesia, Israel, Japan, Republic of Korea, Malaysia, Mexico, New Zealand, Peru, Philippines, Russian Federation, Singapore, South Africa, Ukraine and Vietnam. The earliest expected expiration date for any patents issuing from these patent applications is January 2038, exclusive of possible patent term extensions or adjustments. Any changes we make to the NGM217 molecule to cause it to have what we view as more advantageous properties may not be covered by our existing patent applications, and we may be required to file new applications and/or seek other forms of protection for any such altered molecule. There can be no assurance that our pending patent applications will be issued with the claims we are seeking or that we would be able to secure patent protection that would adequately cover an alternative to our NGM217 molecule, nor can there be any assurance that we will obtain sufficiently broad claims to be able to prevent others from selling competing products.

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NGM621 Patent Portfolio

We do not currently own or have a license to any issued patent that covers our NGM621 product candidate. However, our NGM621 product candidate, and related compositions-of-matter and methods of use, are disclosed and claimed in a pending United States provisional application filed in April 2018 that we expect to use as the basis for U.S. non-provisional and PCT applications, and in applications pending in the following foreign countries and regions: Argentina and Taiwan R.O.C.. Any changes we make to the NGM621 molecule to cause it to have what we view as more advantageous properties may not be covered by our existing patent applications, and we may be required to file new applications and/or seek other forms of protection for any such altered molecule. There can be no assurance that our pending patent applications will be issued with the claims we are seeking or that we would be able to secure patent protection that would adequately cover an alternative to our NGM621 molecule, nor can there be any assurance that we will obtain sufficiently broad claims to be able to prevent others from selling competing products.

NGM395 Patent Portfolio

Our NGM395 product candidate, and related compositions-of-matter and methods of use, are covered by one issued U.S. patent as well as issued patents in Columbia and Mexico; and are disclosed and claimed in other applications that are pending in the United States and the following foreign countries and regions: Argentina, Australia, Brazil, Canada, Chile, China, Colombia, Ecuador, Egypt, the Eurasian Patent Office, the EPO, Gulf Cooperation Council, Hong Kong, India, Indonesia, Israel, Jamaica, Japan, Jordan, Republic of Korea, Malaysia, Mexico, New Zealand, Peru, Philippines, Singapore, South Africa, Taiwan R.O.C., Thailand, Ukraine, Venezuela and Vietnam. The earliest expected expiration date for these patents and any patents issuing from these patent applications is October 2035, exclusive of possible patent term extensions or adjustments. Any changes we make to the NGM395 molecule to cause it to have what we view as more advantageous properties may not be covered by our existing patents and patent applications, and we may be required to file new applications and/or seek other forms of protection for any such altered molecule. The patent landscape surrounding GDF15, the naturally occurring hormone upon which NGM395 is based, is crowded, and there can be no assurance that our pending patent applications will be issued with the claims we are seeking or that we would be able to secure patent protection that would adequately cover an alternative to our NGM395 molecule, nor can there be any assurance that we will obtain sufficiently broad claims to be able to prevent others from selling competing products.

The actual term of any patent that may issue from the above-described patent applications claiming one of our product candidates could be longer than described above due to patent term adjustment or patent term extension, if available, or shorter if we are required to file terminal disclaimers. The term of individual patents depends upon the legal term for patents in the countries in which they are granted. In most countries, including the United States, the patent term is 20 years from the earliest claimed filing date of a non-provisional patent application in the applicable country.

The U.S. patent system permits the filing of provisional and non-provisional patent applications. A provisional patent application is not examined for patentability by the U.S. Patent and Trademark Office (“USPTO”), and automatically expires 12 months after its filing date. As a result, a provisional patent application cannot mature into an issued patent. Provisional applications are often used, among other things, to establish an early effective filing date for a later-filed non-provisional patent application. A non-provisional patent application is examined by the USPTO and can mature into a patent once the USPTO determines that the claimed invention meets the standards for patentability. If we do not timely file any non-provisional patent applications with respect to any of our provisional patent applications, we may lose the ability to claim benefit of the provisional application filing date with respect to the inventions disclosed therein. While we intend to timely file non-provisional patent applications relating to our provisional patent applications, we cannot predict whether any such patent applications will result in the issuance of patents that provide us with any competitive advantage.

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Our ability to maintain and solidify our proprietary position for our product candidates and technology will depend on our success in obtaining effective patent claims and enforcing those claims once granted. We do not know whether any of our patent applications will result in the issuance of any patents, or what the scope of the claims in any future issued patents may be. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, invalidated, narrowed, rendered unenforceable or circumvented, which could limit our ability to stop competitors from marketing identical or substantially similar products or could reduce the length of term of patent protection that we may have for our products. In addition, the claims granted in any of our issued patents may not provide us with advantages against competitors with similar biological molecules or technology. Furthermore, our competitors may independently develop technologies that are similar or identical to technology developed by us but that do not infringe our patents or other intellectual property. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, by the time that any of our drug candidates or those developed by our collaborator can be commercialized, the key patent may have expired or may only continue to remain in force for a short period of time following commercialization, thereby reducing the usefulness of the patent.

We seek to protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, scientific advisors and other contractors. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants, advisors or other contractors use technology or know-how owned by others in their work for us, disputes may arise as to the rights in related inventions. For this and more comprehensive risks related to our intellectual property, see “Risk Factors—Risks Related to Our Intellectual Property.”

Employees

As of December 31, 2019, we had 186 employees. Of these employees, approximately 152 employees are engaged in research and development activities.

Corporate and Available Information

We were incorporated in Delaware in December 2007 and commenced operations in 2008. Our principal executive offices are located at 333 Oyster Point Blvd., South San Francisco, CA 94080-7014, and our telephone number is (650) 243-5555. Our website address is http://www.ngmbio.com.

We file or furnish electronically with the U.S. Securities and Exchange Commission (the “SEC”) annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make copies of these reports available free of charge through our investor relations website as soon as reasonably practicable after we file or furnish them with the SEC.

Information contained on or accessible through our websites is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.

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